Ukrainian Businesses Look West, Held Back By Russia

Attempts to improve the situation for businesses in the Ukraine have been focused on strengthening international relationships, particularly with the EU, but such attempts have been countered by Russian moves to hold on to the historic bonds between the two countries.

Strengthening Links to Europe

Businesses in the Ukraine have traditionally relied on strong trade links with Russia, but many companies are now looking towards Western Europe for new opportunities to increase trade. This new relationship is set to be strengthened by the recently updated Association Agreement between the Ukraine and the EU, which is designed to boost both political and economic ties. It has taken several years to reach this point, but the agreement may now finally be signed at the Vilnius Eastern Partnership Summit in November. One of the most important elements of the agreement for businesses will be the creation of a Deep and Comprehensive Free Trade Area, allowing not just for more trade, but also for increasedcompetitiveness on the European market. Alongside these political measures, businesses are also being encouraged to build more links to the EU by measures such as the expansion of Odessa airport, and the opening up of the local market to foreign corporations. Restrictions on the operation of international financing and insurance companies has prevented Ukrainian businesses from becoming more integrated with the global business world, although Odessa is already home to almost 500 companies that are supported in part by foreign capital investments. The barriers that have prevented such associations from growing are now beginning to be removed, partly as a result of the country’s links with the WTO and EU. As a result, new opportunities are opening up, not just for more international trade, but also for businesses to take advantage of better financial services and improved security.

Russia Clings to Ukrainian Links

The strengthening of the Ukraine’s relationship with the EU has been countered by Russia with attempts to force a return to old allegiances, which are difficult to ignore given that a quarter of Ukrainian exports end up in Russia and the fact that cities like Odessa are so dependent on the transit of Russian gas and oil. Efforts to block the association agreement, which Russian economic adviser Sergei Glazyev described as “suicidal”, began with a series of soft power measures designed to reinforce the shared history and heritage that have bound the two countries together. Benefits such as better market access, a place in the Russian led Eurasian Customs Union, and availability of cheap Russian gas were offered. Despite these measures, the Ukraine has remained keen to build better trade relations with the EU, leading to a shift in Russia’s tactics. Rather than simply attempting to make itself more attractive than the EU as a trading partner, Russia has now begun to impose trade restrictions in order to convince the Ukraine of the importance of maintaining the special business relationship between the two countries. These restrictions have already been felt in the Port of Odessa.

The first move came in July, when Russia banned the import of confectionaries produced by the big Ukrainian manufacturer Roshen. The ban was supposedly put in place because carcinogens had been found in the company’s products, but no such qualms affected trade elsewhere. Apparently, Russia was the only country to have these concerns, which may lead to job losses for 400 Roshen employees. By August, more Ukrainian businesses were starting to feel the effects of reduced trade. According to the Ukrainian employers’ federation, trade was being paralyzed by changes to customs procedures that were preventing the flow of exports into Russia. The employers’ federation may have become a particular target for the restrictions because its members account for 70% of the Ukraine’s GDP, and include the influential Dmitry Firtash, who has close business links to Russia and the ability to reach out to the Ukrainian government.Firtash’s influence is already well known in Odessa thanks to his association with the attempts to privatise the Port-side Chemical Plant, and his links with the energy sector. However, whether he might bring his influence to bear to build stronger links to the EU, which represents an important market for his companies, or to encourage closer bonds with Russia and its energy company GazProm, as he has in the past during discussions over Odessa’s gas pipelines, remains to be seen.

Targeting Odessa’s Energy Pipelines Again?

Officials suggest that the trade restrictions have begun to dissipate, but pressure from other directions may continue. The fear is that Russia will again attempt to use its control over much of the gas imported into the Ukraine in order to make its point as winter approaches. The planned reserves of at least 12.5 billion cubic meters (bcm) that the country is supposed to have in place by October 1st are far from being met. The reserves currently stand at 3.5 bcm, with just a month to go. In such a situation, Russia’s negotiating power may be great enough to require the Ukraine to submit to an agreement that will strengthen links with Russia while making relations with the EU more difficult. Any measures that affect the flow of gas and oil between Russia and the Ukraine will have a particularly severe effect on Odessa, as a major hub for pipelines and tankers crossing between Russia and Europe. Previous disputes, which have been both political and economic in nature, have had a significant impact on the city, which was the focus of discussions during the 2009 crisis that selected the Odessa pipeline as a test route when the flow was restarted.

A Country Pulled to East and West

As the Ukraine looks towards the EU for new trade and relationships, its ties to Russia will necessarily be weakened by the competition. At this moment, the country is torn between its old associations and its new, more international outlook, with Odessa placed right at the center due to its position mediating the trade of oil and gas between its two suitors. Russia remains an important partner, giving it the power to influence the Ukraine’s ability to build new links with the EU, but the final outcome of this tug of war is yet to be decided. Given sufficient time and investment, restrictions on trade with Russia could have a similar effect in the Ukraine as they did when imposed on Georgia in 2008. Unable to continue enjoying large exports to Russia, Georgian businesses were forced to improve their standards in order to be able to compete on the global markets, making them stronger in the long term. Such an increase in exports to the EU and beyond would undoubtedly affect the economy in Odessa if it were to happen in the Ukraine, given the city’s importance as a transport hub. However, with winter forcing the government to prioritize access to heating gas, and elections coming up early next year, it seems unlikely that Ukrainian companies will have the same opportunity now as the Georgians did then. The situation will need to be resolved more quickly and this could be bad news for business.