Trade War With Russia Could Devastate Ukraine’s Budget

August 16, 2013
Trucks queued on Ukraine's border, waiting to enter Russia | Фото: Максим Малиновский

By the end of the year, tough customs measures taken by Russia against Ukrainian goods could cost Ukraine up to $2.5 billion.

Ukrainian exports of goods to Russia have virtually stopped. This is according to the statement by the Federation of Employers of Ukraine (FEU).

Vehicles carrying Ukrainian products are subject to additional scrutiny for no obvious reasons, including unloading, re-weighing and loading back, says the FEU statement, noting that the situation is unprecedented.

Initially, politicians in Kiev declared that these measures taken by Russian authorities are directed against Pyotr Poroshenko, a Ukrainian tycoon, and the Roshen corporation that he controls. After the company’s deliveries were also blocked by Kazakhstan, the emphasis changed: now he says that the member countries of the Customs Union are acting against him, because he is one of the leaders of Ukraine’s Euro-integration drive. But he is not the only casualty of the customs war, although he had to lay off some workers. Another one is Rinat Akhmetov, also a tycoon and a member of the ruling Party of Regions. Metinvest Group that he controls, suffered financial losses associated with increased customs control at the Russian border. The biggest problem is that the mass authentication of certificates of origin for metal products imported from Ukraine. The products can be sent to Moscow for examination, which can take up to two months.

According to the FEU estimates, losses resulting from measures taken by Russia can reach $22.5 billion in the second half of the year.

Ukrainian experts are wondering why the situation deteriorated specifically in August. The answer was given by Russian State Duma deputies, who noted that the difficulties associated with the passage of Ukrainian goods through Russian customs are largely caused by bureaucratic delays due to the fact that Ukraine is not a member of the Customs Union. This explanation was offered by Leonid Slutsky, the Chairman of the Duma Committee on CIS Affairs.

“The statements by Russian officials essentially mean that there wouldn’t be any problems if Ukraine was a member of the CU. This clearly indicates the political nature of what is happening,” Valeriy Chaly, a Deputy Director of the Razumkov Center and an economic expert, told Izvestia.

According to him, Ukraine businesses, as well as the government and the opposition, “see this as an attempt to put pressure on the country ahead of the signing of the Association Agreement with the EU.”

The expert noted that President Viktor Yanukovych is unlikely to change his position, the agreement will be signed, so it is possible that bilateral trade problems will only become more serious.

“But this is a bad scenario, because the relations with Russia are very important for Ukraine, including in the context of European integration,” concluded Chaly.

“The Russian move to limit supplies intimidates the Ukrainian authorities, urging them not to join the Customs Union, but to maintain an observer status. This aggravation of the scandal right now, three months before the scheduled signing of the agreement with the EU, indicates that Kiev has been made to face a choice: you go either eastward of westward, Alexei Poltorakov, an economic expert from the Institute of Ukrainian Politics told “Izvestia.”

The leadership of the ruling Party of Regions believe that the “sanctions” will hurt not only Kiev, but Moscow as well. According to Vladimir Oleynik, a legislator and a member of the ruling party, it appears that by using such harsh methods they are trying to persuade Ukraine to cooperate with the CU.

“But we are already cooperating, anyway. So there is no need to convince us of the importance of such economic contacts. If our goods do not reach Russian markets we will not be the only ones to suffer,” he argues.

Kiev is willing to compromise. It offers Russia the export of Rochen products under tight control. This was stated by the Minister of Agrarian Policy and Food of Ukraine Mykola Prysyazhnyuk.

Obviously, the situation has reached the point when they are trying to demonstrate to Kiev possible economic and social consequences of the “civilizational choice.” Ukraine exports to Russia not only food, but also heavy industrial products. It cannot lose this market. Customs war with Russia results in massive layoffs at major Ukrainian enterprises, which automatically leads to a decrease of budgetary revenues in the form of taxes and social contributions. At the same time, Ukrainian budget deficit has reached a critical level, exceeding $2.8 billion.

There are already more than a thousand trucks on the Ukrainian-Russian border, Leonid Shlyapnikov, the General Director of Sovtransavtoekspeditsiya told Izvestia. All the costs are borne by the freight owners and will translate into higher prices for goods. Growing Ukrainian exports to Russia could be hit hard, he said. In his view, retaliatory measures against Russian shipments through Ukrainian territory should be expected.

So far, shipments from Russia have been entering Ukraine without any problems, a representative of another shipping company notes. As to the opposite direction, the new customs procedures mean at least two weeks of delay, he said.