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Why Ukraine needs to build economic relations with CIS countries?

Author : Oleksiy Kushch

Ukraine is gradually falling out of the global value chains, more precisely, it is slipping into the lowest part of the “food chain” of the world economy. Europeans buy our raw materials and food, but the share of industrial and consumer goods in these shipments is still clearly insufficient for a qualitative leap
13:10, 20 June 2019

112 Agency

The issue of economic cooperation between Ukraine and the CIS countries has always been a favorite topic of politicians and an unloved topic of economists. The first used it to discredit the power that “trades on blood”, the latter feared accusations of working for the “hand of the Kremlin”.

In this article we will try to give the most objective analysis on this theme, without politicized conclusions.

In recent years, Ukraine has largely lost its CIS markets. Why are they still important to us? The fact is that after the crisis of 2014-2015, our enterprises partially compensated for their trade losses by finding new niches for their products in alternative markets. Most of all, we export goods and services to the markets of Africa, Asia and America, although we have an agreement on the creation of a free trade zone with the EU.

In fact, it was only last year that we reached the pre-crisis indicators in terms of supplies to the eurozone. Although in 2013 the format of an FTA did not yet exist. This is explained rather trivially: our exports are becoming increasingly “flat” in terms of the level of added value, slipping into the raw materials paradigm, where even semi-finished products are considered as a significant breakthrough in the product line.

Ukraine is gradually falling out of the global value chains, more precisely, it is slipping into the lowest part of the “food chain” of the world economy. Europeans buy our raw materials and food, but the share of industrial and consumer goods in these shipments is still clearly insufficient for a qualitative leap, which is already noticeable in the dynamics of increasing export figures.

If in previous years, exports increased by 20% or more, mainly due to the low base of comparison of the level of 2014-2015, as well as due to the factor of the new market. Now this dynamic has slowed down to the level of single-digit numbers.

The disclosure factor of trade gateways has already been exhausted, as well as the low base of comparison; now it is necessary to grow due to a new model of economic development, suggesting a gradual increase in the level of value added in exported goods. For this, it is necessary to apply a new industrial and investment policy, which we do not have even on paper.

But let’s return to the markets of the CIS and their significance. There we sold a large part of industrial products, which are not in demand in the more competitive markets of Europe and America.

We can solve this problem by simply stating that we do not need the rusty industrial belt of the times of the Ukrainian SSR, but in order to have the right to say so, it is necessary at least to present a real, adapted to our conditions, new concept of transition to the post-industrial phase of development, without forgetting that even such a classic post-industrial economy, like the American one, has now begun reanimation of a somewhat extinct industrial core and is pursuing a classical neo-Keynesian policy of fiscal and monetary incentives for the development of the industry, including a such tool as cheaper energy factor of production in the form of cheap electricity and gas prices for industry.

If in 2013 we exported goods from the section "machinery, equipment, transport, devices" in the amount of 10.6 billion dollars, in 2018 this figure fell to 3 billion, that is, more than three times!

This disproportion is also seen in the analysis of relative indicators, such as the ratio of exports for this group of products to total sales in foreign markets. In 2013, goods with a high level of added value accounted for 16% in the overall structure, and in 2018, already for 6.9%. The drop is 2.3 times.

We did not find compensatory markets for our industry, which is outdated. But it provided the work for Ukrainians, paid taxes to the budget and formed the minimum demand for domestic innovations. It’s not so bad that it disappeared, like the fact that nothing appeared in return: we now buy helicopters in France and diesel locomotives in the USA.

One of the problems of our policy is that we often put an equal sign between the CIS and the Russian Federation, blocking all forms of economic cooperation. But the CIS includes Kazakhstan, Central Asian republics, neighboring Belarus, and progressive in the context of social change Armenia.

Previously, we could lobby our interests using Ukraine’s participation in various commonwealth agreements, which, by the way, did not contradict either the FTZ model with the EU or the European integration aspirations of our country. Now a part of these agreements has been canceled, a part is blocked, the rest are simply not used. But the Ukrainian economy is currently less competitive than many CIS countries.

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Under these conditions, if you do not have the tools of international lobbying agreed in the framework of special agreements, everything is regulated by the WTO, which is a priori in favor of maximum trade liberalization. In simple words, we lose the opportunity to sell our goods in the CIS markets, as there is a special trading mode.

