EU Reiterates Trade Offer as Ukraine-Russia Situation Escalates

6 March 2014

The EU has reiterated its earlier pledge to ink a trade deal with Kiev, as international tensions over Ukraine's future escalated further over the weekend following the incursion of Russian military forces into the Crimean peninsula. The fall-out has also put Moscow's membership in the G-8 into question, while substantially worsening Russia's economic and political ties with the EU and US.

"If and when Ukraine is ready to sign the [trade] deal, then the European Union is ready to sign the deal," EU Trade Commissioner Karel De Gucht said after meeting with EU trade ministers in Athens last Friday. He added that any decision from the EU would be taken by the Council, pledging an appropriate response "to any request from a new inclusive government committed to political and economic reforms."

The upheaval in Ukraine began late last year, after President Viktor Yanukovich withdrew from signing an Association Agreement with the EU that would have included a trade pact. The decision to pull back from the deal was largely seen as the result of pressure from neighbouring Moscow, and sparked months' worth of protests in Kiev. (See Bridges Weekly, 12 December 2013)

Russia had argued that signing onto the EU deal would make it impossible for Ukraine to join the customs union that it has formed with Belarus and Kazakhstan, given that it would involve Kiev being party to two conflicting sets of tariff rules. It could also lead to a massive influx of European products across Russian borders, Moscow warned. (See Bridges Weekly, 19 September 2013)

The protests ultimately led to Yanukovich being driven from Kiev, with a new pro-Western government being instated in the days following. Last week, Russian military forces entered the Ukrainian peninsula of Crimea, on the grounds that it needed to protect the Russian-speaking citizens living there.

The situation has highlighted long-standing divides in Ukraine over its long-term future. Its population is split between those wanting more EU integration - 60 percent, by some estimates - and those wishing to sign onto the Russian-backed customs union.

Economic situation

While the Russian military manoeuvres have since been halted, the next steps for the embattled Ukraine, however, remain uncertain. The Ukrainian economy is facing severe difficulties, with estimates placing Ukraine's needs at US$15 billion in loans, and US$35 billion over two years.

Given Ukraine's economic situation, EU officials have also noted that a trade pact with Brussels could pay major dividends for Kiev, and have pledged to ratify and implement it immediately should Ukraine decide to sign on. According to EU estimates, the trade deal could save Ukrainian exporters €487 million annually from lower import duties, among other benefits.

In addition, EU Trade Commissioner Karel De Gucht stressed that the Association Agreement and trade pact would also serve as "an unprecedented blueprint for the modernisation of Ukraine's economy."

While the situation has been portrayed as one of two competing economic blocs - the EU and Russia - jostling for influence, Brussels officials have been firm in saying that the trade pact is "not directed towards or against Russia."

De Gucht acknowledged last week that the trade deal is technically "not compatible with Ukraine becoming a member of the customs union between Russia, Belarus and Kazakhstan." Outside of that, though, he noted that the EU "even applaud[s] that Ukraine would have closer economic relations with Russia."

G-8 summit in question

The recent move of Russian forces into the Crimean region of Ukraine has also placed Moscow's status in the G-8 coalition of industrialised economies in question, even as it prepares to host this year's summit.

Leaders from the G-8 countries - which along with Russia also includes Canada, France, Germany, Italy, Japan, the UK, and the US, with participation of EU Commission and Council presidents - are set to meet in the Russian city of Sochi in June for their annual gathering. However, US Secretary of State John Kerry warned on Sunday that "there is no way, to start with, that if Russia persists in this, that the G8 countries are going to assemble in Sochi."

Speaking on NBC's Meet the Press, the US' top diplomat also said that foreign ministers from both G-8 members and other unspecified countries are leaning toward isolating Russia until its stance changes, with possible policy responses ranging from asset freezes to visa bans and beyond.

"There could be certainly disruption of any of the normal trade routine," he warned. "There could be business drawback on investment in the country. The ruble is already going down and feeling the impact of this."

Along these lines, the G-7 - effectively all G-8 countries minus Russia - issued a statement on Monday jointly agreeing to suspend their G-8 summit preparations "until the environment comes back where the G-8 is able to have meaningful discussion."

The group added that they were "united in supporting Ukraine's sovereignty and territorial integrity, and its right to choose its own future."

US suspends Russia trade, investment talks

Russia's military actions have also prompted bilateral trade responses, including the US' decision to suspend trade and investment talks with the country. While bilateral trade between the two sides is relatively small, making up just one percent of US imports and exports, the two sides have a long and troubled trade history. Recent years had appeared to indicate a cooling in economic tensions, including the US decision to sign off on Russia's WTO membership, and Congress' subsequent lifting of Cold War-era trade restrictions.

"Due to recent events in Ukraine, we have suspended upcoming bilateral trade and investment engagement with the government of Russia that were part of a move toward deeper commercial and trade ties," a spokesperson from the Office of the US Trade Representative told Dow Jones newswires.

The EU's trade relationship with Russia has experienced its own set of strains, with the two sides currently embroiled in multiple WTO disputes. While foreign ministers from the bloc have also raised the possibility of "targeted sanctions," they have also put forth offers to mediate between Kiev and Moscow. Analysts have noted that imposing restrictions on Russia could potentially backfire, given EU's close energy and trade ties with the country.

The prospect of sanctions from its Western partners has been slammed by Russian officials, with Foreign Minister Sergei Lavrov telling a UN Human Rights Council meeting on Monday that "those who try to interpret the situation as a type of aggression and threaten sanctions and boycotts, are the same who consistently have encouraged [Ukrainians] to refuse dialogue and have ultimately polarised Ukrainian society."

ICTSD reporting; "U.S. Suspends Trade and Investment Talks With Russia," DOW JONES INSTITUTIONAL NEWS, 4 March 2014; "Lavrov slams threats of ‘sanctions and boycotts' over Ukraine," AGENCE FRANCE PRESSE, 3 March 2014; "EU offer of free-trade pact with Ukraine still stands, Brussels ready to sign - EU trade chief," REUTERS, 1 March 2014; "UPDATE 4-EU tells Russia to withdraw troops or face possible sanctions," REUTERS, 3 March 2014; "EU leaves open option of targeted measures' against Russia," FINANCIAL TIMES, 3 March 2014; "Hoping to Shore Up Ukraine Government, European Union Offers Billion in Aid," NEW YORK TIMES, 5 March 2014.

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