Ukraine is offered an enticing offer to join a Russia-led customs union.
In a bid to scuttle free-trade talks between Ukraine and the European Union, Russia on April 7 offered Kyiv an $8 billion annual discount on natural gas if it opts instead to join a Russia-led customs union.
But despite ongoing tough negotiations with Brussels over trade, Ukraine appeared ready to side with the EU and spurn the Russian offer.
Ukraine can’t do both, and how it resolves the issue will be seen as a key test of its intentions to integrate the nation’s economy more deeply with the West.
Ukrainian President Viktor Yanukovych made clear on April 7, during his annual state-of-the-nation address, that his administration would pursue less-protectionist trade with both Europe and former Soviet republics.
Moscow has long urged Kyiv to also join the customs union whose other members include Belarus and Kazakhstan.
Further development of our ties with the customs union will be based on new agreements – a free trade agreement and a possible agreement on cooperation under a ‘3+1’ scheme.”
– Viktor Yanukovych, president of Ukraine.
Both of those nations agreed last year to bring their foreign trade policy in line with Russia and open up their markets. But for Ukraine, such a deal would preclude signing a free trade agreement with the EU.
Yanukovych’s annual address to parliament comes ahead of Russian Prime Minister Vladimir Putin’s April 12 visit to Ukraine-, one that is sure to revive trade talks.
“I think the further development of our ties with the customs union will be based on new agreements – a free trade agreement and a possible agreement on cooperation under a ‘3+1’ scheme” involving Russia, Belarus, Kazakhstan and Ukraine, Yanukovych said.
Just as Yanukovych was delivering his speech, the deputy head of Russia’s gas giant Gazprom, Valery Golubev, said Russia could cut Ukraine’s annual gas bill by $8 billion if it joins the customs union.
The geopolitical tussle comes as Kyiv officials completed a week of critical negotiations in Brussels over free trade and associate membership agreements. Both sides hope to finalize the agreements this year.
The Kremlin offer illustrates Russia’s desire to keep Kyiv within its sphere of influence. It could prove tempting for Ukraine, whose economy relies heavily on Russian fuel imports and is crawling out of a deep recession.
Sharp natural gas price hikes imposed by Russian since 2006 have hurt profits in Ukrainian factories and have kept annual inflation rates at double-digit levels.
“This is a serious offer from the Russians, who seem desperate to lock Ukraine in and make sure it does not sign the free trade agreement with the EU,” said Timothy Ash, global head of emerging markets research at the Royal Bank of Scotland in London. “Ukraine is, as ever, swinging both ways, trying to milk both cows.”
This is a serious offer from the Russians, who seem desperate to lock Ukraine in and make sure it does not sign the free trade agreement with the EU.”
– Timothy Ash, global head of emerging markets research at the Royal Bank of Scotland.
Asked about the Russian offer for a massive gas price discount, a senior Ukrainian official said: “We’ve come so far in free trade talks with the EU that we can’t turn back. The Russians finally realized we are really close to completing a free-trade agreement with the European Union. They didn’t believe we could get so close.”
However, the official stressed that Ukraine seeks to preserve its large volume of trade with Russia and other former Soviet republics, on par with trade to Europe.
Thus, the official said, Ukraine will “seek a free trade agreement with Russia and other neighbors, but only if it is based on [World Trade Organization] rules.”
Meanwhile, EU officials have expressed concern in recent weeks about Ukraine’s demands to keep protectionist policies in place for a range of products, including grain.
The Russian proposal could offer short-term breathing space for Ukraine’s ailing economy, while the EU free-trade deal could bring short-term pain to Ukraine’s economy as it adjusts to the new competition.
According to Ash of the Royal Bank of Scotland, the Russian offer “represents a $200 per billion cubic meter cut in Ukraine’s gas price. It could push Ukraine’s current account into surplus.”
But in the long-term, Ukraine and Europe will benefit from more trade.
Ukraine’s 45 million people offer a vast and largely untapped market for EU products, while Ukraine already ranks as a top global exporter of grain, metals and chemicals. Other domestic sectors, however, are in dire need of becoming more competitive.
A free trade deal with the EU could also stimulate lagging foreign investment in corruption-tainted Ukraine.
Read also ‘Vox Populi with Nataliya Solovonyuk: Do you think it would be better for Ukraine to enter the Russia-led customs union or the free-trade area with the European Union?‘ and ‘Crunch time‘ editorial.
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