And the countries from the side initially have the worst starting position, at the same time the CIS states are actively selling their goods to us, and Ukraine’s attempts, for example, to block ammonium nitrate imports from the Russian Federation by means of special duties, have been successfully challenged by Russia under the WTO procedures.

What this strategy led to is clearly seen when analyzing the performance of our exports to the CIS countries in 2013 and 2018.

In 2013, exports of goods and services from Ukraine to the CIS markets, according to the National Bank, amounted to $ 33.6 billion, and imports – to $ 35.4 billion. A negative balance of $ 1.8 billion was formed in favor of the CIS countries. Then it was about 1% of GDP. In 2018, figures dropped significantly for objective reasons: exports fell to $ 11.5 billion, and imports fell to 15.7 billion.

But we are interested in the trade balance. So, on the volumes that have fallen, the negative for us trade balance rose to the mark of 4.2 billion dollars, that is, by 2.4 billion, or 2.3 times. With respect to GDP, it is already more than 3%! It should be noted here that the statistics of 2018 did not include the supply of natural gas, that is, the real trade ratio would be even worse for us.

That is, the current policy, provided allegedly for fighting the aggressor and served to society through beautiful patriotic phrases, is in fact irrational and unpatriotic, since: a) it weakens our economy due to the loss of industrial markets; b) it strengthens the economy of the aggressor, since we continue to buy its main export goods in the form of energy resources.

Globally, there are only two models of how militarily weaker countries built their relations with a more powerful neighbor.

The first model is the Cypriot one, which was applied in Cyprus after the Turkish invasion and the establishment of the unrecognized Turkish Cypriot Republic under the protectorate of Turkey. The essence of the model is the complete isolation of the territories under control from uncontrolled and interruption of any forms of interaction with the aggressor country.

This technology yields positive results only if an effective program for long-term economic growth is developed: Cyprus has become a global corporate hub, has relied on tourism, maritime, transport logistics, as well as the financial sector and real estate. Now in Cyprus, innovative industries are actively developing, for example, biotechnologies. They are actively investing in medicine, science and education.

As a result - Cyprus has taken one of the first places in terms of efficiency among the island economies of the world. In addition, Cypriots successfully exchanged their claims against Western partners for unfulfilled security guarantees for additional preferences. Thus, the country-guarantor the United Kingdom became the promoter of the corporate hub in Cyprus, created on the basis of English law, and its European integration locomotive.

On the other hand, there is a Finnish model suggesting that a country that was on the verge of  extinction as a political nation allows for the exchange of territories and certain obligations of neutrality for peace, security and economic preferences: there was a model of zero trade balance between Finland and the USSR when import and counter-export coincided in value, with the only difference that the Finns bought cheap resources in the USSR, for example, wood, and sold goods with a high level of supplementary rates, such as paper products.

In the second half of the 20th century, this model of economic cooperation became one of the elements of regional competitiveness for Finland, as a result of which a backward country quickly caught up with the level of development of neighboring and more industrialized Sweden.

From the point of view of the basic model, Ukraine is in a kind of "limbus", in between. The one hand, the Finnish scenario is grossly contrary to our Constitution. As for the Cyprus scenario, its implementation is possible only if there is an effective plan for economic growth. Plus, building qualitatively new relations with Western partners, which should compensate for the security guarantees they violated, for example, in the form of trade and investment preferences for the affected country.

But here we have a problem: there are no political elites in the country capable of intellectual economic discourse, all the more willing to implement this discourse into real state policy.

In addition, their ability to build the necessary dialogue with the West in the context of Ukraine receiving certain preferences is also very limited: corrupt “elites” always want to have only personal preferences, and the West can reasonably say to them: take the money you have stolen from offshore and feed your people.

In this case, the use of a poorly prepared Cyprus scenario would only mean a very fast annihilation of our economy through self-destruction.

Unfortunately, we still do not have a clear concept of how to further build economic relations with the CIS countries. Bilateral format is clearly not suitable here because of the presence of international regional agreements. It is much easier for our officials to manually prohibit the supply of Russian formalin and glass containers, without noticing at the same time more "big fish".

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