Sunday, April 10, 2011

Strategic Flexibility a Key Issue for Ukraine in Trade Relations with Russia and the EU

April 9, 2011 (Foreign Policy Journal). The Russian government has been increasing pressure on Ukraine to join the Customs Union of Russia, Belarus, and Kazakhstan and halt the process of negotiating the Deep and Comprehensive Free Trade Area (DCFTA) with the EU, expected to be completed by year’s end. While the Ukrainian delegation holds the talks on the EU-Ukraine association agreement in Brussels this week, expected Prime Minister Putin’s visit to Kyiv next week could offer both a “stick” and a “carrot” for Ukraine. A closer look reveals that the risk of a trade war with Russia is not critical, while the benefits of strategic flexibility and strong degree of economic sovereignty are more beneficial for Ukraine.

On 16 March, Vladimir Putin said that “Russia may proceed to tighten up its borders if the free trade zone between Ukraine and the EU goes ahead.” Alongside the threat of trade sanctions, Russia may also present certain economic preferences encouraging Ukraine to suspend the process of EU trade agreement and join the Customs Union. Ukrainian officials’ responses have emphasized the priority of reaching agreement on DCFTA with the EU and finding a plausible solution on cooperation with Russia and the Customs Union through entering the CIS Free Trade Area Agreement, which according to consensus estimates could be signed in May. Russia’s most radical offering would be the reduction of the natural gas price and the levy of export duties for the exports of Russian oil and fuel products to Ukraine. The levy of oil export duty according to Ukrainian Ministry of Economy estimates could create $3-3.5 billion per year benefits for Ukraine and halving the Russian price would result in $4.5 billion benefit. It is likely that Russia could take such costly steps, if at all, only demanding substantial commitments from Ukraine, which would decrease the degree of strategic flexibility and economic sovereignty that the country presently enjoys.