Russia’s Main Losses Arise Because It Doesn’t Participate in Integration with the EU

The norms of the agreement on association of Ukraine with the European Union started to be formally applied on Saturday, November 1. However, due to a tough position of Russia which protects its market the economic part of the association will be effective only fr om January 1, 2016.

The agreement between Ukraine and the EU cannot, but have an effect on the Russian economy. Reduction of trade and economic barriers between the two partners which are important to Russia will result at least in a partial reorientation of their demand from Russian produce to that of each other, while in case of a scrupulous implementation of the agreement may lim it access of Russian producers and suppliers which do not meet the European standards to the Ukrainian market.

There is a concern that after reduction of duties Ukrainian goods will be exported to Russia under the guise of European goods or Ukrainian goods driven out from the country by European competitors will be supplied to Russia in such volumes that cause damage to the Russian economy. Such a problem always arises when a country participates in more than one zone of free trade (Ukraine with the EU and Ukraine with Russia). The above problem can be solved by means of application of the rules of origin: the goods are deemed Ukrainian if they were subjected to reasonable processing in its territory. It depends on the customs service to what extent those rules are actually complied with. In the past few years, in Ukraine customs duties on European goods were much lower than in the Customs Union (European fish, medicine, railway cars are imported to Ukraine duty-free, while to the Customs Union, at the rate of 10%-15%). There were no problems with re-export. In case of Belarus, it is more difficult to control re-export as there is no customs border.

A partial closure of the Ukrainian market for Russian suppliers after adoption of European standards, norms and customs rules which are different from those of the Customs Union may, in our view, result in losses for the Russian economy (up to $2.5bn). It is to be noted that growth in import duties on Ukrainian goods from the preferential level (0% for nearly all the goods) to the level of duties in trade with countries beyond the CIS free trade zone will result in economic losses for all the participants. For Russia and Ukraine, they will amount to up to $2bn and $950m, respectively. Russia's losses are higher in absolute terms, but lower in relative terms: except for gas Russia's trade surplus with Ukraine is a negative one. A possible reduction of the competitive edge of Ukrainian goods on the Russian market due to higher duties is certainly offset by depreciation of the hryvna.

For Ukraine, an agreement on the association with the EU is actually a ready (though incomplete) list of institutional transformations to be carried out in the economy. The way it will be implemented depends on the political will of its leadership. Both scrupulous fulfillment and sabotage of the agreement are possible. Threats of retaliatory restrictive measures are unlikely to influence Ukraine's decision on the rate and extent of implementation of the agreement, while additional trade barriers inflict losses on all the participants.

The main losses for Russia arise due to the fact that it does not participate in integration with the EU: Russia is missing one of the few left sources of growth. Development by some CIS states of integration with the EU makes Russian losses even higher.

Аlexander Knobel, Head of the Foreign Trade Department