You're reading: Do not enter: Russia’s trade war with Ukraine

Ukraine woke up to bitter news on July 29, when Gennady Onishchenko, Russia’s chief health inspector, announced an across-the-board ban on imports of chocolate and other sweets produced by Roshen, the country’s largest confectioner.

The announcement came after Rospotrebnadzor, the Russian government inspection agency, said it had detected “systemic violations” in the company’s sweets, including high levels of the cancer-causing substance benzopyrene.

Roshen, Ukraine’s largest exporter of sweets to Russia, quickly denied the allegations and pointed to the fact that no other country that had examined the products, including Customs Union members Belarus and Kazakhstan, found traces of the chemical. Moldova also tested Roshen products and found no benzopyrene.

Observers say the candy ban is a knee-jerk reaction to a new import tax on cars that affects Russian automakers. It is also seen as the latest move in an escalating trade war that has grown more serious as a November EU-Ukraine summit approaches, where a bilateral landmark free trade agreement with the 28-nation bloc could be inked.

Experts were quick to point out that other countries affected by the tax have levied reprisals against Ukrainian imports. First Deputy Prime Minister of Ukraine Serhiy Arbuzov on July 29 denied any “trade war,” saying officials were looking into the matter.

The announcement of the sweets ban came on the heels of Russian President Vladimir Putin’s visit to Ukraine in late July to celebrate the anniversary of the Baptism of Kyivan Rus alongside his Ukrainian counterpart Viktor Yanukovych and persuade him to reconsider signing the agreements with the EU. Instead, Putin pushed penning a deal with the Customs Union.

Although Ukraine has observer status in the Custom Union, it has resisted joining it, publicly saying it prefers integration with the EU, which would give it access to the world’s biggest market. Russia meanwhile stands to lose control and influence over Ukraine if the country further integrates with the West, hence the strong-arm tactics employed against Ukrainian goods manufacturers.

Ukraine’s hard-currency-starved economy is particularly vulnerable at the moment. The central banks announced this week that foreign currency reserves fell to $22.7 billion following debt repayments. Reserves now stand at the equivalent of 2.7 months of imports, below the widely acknowledged safety threshold of three months. With the threat of a devaluation crisis constantly in the air, even small shocks could push the country over the edge.

Generally speaking, large producers will be left merely bruised by Russian sanctions, “but for smaller producers, losing even a part of the market could severely hurt them,” says Andriy Bespyatov, head of research for leading investment bank Dragon Capital.

“Almost all export of cheese makers goes to the Customs Union, especially Russia. It is also a huge market of our confectionery industry. Several large machine building companies like Motor Sich are also Russia-oriented. The same is true for most of our (train) wagon-making companies, who export up to 90 percent of their products to Russian railways. Most of our pipe making factories export up to 100 countries worldwide, however, up to a dozen of them export the largest part of what they produce to Russia and Kazakhstan,” says Ildar Gazizulin, director of the economic policy and business program at the Kyiv-based Institute for Public Policy.

Ukraine’s confectionary sphere, one of the most developed food sectors in the country, exports half of its products, according to Ukrkondprom, an association of confectionary makers. Most exports go directly to CIS countries, with Russia being the biggest export destination, receiving some 20 percent of all confectionary exports.

Bespyatov says confectionary companies are among those hardest hit by the tough regulatory measures imposed by the Customs Union. Their export to Russia, Belarus and Kazakhstan has been in decline since 2011, dropping a further 6 percent in 2012, according to Ukraine’s State Statistics agency.
Besides Roshen, other companies are vulnerable to retaliatory bans by Russia.

Before the Roshen conflict, dubbed by the media as the “chocolate war,” there was a so-called cheese war in February 2012, when Russia claimed to have found palm oil in Ukrainian cheese. After many tests and months of negotiations, Russia lifted the ban and allowed certain cheese makers to begin exporting goods. But experts say the cheese sector could be singled out again.

Pipes are also likely to be targeted, as experts say about a dozen pipe making plants in Ukraine export most of their produce to Russia. Among them, Ukrainian billionaire Viktor Pinchuk’s  company, Interpipe, stands to lose the most.

On July 16 Russian Prime Minister Dmitry Medvedev said the Customs Union is set to cancel the Ukrainian quota for customs-free export of steel pipes.

“We should use the advantages of the Customs Union for protection from the careless competition from foreign manufacturers,” Medvedev said. Until 2012 the Customs Union allowed 300,000 tons of steel pipes to be exported from Ukraine without custom fees. That number was cut to 120,000 tons in the first half of 2012.

“All pipe makers, large-diameter pipes, in particular, could be seriously hit,” says Bespyatov.

Oleksandr Zholud, an expert at the International Center for Policy Studies, believes this is another area that could escalate into an all-out trade war. “However, Ukrainian pipes are more competitive than Russian domestically-produced pipes, since all the costs, including labor, are lower in Ukraine,” he says.

Zaporizhia’s Motor Sich company, one of the largest engine manufacturers for airplanes and helicopters worldwide, could also face bans or have its exports restricted by Russia, though it’s not as likely, says Bespyatov.

“In terms of risk, Motor Sich is below average, for two reasons,” he said. “First, Russia currently doesn’t have the ability to produce technology like Motor Sich. Its engines can’t be substituted easily. Secondly, (Motor Sich) is also working on joint projects with Russian parties, meaning Russian engine producers are involved, and so this reduces the risk that it will become a target.”

But the fear of losing a big chunk of their market could push other firms to lobby hard for closer relations with the Customs Union, not the EU. This is particularly true since many large firms are owned by lawmakers, or have close ties to them.

For example, Westa ISIC corporation, the biggest storage battery manufacturer in Ukraine, exports 75 percent of its product, most of it to Russia, accounting for a 14 percent market share there. The son of its supervisory board chairman, Denys Dzenzersky, is a parliamentarian from the opposition Batkivshchyna faction.

Many pro-Russian businessmen gathered at a July 29 conference organized by Viktor Medvedchuk, a pro-Kremlin Ukrainian politician who advocates for Customs Union membership. The meeting was attended by Putin, who said Ukraine needs to “join forces” with the Customs Union “to be competitive.”

He also noted that in the first quarter of 2013 trade between Ukraine and Russia fell 18 percent while the goods turnover between Customs Union countries grew 2 to 3 percent.

Others voiced benefits such as a common language, or culture closeness to the Russia-led bloc.
“We have similar cultural roots, and a similar mentality,” said Yevheniy Romashchin, head of coal mining equipment manufacturer Gornyi Mashyny. “Our historical industrial standards – not the current ones,because the Customs Union is developing more advanced standards, and Ukraine is not adopting them fast enough – are essentially the same, though in the future Ukraine may lose its competitiveness.”

Zholud says that entering the Customs Union is not a panacea for trade wars with Russia.

“Membership in the Customs Union does not automatically mean all trade restrictions and customs fees and quotas will be lifted. Look at how often Belarus, a member of the Customs Union, complains about not even being allowed to bid, for example, for its (bus) producers. They also complained about many other restrictions. So, it is basically about negotiations with Russia, not even entering the Customs Union per se,” he says.

Kyiv Post editor Christopher J. Miller can be reached at [email protected] and staff writer Svitlana Tuchynska can be reached at [email protected], respectively.