Amid political and military unrest in eastern Ukraine, relations between Russia and Ukraine are at their lowest point in recent history. Interpersonal, cultural, political and economic relations between the two countries have undergone significant changes due to the geopolitical conflict. Russia and Ukraine have developed close ties over the centuries with a common market of goods and the break-up will invariably impart substantial economic costs. - See more at: http://bit.ly/1vZrVNR

1. 08 Jul 2014
The Economic Implications of Ukraine-Russia
Trade Relations
Amid political and military unrest in eastern Ukraine, relations between Russia and Ukraine are at their lowest point in recent history.
Interpersonal, cultural, political and economic relations between the two countries have undergone significant changes due to the
geopolitical conflict. Russia and Ukraine have developed close ties over the centuries with a common market of goods and the break-up
will invariably impart substantial economic costs.
Russia’s imports from Ukraine amounted to USD 15.8 billion in 2013. From Russia’s perspective, imports from Ukraine amounted to 5%
of its total imports – the largest share among Commonwealth of Independent States (CIS) and the fourth largest across countries around
the world. Ukraine’s main foreign trade partners in 2013 were the EU, the CIS, and Russia (the largest CIS market). The share of
exports to Russia from Ukraine amounted to 24% from Ukraine’s perspective, revealing the stronger dependence of Ukraine on the
Russian market.
The Ukraine-European Union Association Agreement signed on 27 June 2014 drives a further wedge between Russian-Ukrainian
relations, impairing future bilateral trade flows. This agreement includes the Deep and Comprehensive Free Trade Agreement with the
EU, which will allow expansion of bilateral trade between the EU and Ukraine due to tariff reduction. Similar agreements have been
previously established between Russia and Ukraine; Russian officials warned that the Ukraine-European Union Association Agreement
will provide grounds for revising trade agreements between Ukraine and Russia, a move that will raise protective tariffs in Russia against
the inflow of cheap Ukrainian or European goods. The lead up to the Agreement was central to the chain reaction that led to the full scale
political crisis in Ukraine.
Russia Premium Database
+ Foreign Trade
+ Foreign Trade: Main Trading Partners: by 2-Digit HS Code
+ Table RU.JAD157: Imports: by 2-Digit HS Code: Ukraine: Annual
The current situation is difficult both for Russia and Ukraine due to the
interdependence relationship across these countries. Ukraine is the main transit
country for natural gas shipments to Europe from Russia. Russia has tried to
diversify gas shipments to Europe to get round Ukraine by building the Nord
Stream and South Stream gas pipelines. That would diminish the dependence on
Ukraine when dealing with other European consumers. However, the EU is trying
to reduce its dependence on Russian gas and is resisting further development of
the South Stream pipeline to support Ukraine and diversify its own energy inflows
from other suppliers.
The present conflict means that Russia will have to develop its own production of
the main imported items from Ukraine domestically, or seek other sources of
imports to compensate for reduced imports from Ukraine. The following key
commodity groups constituted 53% of Ukrainian exports to Russia in 2013: Iron &
Steel (14%); Machinery & Mechanical Equipment, Nuclear Reactors (14%);
Railway or Tram Locomotives, Rolling Stock (12%); Electrical Machinery &
Equipment (7%); Iron or Steel Products (6%).
It is unlikely that Russia will sever all of its imports from Ukraine as it will prove
self-defeating, although due to the heightened state of tensions and political
motives involved, foreign trade between the two countries will likely diminish due
to the protective tariffs. The long term process towards eventual EU integration
most likely will take decades, as Ukraine needs to align its economic and political
system to the standards of the EU. In the meantime restructuring of foreign trade
and production patterns between Russia and Ukraine are likely, given that an
amicable solution to the current crisis is presently not on the cards.
Contributed by Alexander Dembitski, CEIC Analyst
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