Ukraine is Re-integrating its economy with the “Aggressor” nation – Part I

Dear Readers:

Today’s post is based on this piece written for VZGLIAD by Olga Samofalova.

The Ukrainian government of Petro Poroshenko has declared Russia to be an “aggressor state” and even stated in black and white, that it is at war with Russia.  And yet, as Samofalova shows, the Ukrainian economy is rapidly re-integrating with the economy of its larger neighbor.  An odd war, indeed.

Traditional Ukrainian wedding cake. But who is the bride, and who is the groom?

It took Kiev four whole years to realize that Ukraine was not going to be integrated into the European (EU) economy, in spite of the fact that the entire 2014 coup was based on that concept.  In that sense, it could be said that the coup and the resulting government have been a colossal failure.

The growth in trade between Ukraine and Russia, however paradoxical this might sound, was accelerated by the Ukrainian Civil War in the Donbass.  Further down, we shall see why this is the case; and it mostly has to do with coal.  This internal civil war between East Ukraine and West Ukraine, the Ukrainian government calls a “Russian invasion”.  Other people call it other things.  Either way, it has generated an uptick in friendly trade between the two “warring” nations.

A very spiffy looking Alexander Koltunovich

In the year 2017, compared to 2016, trade between the two nations increased by 25.6%, up to a level of almost $13 billion dollars.  Ukraine purchased $8 billion dollars worth of Russian goods, up by almost 25% compared with 2016.  On the other side of the ledger, Ukraine’s delivery of its own goods to the Russian market increased by more than 26%, managing to sell to the “aggressor nation” almost $5 billion dollars worth of product.  To a small and poor nation such as the Ukraine, devastated by a series of incompetent governments, $5 billion is not peanuts.

These numbers show that, after the disruptions of the Maidan period, Ukraine is returning to its old rut as a (junior) trading partner with Russia.  Ukrainian Economist (and “Integration Specialist”) Alexander Koltunovich reckons that the Ukraine has factually begun the process of re-integrating into the “Eurasian” economic space.  Which, again, denotes a failure of the “A Man A Plan A Maidan” movement.  The goal of “Maidan” was (1) to spit in the face of Russia and (2) become a key and cherished player in the Western European economic space.  Goal #1 was accomplished, but not Goal #2.

Ukraine is famous for its delicious honey, which it exports to the EU.

For Russia, Samofalova goes on to say, trade with the Ukraine is not all that important.  Ukraine’s share of Russia’s overall trade remains at 2.2%, a number that has not gone up nor down.  In 2017 Russia experienced a trade growth (with the rest of the world), up 25% in comparison with 2016.  Russia is buying and selling a lot of goods, to the tune of $584 billion dollars.  The relatively few billions involving trade with the Ukraine are not significant either way.  This is a one-sided relationship:  Trade with the Ukraine is not important to Russia, but trade with Russia is highly important to the Ukraine.  Especially after the EU made it clear that it did not welcome Ukrainian goods into their market.  The EU needs very few things from the Ukraine:  grain, honey, some meat.  But the Europeans are not at all interested in purchasing Ukrainian machinery or other high-cost manufactured goods.

To be sure, Samofalova continues, trade between Ukraine and Russia has still not returned to its glory days of 2011, when Ukraine sold Russia almost $20 billion dollars worth of goods.  According to Koltunovich, Ukrainians will soon understand the utility of restoring economic relations with Russia, to that previous level:  “If Ukraine were to fully restore the previous levels of export to Russia, then it could receive over $20 billion dollars of currency; high-tech industrial sectors could resume their work, and our citizens could get high-salary jobs.”

Economic pragmatism should kick in, like it did in Gruzia, which is nowadays struggling to return to its previous place in the Russian market.

What Does Ukraine Buy And Sell?

In its trade relations with Russia, Ukraine is most successful with small-manufacture products:  Shoes, Children’s Clothing, Clothing Accessories, etc.  Russian consumers are used to buying this stuff, and continue to do so.  According to Management Consultant Sergei Zvenigorodsky, the European market is mostly closed off to such goods; the Europeans make their own clothing and accessories, which they protect scrupulously via tariffs, etc.

Management Consultant Sergei Zvenigorodsky

Zvenigorodsky points out the Ukrainians willfully threw away their best and most profitable industries such as the oil and chemical industry.  Petroleum products that companies used to buy in the Ukraine — they now have to buy from Russia.  Ukraine still has a huge agri-business complex, but it can’t run without the farmers having to purchase fuel and fertilizers from Russia.  Ukraine used to be more or less self-sufficient in both fuels and fertilizers, but here is still another collateral damage of the “Revolution of Dignity”.  Namely, the death of large industries and industrial complexes which once made Ukraine a regional super-power, almost.

The one silver lining here is that Ukraine can still sell Russia certain products needed for the metallurgical complexes:  pipes, furnaces, armature (casings?), transformers, motors, machine tools, and the like.  Zvenigorodsky:  “Ukraine, of course, would love to sell those same tractors to the EU [instead of Russia], but the high tariffs do not allow that.  Factually, it is these sales of machine parts to Russia which keeps this sector alive in the Ukraine.”

Next:  Oil, Coal, the Laws of Reality, and a case study involving a Rocket…

[to be continued]

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This entry was posted in Economics, Friendship of Peoples, Russian History and tagged , . Bookmark the permalink.

2 Responses to Ukraine is Re-integrating its economy with the “Aggressor” nation – Part I

  1. Jen says:

    Another issue that maybe needs mentioning is whatever happened to the scientists, engineers and other technical people employed by the petroleum industry and other heavy industries in Ukraine before they collapsed through Kiev’s economic mismanagement and the Kiev oligarchy’s bias (encouraged by the EU) towards supplying commodities rather than finished products to the outside world. If the skilled technical people have gone to Russia or elsewhere, and have put down new roots, are they likely to relocate once again back to Ukraine if and when trade with Russia resumes? Ukraine would need to demonstrate that it is a stable country, politically most of all, before these people and the investors they need to back any new businesses they establish return there.

    Like

    • yalensis says:

      That’s a good point. Without skilled labor, nothing is possible, even if you have the infrastructure in place.
      I don’t have any numbers for Ukrainian scientists and engineers emigrating, but I reckon a lot of them have left for Russia.
      Ancillary problem is the collapse of the Ukrainian educational system which is supposed to train the new generation of scientists/engineers.

      Like

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