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Apr 20, 2017 | 19:59 GMT

The Economic Ramifications of Conflict in Ukraine

By all appearances, the Ukrainian and Russian economies seem certain to keep drifting apart in the years ahead.
(Stratfor)
The Economic Ramifications of Conflict in Ukraine

The conflict in eastern Ukraine has dealt a particularly heavy blow to its economic relationship with Russia. Much of Ukraine's industrial production was taken offline as its separatist rebellion escalated into a full-fledged war. The country lost a sizable share of its exports, while its GDP saw a double-digit contraction. Kiev, along with the European Union and United States, slapped Russia with sanctions for its actions in Crimea and Donbas; Moscow responded in kind, leveling its own punitive measures against Ukraine and its Western backers.

Around the same time, the Ukrainian government began to draw down its imports of Russian natural gas in response to a pricing dispute, and it started looking for new energy partners elsewhere. To that end, it began importing reverse-flow natural gas supplies from neighboring EU states such as Poland, Hungary and Slovakia. (Though these supplies still technically originated from Russia, they weren't subject to the same contractual conditions as direct imports from Russia.) By the beginning of 2016, Ukraine had halted all of its natural gas imports from its eastern neighbor.

Together, these moves have cut deeply into cross-border trade between the two countries. In 2013, just before the Euromaidan protests reached their peak, Ukraine exported some $15 billion worth of goods to Russia each year. The following year, that figure fell to $9.8 billion, dropping again in 2015 to $4.8 billion. By 2016, Ukraine sent only $3.6 billion in exports to its eastern border, and they amounted to only 8 percent of its total exports. The European Union, on the other hand, grew to account for over 37 percent of Ukraine's exports in the same year.

That trend has only picked up pace in 2017. At the start of the year, far-right activists and Donbas war veterans imposed an informal blockade on rail and cargo traffic — including anthracite coal shipments — flowing from the separatist territories to Ukraine proper. The leaders of the self-declared autonomous republics of Donetsk and Luhansk then retaliated by seizing control of Ukrainian plants and companies operating in their regions, bringing them under "external management." In response, Kiev erected an official blockade against the two republics, and virtually all economic activity between Ukraine and the rebel regions ground to a halt.

By all appearances, the Ukrainian and Russian economies seem certain to keep drifting apart in the years ahead. Free of its own historical dependence on Russia, Ukraine will look to other markets, especially Europe, for new export destinations and energy supplies.

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