LOGISTICS OF EXPORTING TO EURASIA SERIES 

 

Transportation, Distribution and Warehousing Services in Ukraine

 

November, 2006

 

Author: Sergiy Polovenko, Bisnis Representative in Kyiv, Ukraine

 

INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2006. ALL RIGHTS RESERVED FOR USE OUTSIDE OF THE UNITED STATES.

 

 

1.         GENERAL MARKET OVERVIEW

 

U.S.-Ukraine market Trade

The total US exports to Ukraine amounted to $532 million in 2005. The January-September 2006 figure was $550 million. Ukraine is the third largest importer of US goods and services in Newly Independent States after Russia and Kazakhstan ($3.9 billion and $538 million respectively). US exports to Ukraine have grown 34% during 2005 and 186% during last five years ($186 million in 2000 and $531million in 2005). The main US export categories to Ukraine are: a) nuclear reactors; boilers, machinery, parts (23%); b) vehicles, except railway or tramway, parts (15%); c) meat and edible meat offal (12%); d) aircraft, spacecraft, and parts (6%). At the same time, Ukraine is the second largest exporter to US among NIS countries after Russia ($1.1 billion and $5.3 billion respectively).

 

Transport Infrastructure

The transport infrastructure of Ukraine is a well-developed network, with Black Sea, Odessa, and Ilichevs’k seaports being the main gateways for overseas exports. Railway and road networks are the main transportation mode for European export. There are 169,322 km of motor roads, 21,980 km of railway and 2,191 km of navigable path spread on the overall Ukraine area of 604 thousand sq. km, with extension from the West to East – 1,300 kilometers; from the North to South - 900 kilometers. The most popular mode of transportation within the country is motorways, with the annual cargo transportation rate of 1.2 billion tons, followed by railway transportation with 450.3 million tons and river transportation with 12.8 million tons of cargo transported annually. Air transportation is not extensively used amounting to only 126,300 tons of cargo per year.

 

Market peculiarities

The Ukrainian market is a very promising one. After the recession of 1990s that ensued upon the collapse of the Soviet Union, Ukraine is currently in the stage of rapid economic growth. It is the second largest market in all post-Soviet countries after Russia in terms of number of consumers. Ukraine is quite convenient for conducting business as the market is very compact. For example, it is possible to reach any dealer or local market by taking an overnight train or traveling five hours by car.

 

Ukraine borders Russia, Belarus, Moldova, Poland, Slovakia, Romania and Hungary. This makes Ukraine a key logistics point for companies operating in Europe. Three of the nine International Corridors defined by European Union cross Ukraine from border to border.

 

Ukraine proclaimed its intentions to join the European Union and the World Trade Organization. There are many companies adopting and implementing western certification, auditing and management standards and protocols due to growing cooperation with European Union and increased inflow of foreign investments, as well as more multinational companies entering the Ukrainian market and urging local enterprises to upgrade to be able to compete.

 

Ukraine is attracting the interest of several multinational corporations, which are currently establishing their manufacturing facilities in the country. These companies view Ukraine as an important location for a number of reasons, the top three of which include the following:

  1. The country’s infrastructure is quite developed and is workforce is both highly educated and underpaid.
  2. If Ukraine is successful in joining the EU, there are great possibilities for lower shipping and customs costs through reductions in tariffs and other trade barriers.
  3. Having inherited its manufacturing capacity from the Soviet Union, Ukraine already has existing manufacturing facilities and infrastructure in place (though equipment and machinery in most of the cases have to be replaced and modernized).

 

Major Infrastructure Development Projects

Having a well-developed infrastructure, Ukraine strives for increasing the transit potential of the country, increasing transport safety and modernizing fleet and equipment in order to improve quality of services.

 

During a special investment presentation given in February 2006, the Minister of Transportation and Communication of Ukraine presented 29 investment offers for a total amount of $10 billion.  Transportation and communications are two of the fastest growing industries in the country, with average growth rates of about 12% GDP. These industries have attracted more than $6 billion investment during last four years.

