Trade war between Ukraine and Russia: method of embargo

Author : Elena Gerasimova

Source : 112 Ukraine

Ukraine and Russia are ceasing mutual trade relations, which would not positively affect their economies
19:36, 21 January 2016

January 20 the Cabinet of Ministers of Ukraine adopted a resolution according to which the list of Russian-made goods, the import of which is prohibited in the Ukraine, should increased by more than 70 positions. Such a decision was based on the instructions given by Prime Minister Yatsenyuk. "This step is necessary to reinforce the measures already taken by the state to protect the domestic market from the economic aggression of the Russian Federation," he explained.

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Recall that on January 1 this year, the Agreement on a deep and comprehensive free trade area (FTA) between Ukraine and the European Union came into force. Deputy Minister of Economic Development (MED) of Ukraine Natalia Mykolska assures that specialists from MED and the National Bank of Ukraine (NBU) forecast that "the collapse of the market of domestic products and the huge influx of European goods into the country will not happen".

Related: Russia to introduce economic sanctions against Ukraine

Russian authorities have repeatedly expressed their concern about the consequences that will have its effect on the Russian market. "In the short term, the potential damage to Russian companies could exceed $ 3.5 bln," said Deputy Minister of Economic Development of Russia Alexei Likhachev. Therefore, Russia insisted on the conclusion of additional tripartite agreement, which is legally forced EU and Ukraine to eliminate the risks associated with the customs, veterinary and phytosanitary control, uncontrolled influx of goods from third countries via Ukraine, etc. However, the negotiation process that led to the side for nearly two years, ended without a result - the representatives of Ukraine and the EU refused to sign such a document.

As a result, the State Duma adopted the law on the suspension of the FTA with Ukraine, which entered into force also on January 1. "This regulation not only abolishes the Ukraine’s preferential trade regime in the framework of a free trade area for the CIS countries and involves setting of the “most favorable customs rates”, but also deprives the country of preferences in other areas - sanitary and phytosanitary measures, customs, migration, services, investment, etc.,” noted the representative Russia’s Ministry of Economic Development.

In addition, Russia’s Cabinet of Ministers has adopted a decree on food embargo to Ukraine, as a part of restrictions imposed on those countries that have supported economic sanctions against Russia. This kind of trade limitations came into force on the first day of this year. It includes the prohibition of importation of meat, milk, fish and related products, as well as fruits and vegetables.

"Now the share of these goods in total exports of Ukrainian agricultural products to the Russian Federation is 46%, and total exports of these products amounted to 1%," emphasized Ukraine’s Minister of Agrarian Policy and Food Oleksiy Pavlenko. He also noted that in recent years, the volume of Ukrainian agricultural supplies to Russia has been steadily declining, and in the past year it was really reduced. Therefore, in January-October 2015 it decreased by 73% - up to $ 253.8 mln compared to the same period last year. In particular, Ukraine stopped importing to Russia condensed milk, animal oil, eggs, fish products and shellfish, cereals, oilseeds, and sugar confectionery.

Related: It is possible to trade with Russia but without economic foolishness

Related: It is possible to trade with Russia but without economic foolishness

Some experts believe that the impact of trade barriers imposed by Russia in response to FTA between Ukraine and the EU will not be significant for the Ukrainian economy. "Russia’s unilateral cancellation of free trade regime with Ukraine will reduce the volume of Ukrainian exports to Russia for more than $ 1 bln, what is 1% of (GDP). The losses from the introduction of partial food embargo will not even reach $ 130 mln, which is altogether 0.1% of GDP," says the expert of the Kyiv Institute for Economic Research and Policy Consulting Mykola Ryzhenkov.

In addition, the majority of experts has an opposite vision. "Despite the fact that in recent years exports from Ukraine to Russia have significantly reduced, its share in the total Ukrainian exports still amounted to 10-12% to the end of 2015. The volume of exports from Ukraine to the European Union (EU) are declining even faster. So, by the end of the first half of last year, it decreased by almost 35%. The European market will not become an alternative to Russian one, and the domestic exporters will have to limit their production," suggests the head of the VTB Bank Treasury Stanislav Verhgradsky.

According to the Head of Strategic Planning UniCredit Bank Yegor Perelygin, this sales crisis might have irreversible consequences. "It is possible that the loss of traditional markets, such as Russian Federation, would ultimately undermine the Ukrainian machine building, chemical and polymer production, and industrial segments. At the moment, domestic industry and some agricultural segments are not ready to enter the EU market due to non-compliance of their products with European technical standards and phytosanitary regulations," the expert noted.

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Meanwhile, in response to the Russian Federation, Ukraine has found it necessary to introduce the counter-trade restrictions. Resolution on the establishment of import duties on Russian goods has entered into force January 2. The supposed purpose of this resolution was "protecting the economic interests and security of Ukraine, rights and freedoms of its citizens from the actions of the aggressor state - the Russian Federation, which restricts the rights and interests of country’s subjects of foreign economic activity". Ban on the import to Ukraine of 43 kinds of Russian goods came into effect January 10. It includes foods, some types of chemical products used in agriculture, equipment for railways and diesel-electric locomotives.

Related: Peak of economic problems in Russia not over yet, - ex-Finance Minister
Ukrainian Minister of Agrarian Policy has stressed that in monetary terms, total exports from Ukraine’s agricultural exports to Russia is almost equal to the volume of imports of goods which are banned. "For 10 months in 2015 total shipments of agricultural products from Ukraine to Russia amounted to $116 mln, while imports of prohibited goods is $ 118.8 mln,” said Pavlenko. In his opinion, Ukraine will lose nothing when it stops selling and buying.

In turn, some experts also believe that establishing the trade barriers will not affect Ukraine’s economy. "Now, many Ukrainians without any formal prohibitions refuse to consume Russian. This reduction in demand impulse Russia to decrease the supply its products to Ukraine,” says Oleksandr Kovalchuk, expert of agricultural markets association. “If we take into account the capabilities of domestic production and the capacities of purchases of the relevant goods in foreign markets, none of Russian prohibited goods is critical for Ukraine’s economy".

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There are some accepted standards, according to which the expansion of the range of markets and an increase in turnover in the foreign trade are signs of economic growth. Although Ukrainian officials and experts express the belief that the loss of Russian markets would not undermine the country's economy. However, it is clear that due to the introduction of Russian-Ukrainian trade barriers many domestic exporting companies will be forced to either urgently diversify markets, or limit their production. Therefore, there would be less currency in the treasury. Importing companies will have to completely restructure or liquidate their own business, which means that the range of products on the market will become even poorer. In short, Russian restrictions and Ukraine’s counter measures would not adversely influence the economic situation of both of the countries.  

Related: China connects Russian and Ukrainian economies

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