MOSCOW: The Russian parliament voted to suspend its free-trade zone with Ukraine from January in a further deterioration in relations.
Economic ties between the neighbours had been significant until political relations soured after Russia’s annexation of Crimea in March 2014.
Bilateral trade has fallen from $50.6bn in 2011 to just $12.5bn in the first 10 months of this year, according to Russian government statistics.
Tim Ash, emerging markets analyst at Nomura, said: “From January 1, 2016 it seems likely we are going to see a fully-fledged, ‘total’ trade war between Ukraine and Russia.”
Trilateral talks intended to ease Moscow’s concerns over Ukraine’s trade deal with the EU ended in failure on Monday.
Cecilia Malmström, EU trade commissioner, said that Russian president Vladimir Putin’s suspension of Moscow’s free-trade agreement with Kiev — long threatened in response to the EU-Ukraine trade deal — went “against the mandate, the spirit and the objective of these talks”.
Mr Putin in turn lashed out at Brussels, saying that when Moscow raised contentious issues in the talks the European negotiators said “the game is over” and left. “This is not very European, not tolerant at all,” Mr Putin said on Tuesday.
Moscow, Kiev and Brussels have held 23 rounds of trilateral talks on the subject since November 2013.
Russia left open the possibility of further negotiations, with Mr Putin saying he believed the issue would be revisited. “We want to improve relations with our partners on this subject — both with Ukraine and with the EU,” he said.
Nonetheless, it appears all but certain that from January 1 the Russian free-trade agreement with Kiev will cease, leading to a sharp increase in import tariffs on Ukrainian products. Mr Putin said last week that the move would increase import tariffs on Ukrainian products from zero to an average of 6 per cent.
Russia is also set to extend to Ukraine the food import embargo it has imposed on European countries, a move it says is a response to Ukraine’s adoption of western sanctions against Russia.
The measures are the latest in a series of tit-for-tat economic and financial disputes between Kiev and Moscow, including a likely Russian lawsuit over Ukraine’s non-payment of a $3bn debt that was due this weekend.
The sharp decline in trade between the two countries means the effect of the latest trade measures will be limited, analysts say.
Dragon Capital, a Kiev-based brokerage, predicted that Ukraine’s exports of meat, paper and steel products would be hardest hit.
“We roughly estimate the negative combined impact of the food import ban and free-trade regime cancellation at around $500m-$700m or 0.5-0.7 per cent of estimated 2016 GDP,” it said.
The brokerage noted that Ukrainian food exports to Russia were already down 76 per cent year-on-year in the first nine months of this year, meaning that even a complete halt in sales would cost Ukraine less than $300m a year.
In the manufacturing sector, Ukrainian exports of steel pipe are likely to be hit, with Kommersant, the Russian business daily, reporting that the change in the trade agreement could lead to additional duties of 5-10 per cent. Ukraine exported $282m of steel pipe to Russia last year.
“Historically Russia had strong economic ties with Ukrainian manufacturing,” said Oleg Kouzmin, economist at Renaissance Capital in Moscow. “Plant A in Russia and plant B in Ukraine were part of the same manufacturing team. Of course the recent crisis has reduced those linkages.”
Ukraine has been working hard to diversify exports to other markets, inking a free-trade deal with Canada this year. On Tuesday, president Petro Poroshenko said that Kiev would also sign a free-trade agreement with Israel within the next six months.
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