 

Below are some of the major infrastructure development projects offered by state owned companies through the Ministry of Transport of Ukraine:

 

Airways and Airports:

Project Description

Project cost

(MM USD)

Investment required (MM USD)

Payback period

(Years)

Reviving JSC “Airlines of Ukraine” as a national air-carrier

330

330

10

“Kyiv” International Airport: checkpoint reconstruction

78

78

1.5

Reconstruction of Kharkiv International Airport

40

40

14

Lviv International Airport: runway reconstruction and construction of modern international passenger terminal

21

15

3.5

Donetsk International Airport: technical re-equipment of land complex, modernizing of airport building, and airdrome

15

14

25

 

Railway:

Project Description

Project cost

(MM USD)

Investment required (MM USD)

Payback period

(Years)

Purchase (leasing) of 25,000 freight railway cars

1,952

1,952

NA

Purchase of 1000 electric and diesel railway cars

800

800

NA

Purchase of 300 electric cargo locomotives of DE-1 type

800

800

NA

Purchase of 750 passenger railway cars

614

614

NA

Purchase of 100 electric passenger locomotives of DSZ type

450

450

NA

Purchase of 100 electric cargo locomotives of 2EL5 type

350

350

NA

Electrification of Lubotin-Poltava-Burty-Korystivka and Dolyns’ka-Mykolaiv-Kherson-Vadim-Jankoi railway lines

260

260

NA

 

Sea and River Ports:

Project Description

Project cost

(MM USD)

Investment required (MM USD)

Payback period

(Years)

Odessa Trade Seaport: developing of quarantine facilities

350

136

1.7

Odessa Trade Seaport: construction of dry cargo terminal

110

84

4.9

Odessa Trade Seaport: equipping 23.18 ha of coastline with additional berths

108

57

4.9

Odessa Trade Seaport: construction of multifunctional container reloading complex of 2.85 ha area

46

20

7.3

Berdyansk Trade Seaport: construction of additional container reloading facility

22

15.5

6.3

 

2.         PRIMARY MODES OF TRANSPORT

 

Waterways and Ports 

Seaports are the most commonly used methods of getting the cargo into Ukraine from overseas. There are 14 seaports on the Black Sea and Azov Sea coastline, but Odessa and Ilichevsk are the largest and most suitable for international cargo processing. Generally, the shipping time from the United States to Ukraine by sea is roughly 25 to 30 days.

Odessa Commercial Sea Port (www.port.odessa.ua) is one of the largest ports of the Black Sea-Azov range. Facilities at the port allow processing of more than 14 million tons of dry cargo and 24 million tons of oil products annually. There are eight handling complexes for dry cargo processing, passenger complex, oil and container terminals, complex for technical and vegetable oil processing on the 109 hectares of the port territory. Also worth noting that there is a special economic zone, "Porto-Franco," situated on the quarantine pier of Odessa Seaport. In addition to the handling and storing of cargoes (the port’s main activity), Odessa port provides a full package of value-added services, such as: forwarding, customs brokerage, container loading/unloading, cargo packaging and repairs, international cargo transportation using Mercedes brand trucks, guarded TIR-parking, and cargo tracking information services.

 

Port of Illichivsk is situated on the coastline of Sukhoi Liman, 12 miles southeast of Odessa. The port is capable handling up to 20 million tons of cargo annually among which are various metal products, containers, break-bulk and crated goods, heavy equipment, fertilizers, grain in bulk, vegetable oils, and commercial chemicals.

 

Waterways
There are 4,400 km navigable waterways, of which 1,672 km were on the Prypyat river and 1,990 km on Dnipro river, with the largest river-port -- Kyiv. The Dnipro river is the main inland waterway used for transportation and irrigation. Other major rivers include the Danube, Western Buh, and Tisza. Some of the main seaports and harbors are Berdyans'k, Illichivs'k, Izmayil, Kerch, Kherson, Mariupol', Mykolayiv, Odessa, and Reni.

 

The use of inland waterways is limited as the rivers are frozen 3 month per year. The Black Sea sometimes also freezes near the shore.

Rail
Railroads serve as the second most-used transportation system for the country. Ukraine has extensive railroad system total of 23,350 km (8,600 km electrified) in length. Railways are managed by the stated-owned enterprise Ukrzaliznytsa (www.swrailway.gov.ua).

 

Railways used to be the most common way of cargo transport during the Soviet Union. Due to the fact that Ukraine (especially its Eastern part) was not only agricultural but also a strong industrial hub, the domestic railroad network and the rail links with all the bordering countries are very well developed.

 

Transportation through Urkzaliznitsa State Railroads is reliable. Refrigerated and general cars are available at all ports in the country. There are also companies that provide transportation, quality control, and door-to-door delivery services, but the high tariffs make most of distributors shift to road transportation.

 

Ministry of Transport and Communication is planning to attract about $600 million in modernization of infrastructure and purchasing of new rolling stock in 2006.  It is anticipated that about 40% of the required funds will come from foreign investors.

