Denunciation of treaty on cooperation with Russia: Any economic consequences?

Author : Oleg Ustenko

Source : 112 Ukraine

Commentary of Oleg Ustenkoon the proposal of the Ministry of Foreign Affairs of Ukraine to denounce the Treaty of Friendship with Russia
20:30, 19 March 2018

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112 Agency

Until 2014, when Ukraine was quite dependent in terms of its GDP and exports from the Russian Federation, in every hryvnia that we received here, 20 kopecks were paid to consumers in Russia. At that time it was the maximum that existed.

At the same time, we gave Russians in each ruble, which they received, about 2.5 - 3 kopecks. We gave them 40% of our exports, which was 20% of our GDP, while they gave about 6% of their exports (that is 6% of their exports went to the territory of Ukraine). Even for those times, we were very dependent on the Russian Federation, and they were much less dependent on us.

It is clear that Ukraine was trying to increase its presence in many markets, including the Russian market. Until 2013, there were various attempts to do this. Here Groysman recalled the agreement signed in 2011. In autumn 2013, against the backdrop of a permanent trade conflict with Russia, Ukraine signed an agreement on a free trade zone within the CIS. Ukraine was subjected to serious pressure from Russia, for example, in the summer of 2013, Ukrainian producers were banned from partially exporting to the Russian Federation. You remember the cheese-milk "wars", and at the same time, for example, we were banned from supplying pipes of small diameter to the territory of the Russian Federation, the delivery of cutlery, which seemed generally some kind of nonsense. That is, Russians then demonstrated that, in general, they could affect our exports.

Now the situation has changed. For every hryvnia, which we get here, somewhere around 5 kopecks is paid by consumers from the Russian Federation. Yes, we do change our export flows. The EU has become an important export destination for us. Now about 17-18 kopecks of each hryvnia, which we get here, are paid by consumers in the EU. However, if you look at the volume of our exports, it has sharply decreased.

Here is the problem. We have a reorientation to other markets, but the question is, what products we sell there. Until 2014, about 70-80% of our high-tech engineering exports went to the territory of the Russian Federation. It was $ 7-8 billion. By today's standards, it is about 8% of our GDP. If we assume that it was possible to restore our machine-building exports to the territory of the Russian Federation, we could simultaneously receive a 7-8% increase in our growth. The main blow of the Russian Federation was not aimed at the grain market, not at the market of metallurgy, but at engineering high-tech products. But here a serious problem: our machine-building products were consumed mainly in the Russian Federation, and only a quarter of it went to other regions. I assure you that this quarter did not belong to the EU.

The problem was that we continued to exploit the old chain when there were vertical integrated companies within the Soviet Union. And so the Ukrainians swam with the flow, they sold their products there, not really thinking about the need to modernize their enterprises, enter other markets, for example, at least try to enter the Latin American markets more actively. And now all this rhetoric is already annoying. Over the past ten years, it's the same - let's try to enter other markets, diversify our exports. That's right, this must be done.

But I would say that even if Ukraine denounces the Treaty of Friendship with Russia, it will be only a symbolic rupture. Although I also don’t take this symbolic rupture seriously. After all, frankly, I do not see any serious economic consequences. The contract described much less than in the next treaty, which is about Ukraine's entry into the free trade zone within the CIS. All issues cannot be solved within the framework of one contract. We and Russia are members of the WTO. Both we and Russia can make demands to each other within the framework of the WTO in Geneva. In Geneva, you can file lawsuits against each other; try to actively defend your interests, if we suddenly decide to continue to export our goods to the territory of the Russian Federation.

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