Visa-free travel: the economics of a queue that disappeared

Visa-free short-stay travel to the Schengen area began for holders of Ukrainian biometric passports on 11 June. It permits ninety days in any hundred and eighty for tourism, business or family visits. It does not permit work.

The public reaction has been about tourism and about dignity, both understandable. This entry covers the commercial consequences, which are larger and which arrive on different timescales.

The immediate effect: transaction costs in trade

The cost of a Schengen visa was never the fee. It was the two to three weeks of lead time, the appointment scheduling, the documentary requirements and the uncertainty about approval.

Consider a small Ukrainian manufacturer receiving an enquiry from a German distributor who wants to visit the production site or meet at a trade fair. Under the visa regime, the earliest realistic response was a month out. Competitors in Poland or Slovakia could be there the following week. That gap decided a meaningful number of contracts, and it is now closed.

The categories that benefit most are those where the sale requires a person in the room: bespoke manufacturing, engineering services, food products requiring buyer site visits, and anything sold at trade fairs.

The larger effect: services exports

Ukraine's fastest-growing export is software and IT services, running above three billion dollars annually and growing at more than twenty per cent. The delivery model has been remote, with periodic client visits that required visa planning a quarter ahead.

Removing that constraint changes what Ukrainian firms can sell. Projects requiring on-site discovery, embedded team members or regular client workshops were previously the preserve of vendors with an EU presence. They are now available to a Kyiv or Lviv company with a laptop and a passport.

The same logic applies to design, architecture, engineering consultancy, marketing and legal support services. Ukraine's services exports are underdeveloped relative to its skills base, and the binding constraint was partly mobility.

The effect that requires planning: labour

Visa-free travel does not confer work rights, but it lowers the cost of exploring the possibility, and the labour outflow was already accelerating. Poland has issued well over a million work-related documents to Ukrainians in two years. The Czech Republic, Hungary, Slovakia and the Baltic states are recruiting.

The wage differential does the work: three to five times more for a welder, driver, nurse or construction worker, in a language that takes weeks rather than years. That arithmetic is not going to be argued away.

The consequences are already visible domestically. Wage inflation in construction, logistics and industry is outpacing productivity. Employers in the west report vacancies open for months. Any business plan for Ukraine built on the assumption of abundant cheap labour is now out of date, and the gap between that assumption and reality will widen every year.

What to do about it

For anyone with a Ukrainian operation: model your labour costs upward, and invest in the things that reduce headcount per unit of output. The firms that did this in 2015 and 2016 are the ones not struggling now.

For exporters: use the mobility while it is still a differentiator. Attending European trade fairs in person is the cheapest competitive advantage available to a Ukrainian supplier this year.

For anyone assessing Ukraine as an investment destination: the country has just become substantially more integrated with EU labour markets without gaining any of the offsetting mechanisms that come with membership. That asymmetry is a real medium-term problem, and it is the single most under-discussed issue in Ukrainian economic policy.

Related in this archive

• Why the reform direction became irreversible, and what irreversible actually means
• When a free trade area actually starts working, and why it takes longer than the signing
• What external partners can actually deliver, and what they cannot
• Ukraine Annual Review 2017: growth returns and the constraint changes

The queue disappearing was a direct gain in speed in my work: sending an engineer to a European factory for training stopped being three weeks of applications and became a plane ticket. The real effect on trade is not tourism but people being able to see each other. The effect on the labour side needed planning, and most companies did not plan for it.