 

Roads and Highways
Automobile transportation has been increasing in popularity due to its high flexibility and speed. There is about 163,937 km of paved roads (including 1,875 km of expressways) in Ukraine. In addition, traversing the territory of Ukraine are three European transit corridors: Corridor III: Berlin-Wroclaw-Lviv-Kyiv; Corridor IV: Trieste-Lyublyana-Budapest-Lviv; Corridor IX: Helsinki-Kyiv-Odessa-Chisinau-Bucharest-Plovdiv-Alexandropolis. Central and local governments are working to improve highway networks throughout the country.

 

Road transportation is the most common mode of cargo transport in Ukraine.  There are several logistics centers throughout the country which are cooperating with each other in order to optimize all routes and reduce costs. In 1994, more than 100 transport enterprises established the Association of International Freight Forwarders of Ukraine (www.ameu.org.ua), which is still one of the most diversified logistics networks.

 

Airports
The commercial aviation market is relatively small in Ukraine (estimated around $30-40 million in 2004), but which is rapidly growing. Since Ukraine is bordering with several of EU countries, many western corporations look at Ukraine a potential new center for air cargo transport as the customs union moves further east.

 

Scheduled flights are available between Kyiv and major administrative centers (i.e., Donetsk, Dneipropetrovsk, Simferopol, Odessa, Kharkiv, Lviv, Ivano-Frankivsk, and Chernivtsi), but neither passenger nor cargo flights operate between the largest cities of Ukraine bypassing Kyiv, i.e. it is not possible to fly directly from Kharkov to Odessa, the second and the third largest Ukrainian cities (with population of more than one million each). 

 

Ukraine’s underdeveloped infrastructure will have to be upgraded to address demands of a growing market.  This modernization process will provide opportunities for US suppliers of aviation technology and equipment.

 

 

3.            TRANSPORTATION AND LOGISTICS SERVICES

 

Transportation and logistics services are emerging as an important and rapidly growing sector. Lots of companies that used to act as agents or brokers are enlarging their operations to include transportation, as this service is quite profitable. Due to the attractiveness of transportation and logistics business, several multinational companies entered the market, which increased competition, and, as a result, significantly improved quality and diversity of transport and logistics services in the country.

 

Shipping and Freight forwarding

The main shipping and freight forwarding companies could be divided into:

 

a)      Overseas shipping:

Ukrainian Association of Seaports has announced the following companies to be the largest container forwarders in 2005:

 

b)      Inland transportation:

One of the most prominent transportation companies is Intertrans (http://intertrans.ua/en/main/), which is a state railway operator, which not only manages all railway cargo transportation in Ukraine, but also deals with road and sea cargo transportation.

 

As to the general logistics dealing not only with transportation but providing the full range of services starting from clearing the cargo at the customs and to storing it at the warehouse there is a number of companies with UVK company  (http://uvk.ua/en) being the recognized leader.

 

By 2006 the following companies took the leading positions in distribution/logistics sector:

 

c) Supply chain management, 3PL logistics

The following is the list of leading operators in warehouse logistics (3PL and supply chain management):

 

Warehousing

During the last two years, warehousing has become one of the fastest growing businesses. In fact, demand for warehousing exceeds supply.  There are several factors contributing to this trend: favorable geographic position of Ukraine; fast growth of trade; quick investment recovery period (up to 7 years); relatively low construction cost (comparing with constructing other types of commercial real estate) with a high profitability of up to 18-20% per year. Increasing demand also results from the fact that logistics outsourcing, which used to have clients mostly among big multinational importers, becomes more and more popular with the Ukrainian importers and even Ukrainian manufacturers.

 

The highest demand for warehouse space is in Kyiv, the capital of Ukraine. The average cost of monthly rental for one square meter of warehouse in Kyiv is $15-$20, while in the regions it is $10-$20. List of the main logistics companies providing warehousing services in this city includes:

 

The logistics market has bright prospects for expansion over the next two years. By 2007, about 40 to 50 thousand square meters of warehouses will be launched and more companies are declaring plans to construct own warehouse facilities. Currently, the demand for A and B+ class warehouses in Kyiv is estimated at about 800,000 sq. meters, but only 150,000 is offered. Taking into account the fact that the payback period for warehouse facilities vary from 2.5 to 5 years and the price for these services has an annual growth rate of 15-20%, the warehouse business will keep growing in terms of space as well as in terms of number and quality of services suggested.

