KIEV, Ukraine – Ukraine and Russia today are politically and economically tied. Ukraine is caught between Russia and the European Union in a tug-of-war over whether to align itself with the EU or Russia. Ukraine has put the free-trade and political-association agreements with the EU on hold. It has yet to sign an agreement with Russia for financial support. The former Soviet state finds itself under pressure as its economy struggles. Russia has its own economic concerns if Ukraine turns to the EU.
Ukraine went into an economic recession last year and now has a widening current account deficit. First Deputy Minister of Economic Development and Trade of Ukraine Anatoliy Maksiuta reported to the UN that Ukraine had a 25.5% poverty rate in 2012. Maksiuta noted the poverty rate had actually decreased. However, the current poverty rate is still about a quarter of the population. Maksiuta further detailed that every third family with children and every fifth working person in Ukraine are poor.
Ukraine and Russia have a free-trade agreement. President Vladimir Putin of Russia worries that a pact between Ukraine and the EU will hurt the Russian economy. According to Putin, European goods would flood the Russian economy if there are no tariffs. The reason for his concern is the potential damage that the influx of cheaper foreign goods could do to Russian industries. Russian goods and services would be at risk of a decrease in demand. Domestic and external factors have already caused Russia to have a weaker demand. Investment and consumption activities have also been low. Russian export performance also has not been strong.
Ukraine and Russia today are in a position where their policy decisions directly affect each other. Ukraine elected to improve its relations with Russia and prevent economic failure rather than continue its plans with the EU. Russia put pressure on Ukraine in opposition to the EU agreements. It threatened Ukraine with trade sanctions and potential damage to the Ukrainian economy as a result. Ukraine is hopeful for a new gas agreement with Russia. The expensive gas imports from Russia are putting a strain on the Ukrainian economy.
Russia’s opposition to the EU may stem from its own aspirations to form a trade bloc. The Customs Union, proposed by Russia, is a trade bloc consisting of former Soviet states. Membership to the Customs Union would afford Ukraine lower-cost gas imports from Russia. Ukraine would also be able to increase its exports to Russia, which would improve economic growth. The combination of economic threats and economic incentives from Russia may have influenced Ukraine’s decision to move forward with Russia.
History binds Ukraine and Russia today. Ukraine still manufactures military and energy equipment for Russia. Russian aircrafts, rocket engines and turbines are all made in Ukraine. Ukraine has the only factories capable of doing the upkeep on the Soviet-made intercontinental ballistic missiles that are central to Russian nuclear defense. The Russian Black Sea Fleet base is located on Ukrainian territory in Sevastopol. Russia has a lease on the base until 2042. A Russian base is not yet complete on the Russian Black Sea Coast.
The economic relations, industrial cooperation and a territory lease between Ukraine and Russia make the two countries interdependent. An agreement with the EU may be fruitless for Ukraine if it comes at the cost of economic retaliation from Russia. Russia may also suffer economically and lose more regional influence if Ukraine sides with the EU. Separation between Ukraine and Russia poses a serious challenge for both countries.
– Brittany Mannings
Sources: Wall Street Journal, United Nations, British Broadcasting Corporation, World Bank, ABC News