Hidden Sting Raises Costs for Ukraine in Russian Trade War

Map of Ukraine, Including Crimea, and Neighbors, Including Russia

(Bloomberg – bloomberg.com – Daryna Krasnolutska – January 14, 2016)

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With the conflict in Ukraine already having ravaged bilateral trade, Russia canceling a free-trade pact with its former ally wasn’t seen as a big danger. But there was a twist.

On top of annulling the accord, a response to Ukraine’s trade agreement with the European Union, Russia halted onward transit of its neighbor’s goods to markets in central Asia. Even if other routes are eventually found, the trade disruption — along with a ban on Ukrainian agricultural imports into Russia — may add up to 0.5 percent to 0.7 percent of 2016 gross domestic product, investment bank Dragon Capital in Kiev predicts.

Highlighting the significance of sales including grains, metals and medicines to countries such as Kazakhstan and Azerbaijan, data reported Thursday showed exports to central Asia reached $1.4 billion in the first 11 months of 2015.

Russia’s move, which Ukraine says breaches World Trade Organization rules, comes at a delicate moment for the nation’s economy. Having exited a 1 1/2-year slump in the third quarter, a Bloomberg survey of economists in December put the chance of another recession in 2016 at 60 percent. Ukraine’s currency, the hryvnia, has weakened by almost a third in the past year and may also face renewed stress.

“The transit blockade poses meaningful risk to Ukraine’s current account and will compound pressures on the hryvnia in the coming weeks and months,” Dragon said this week in a research note.

It will also push inflation “slightly” higher, the Economy Ministry said Thursday. Consumer prices, still feeling the effects of the hryvnia plunge, surged 43.3 percent from a year earlier in December.

Trade between Ukraine and Russia was already on the rocks when President Vladimir Putin annexed Crimea in 2014. That was a response to the ouster of Ukraine’s pro-Russian leader Viktor Yanukovych, who was deposed after refusing to sign EU association and free-trade pacts. Russia had wanted Ukraine to join a rival trading bloc that now includes Kazakhstan, Belarus and Armenia. Ukraine instead sealed the EU deal, which began Jan. 1.

The EU and China have since overtaken Russia in terms of trade with Ukraine. Exports to Russia dipped to 12.7 percent of the total in the first 11 months of 2015 from 18.8 percent a year earlier, official data showed Thursday.

Russia’s transit ban has left Ukraine searching for alternative export routes. One option is to send shipments through its northern neighbor, Belarus, though journeys are longer. More ambitiously, Prime Minister Arseniy Yatsenyuk says Ukraine will this week test deliveries to Azerbaijan and Kazakhstan via Georgia, another nation to plump for free trade with the EU over the Russia-led Eurasian Economic Union.

Ukraine’s trade partners may also help. In a phone call Tuesday with President Petro Poroshenko, Kazakh leader Nursultan Nazarbayev vowed to prevent discrimination in bilateral trade.

Even so, the trade war shows no signs of letting up. Yatsenyuk this week ordered officials to expand a list of banned Russian goods.

“From Jan. 1, a powerful, large-scale economic aggression has begun, imposing an embargo on a great range of Ukrainian goods,” Poroshenko said Thursday.

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