Ukraine's Escalating Trade Tensions with Russia

4 MINS READAug 15, 2013 | 10:22 GMT
Russian President Vladimir Putin (R) and Ukrainian President Viktor Yanukovich in Sevastopol on July 28.

Ukraine's effort to balance relations with Russia and the European Union is facing a mounting challenge due to escalating trade frictions with Moscow. According to an Aug. 14 statement from the press service of the Federation of Employers of Ukraine, the Russian Customs Service has put all Ukrainian importers on its list of high-risk importers, and Ukrainian exports to Russia have been halted indefinitely. The suspension has not been confirmed by Russia or Ukraine, but Moscow did announce stricter customs controls on nearly 50 Ukrainian companies at the end of July, and Russia banned all imports from Ukrainian candy maker Roshen. With Ukraine negotiating a free trade agreement with the European Union that Russia has vocally opposed, Moscow's tightened import restrictions can be seen as a retaliatory move meant to disrupt the trade discussions and discourage Kiev from expanding cooperation with Brussels.

As a country located on the borderlands between Europe and Russia, Ukraine has long sought to balance its economic and political relationships with its more powerful neighbors. The country's trade profile reflects this imperative, with the European Union accounting for roughly 30 percent of Ukraine's total trade and the Russian-led Commonwealth of Independent States responsible for around 40 percent. Ukraine exports industrial and agricultural goods in both directions, while relying heavily on energy from Russia and manufactured products from EU states.

Due to Ukraine's strategic location, relatively large population and skilled workforce, Russia and the European Union have sought to build closer economic ties with the country. For Russia, this has involved lobbying Kiev to join the Moscow-dominated Customs Union, while Brussels has sought to reach free trade and association agreements with the country in the context of the Eastern Partnership program

Ukraine has been negotiating with both sides for years, but it has not made any binding commitments to either bloc for several reasons. Brussels has made the free trade agreement contingent on former Ukrainian Prime Minister Yulia Timoshenko, a rival of current President Viktor Yanukovich, being released from prison. So far, the president has resisted complying with the demand due to fears that Timoshenko's release could jeopardize his domestic consolidation of power. Meanwhile, Moscow has offered Kiev steep discounts on natural gas in exchange for Ukrainian assets — particularly natural gas pipelines and storage facilities currently controlled by state energy firm Naftogaz — and accession to the Customs Union, but Yanukovich has declined this offer as well, fearing the loss of sovereignty it would entail.

The biggest obstacle to movement in Ukraine's negotiations with Europe and Russia is that an economic agreement with one side would preclude a deal with the other. Brussels and Moscow have each said that Ukraine's participation in the Customs Union would not be compatible with further integration with the European Union. Given the importance of each bloc to Ukraine's economy, Kiev prefers to maintain trade relations with both, without fully committing itself to one or the other. 

Ukraine's Balancing Act

Thus far, this strategy has worked for Kiev, but Brussels and Moscow are not willing to let negotiations drag on forever. The upcoming Eastern Partnership summit in November could be a turning point for Ukraine's ties with the European Union. If the free trade agreement is not signed then, EU officials have expressed concerns that it could be postponed indefinitely. The possibility of a deal in November has made Moscow nervous, which could explain the timing of Russia's limits on Ukrainian imports, less than three months before the summit.

These restrictions, while likely not a full suspension of imports as the Federation of Employers of Ukraine has claimed, could have a major economic impact if exports such as energy, steel and railcars are indeed held up at the border. Thus, the move is likely a pressure tactic intended to prevent Kiev from signing the EU trade deal and convey what further Ukrainian integration with the bloc would mean for Russian economic policy toward its western neighbor. 

Kiev has reacted to the Kremlin's recent moves cautiously, calling for a dialog with Moscow over the trade frictions. Indeed, Ukrainian and Russian officials are scheduled to discuss the ban on Roshen exports in Moscow on Aug. 16, and the wider trade disputes will likely be discussed at the meeting as well. In the meantime, Ukrainian officials are stressing the importance of Russia to the country. Ukrainian Prime Minister Nikolai Azarov said Aug. 14 that cooperation with the Customs Union should increase, and the signing of a free trade deal with Europe should not preclude such strengthened ties. Nonetheless, Russia has made it clear that it will not tolerate Ukraine's attempts to move closer to both sides simultaneously, and trade frictions will not ease if Kiev's negotiations with the West advance. This pressure will at least complicate the trade talks, if not derail them altogether.

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