 

Distribution (wholesale/retail supply networks)

Modern distribution systems were created in Ukraine after the collapse of the Soviet Union, and have experienced little advancement since.

 

Currently, there are three main channels of indirect distribution – through appointed distributors, wholesale, and retail networks. Recently the share of all three has changed significantly with the rapid growth of wholesale and retail chains, as well as due to entrance of multinational players into the market.

 

a) Distributor(s)

Many multinational companies who successfully conduct their business in Ukraine often mention that their success results greatly from their ability to find a right distributor. Many foreign companies choose to find a distributor who is able to import, clear through customs, store, certify, and distribute their products. This preference criterion applies both: the initial stages of market entry as well as after a foreign company establishes their representative office.

 

b) Wholesale

The most outstanding representative of wholesale network in Ukraine is Metro Cash&Carry wholesale chain. This company opened its first hyperstore in 2003 and today operates thirteen stores throughout the country, providing a wide range of food and non-food products. The rest of wholesale distribution system is structured by product type with most companies operating entirely with warehousing facilities and delivery networks. Since the cost of money is quite high in Ukraine, and SME business financing is not easily available, small retail outlets tend to order goods on one to three weeks credit terms. Therefore, one of important characteristics of a strong participant in the wholesaling sector is the ability to provide such credit, which is usually covered by the original product vendor. This tendency is more obvious in a segment with tough competition, where the payment terms can be one of the most important decision-making factors.

 

c) Wholesale networks

 

d) Retail

The Ukrainian retail market is one of the most promising sectors of the country’s economy. Over the past five years, growth rate of retail turnover has significantly surpassed Ukraine’s GDP growth. This segment is estimated to have grown 25-30% over the last year and this trend is forecasted to continue. A.T. Kearney ranked Ukraine the third most prospective market in the world in the 2005 Global Retail Index. Ukraine was given the highest point in such criteria as time pressure for market entry (for global retailers) and market saturation. As of now, local chains dominate, but the situation can change with the entry of global retail companies. German OBI, Swedish IKEA, and French Aushan are to enter the Ukraine in the near future.

 

i) Food sector

Velyka Kyshenya

·       Fozzy group (Silpo, Fora, Fozzy)

·       Garantia Trade Group (Furshet stores)

 

ii) Non-food sector

In the last five years, the consumer goods retail sector experienced consistent growth and surpassed the growth rate of a retail grocery sector. The largest shopping outlets in the retail market are Karavan, Globus, Metrograd, Ukraina and Mandaring Plaza (located in Kyiv).

 

iii) DIY sector

Do-it-yourself stores appeared on the Ukrainian market only in 2003, but quickly gained popularity. Currently, local operators dominate the market, with the major retail chains being:

 

 

4. USEFUL RESOURCES

 

Ukraine Government Resources

United web-portal (www.kmu.gov.ua/control/en) for executive power organs of Ukraine with the links to:

·       Ministry of Economics

·       Ministry of Statistics

·       State Customs Service

·       Ministry of Transport and Communications

·       Tax Administration

 

a) Investment Council under the Ministry of Transport and Communications of Ukraine

http://mintrans.kmu.gov.ua/mintrans/ic

 

b) State Railway Ukrzaliznytsa Company

www.swrailway.gov.ua/en/

 

c) Trade associations and information portals

 

US Government Resources in Ukraine

 

a) U.S. Commercial Service in Ukraine

The Commercial service,                           

U.S. Embassy Kyiv,                                                          

4, Hlybochitska Str.                                              

Kyiv 04050 Ukraine

 

CS Commercial Specialist Yuriy Prikhodko,

Yuriy.Prikhodko@mail.doc.gov    

www.export.gov

 

b) U.S. Embassy in Ukraine

www.usemb.kiev.ua

 

c)      USAID

http://ukraine.usaid.gov

 

d)      BISNIS (Business Information Service on Newly Independent States) in Ukraine

www.bisnis.doc.gov/bisnis/country/ukraine.cfm

 

The Commercial service,                           

U.S. Embassy Kyiv,                                                          

4, Hlybochitska Str.                                              

      Kyiv 04050 Ukraine

 

BISNIS Representative

Sergiy Polovenko

Sergiy.Polovenko@mail.doc.gov

 

For more information on Ukraine, visit BISNIS online at www.bisnis.doc.gov/bisnis/country/ukraine.cfm

 

 

BISNIS (www.bisnis.doc.gov) is part of the U.S. Commercial Service (www.export.gov).