Ukrainian open economy model includes development of effective international trade, particularly export of products, as one of the main sources of country’s balance-of-payment account. Strong competition at the international markets requires that domestic producers should enhance their export products competiveness. For domestic manufacturers it is hard to compete with high quality products of foreign countries. The most effective way to stand up to this challenge is to regulate export products price without decreasing profits. The export products are always traded in a special currency (either national or foreign) depending on a foreign trade partner. So, the government of the country can and should support domestic producers. At the moment, Ukrainian government can`t control prices at the international markets in general, but Ukrainian authorities are in the power to influence national currency and exchange rate as well as provide statistic information about the exchange rates on the domestic currency market.
A number of scholars study the issue of correlation between exchange rates and export products competitiveness.
For example, P. Polivach investigated interdependence between euro and export volumes of Eurozone countries [2]. T. Akulich examined how exchange rate control of the national currency stimulates competitiveness of Belarus producers [1]. A. Suetin compared changes in exchange rates and product competitiveness based on cost structure, price and trade [3].
The purpose of this study is to analyze how currency and exchange rate influence competitiveness of export products of Ukrainian manufacturers.
Exchange rate control (currency control) includes some currency transactions restrictions. Exchange rate of Ukrainian national currency (hryvnia) is regulated and quoted by the National Bank of Ukraine on a daily basis. The exchange rate is pegged to such hard currencies as US dollar, euro, pound sterling and others. But currency transactions in Ukraine are traditionally performed in euro and USD.
The general tendency (fig. 1) shows exchange rate increasing for all currency pairs. The exchange rate of pound sterling/hryvnia demonstrates the fastest growing dynamics. At the same time euro and USD are more stable in their dynamics and provide stable exchange rate margins for the producers.
Within the framework of this study, the correlation analysis between currency and export products price is based on activities of LLC “Gorobyna” – the producer of alcohol beverages in the Sumy region which exports to China, Kazakhstan, Italy, Germany, the USA and other countries.
LLC “Gorobyna” predominantly exports on short-term basis and on the condition of 100% advance payment. Term of delivery – FCA. Price of the contract is fixed, as a rule, in euro (in case of exports to European countries) or in US dollars, but exchange rate is not fixed in the contract. Income from export is converted into the hryvnias at the moment of payment according to bank`s exchange rate. The cost price and profit are always determined in USD (Table 2). For example, selling price for vodka “Premium” (0.5 bottle) stands at $1.34 per bottle, with cost price – $1.27/bottle.
However, the LLC “Gorobyna” is most advantageous to calculate the cost price in UAH than in USD. Price should be set in dollars and other hard currencies (e.g. euro, pound sterling etc.).
The enterprise exports alcoholic beverages only. The raw and packing materials are purchased in Ukraine in UAH. Administrative costs and labour costs are fixed and accrued in hryvnias. Custom fees must also be paid in the national currency, according to legislation of Ukraine. Equipment is purchased in Italy in foreign currency (euro), but depreciation is calculated in UAH.
Profit = Price of contract (Income) - Price costs (Expenses).
Let’s consider the following case:
On October 20, 2018 LLC “Gorobyna” concluded a contract with Canada for delivering 3,000 bottles of Vodka “Premium” (0.5 l), 6,500 bottles of Vodka “Premium” standard (0.5 l) and 10,000 bottles of Vodka “Premium” (0.5 l). Date of payment on LLC`s “Gorobyna” banking account is November 21, 2018. Currency of contract is USD. Selling price for 1 bottle is USD 1.34 (Table 2).
Profit = (₴/$27.75 *($1.34/bottle *19,500 bottles) - (₴/$27.75*($1.27/bottle* *3,000 bottles +1.28/bottle*16,500 bottles) = ₴724,025 - ₴689,851 = ₴34,174
Let’s suppose that price cost is calculated in UAH, with exchange rate on October 20, 2018 being as follows: 1 USD = 26,55 UAH. Then the cost price per bottle stands at ₴33.80 (Table 2).
Profit = (₴/$27,75*($1.34/bottle *19,500 bottles) - (₴33.80/bottle* *19,500 bottles) = ₴724,025 - ₴660,019 = ₴64,005.
Comparing the price costs converted into UAH and USD, we see that figures for profits differ: if price costs are calculated in USD, profit figures stand at UAH 34,632; if price costs are calculated in UAH, profit figures stand at UAH 64,005,052.
Thus, for LLC “Gorobyna” the price cost calculation in UAH is more profitable than calculation in USD, but this is only at the condition of UAH depreciation. In this case, currency policy should involve restrictions which ensure devaluation of the national currency in order to support the domestic producer. If exporters have the information from the NBU that the exchange rate increases in the future, they will get price advantages. So, such exporters as LLC “Gorobyna” may slightly reduce the export product price and increase their competitiveness at the international market.
REFERENCES
1. Akulich T. Stimulation of the competitiveness of the Belarusian manufacturers through the management of the rate of the national currency / T. Akulich// Belarusian State University. – 2012. - P. 154-156. - ISSN 2519-4437 2012.
2. Polivach P. Single European currency and external trade of the Eurozone countries / P. Polivach// Publications of Young Scientists. – 2012. - P. 87-97
3. Suetin A. Currency risks / A. Suetin// Auditor. – 2011. – № 2. – P. 54-58.
4. National Bank of Ukraine. [Electronic resource]: NBU, 2018. - Mode of access: https://www.bank.gov.ua
5. Parttners. [Electronic resource]: Gorobyna, 2018. - Mode of access: gorobina.sumy.ua
Language advisor: Ph.D. in Philology, L.Hnapovska, Education and Research Institute for Business Technologies “UAB” of Sumy State University
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