Independence Day 2013: a trade war already under way
Ten days before this anniversary, russian customs placed every Ukrainian exporter under enhanced inspection. It lasted a week, cost hundreds of millions, and was a demonstration rather than a dispute.
The twenty-second anniversary is being marked ten days after an event that most coverage treated as a customs irregularity and that was in fact the clearest strategic signal of the year. In the middle of August, russian customs placed all Ukrainian exporters on an enhanced inspection list. Lorries and rail wagons stopped at the border. The measure was lifted after about a week, having cost Ukrainian exporters somewhere in the hundreds of millions of dollars.
Nobody in Kyiv or Moscow pretended this was about paperwork. Ukraine is expected to sign the Association Agreement with the European Union at the Vilnius summit in November. The August blockade was a demonstration of what the alternative costs, delivered in a form that every director of every exporting enterprise in the east of the country would understand immediately.
The arithmetic of the choice
The decision being framed as a civilisational choice is, in trade terms, a fairly concrete calculation with a difficult time profile. Roughly a quarter of Ukrainian exports go to russia, and they are concentrated in the highest value-added categories the country produces: railway equipment, machinery, chemicals, food processing. Exports to the EU are of similar total value but are weighted toward raw and semi-processed goods — grain, sunflower oil, iron ore, steel semis.
The DCFTA offers tariff-free access to a market of five hundred million and, more importantly, a regulatory template. What it does not offer is a buyer for Ukrainian railcars. The adjustment costs fall immediately and concentrate geographically in the east; the benefits accrue slowly and diffusely. Any honest account of the choice starts there, and very little of the public argument on either side does.
The macro position is deteriorating
Growth is around zero for a second year. The current account deficit is running above eight per cent of GDP. Reserves have fallen to a level that covers barely two and a half months of imports. The exchange rate remains pegged near eight, which is now clearly overvalued, and the cost of defending it is being paid daily.
External debt repayments due in 2014 are large and there is no IMF programme. The government has been financing itself through domestic bond issuance to state banks and through increasingly expensive eurobond placements. This is a position that resolves in one of three ways: an IMF programme with conditionality, a bilateral rescue with different conditionality, or a disorderly adjustment. All three are being discussed openly.
What this means for anyone trading here
Concentration risk has become the dominant consideration. Any Ukrainian supplier or customer whose business depends on unimpeded access to the russian market should now be assessed on the assumption that access can be interrupted administratively at any time, without notice and without a mechanism of appeal that operates on a commercial timescale.
The same logic applies to logistics. Routes that depend on a single border crossing or a single transit country carry a risk that did not need pricing in 2010 and does now. Companies that have already built alternatives through Poland, Slovakia, Romania and the Black Sea ports are in a materially better position this autumn than those that have not.
On the currency: everything written here in 2012 applies with more force. The peg is being held for political reasons through a period in which it should have been adjusted. When it goes, it will go quickly.
Twenty-two years in
This is the year the country's two orientations stopped being complementary. For twenty-two years Ukraine has managed a genuine dual position — Soviet-era industrial links east, growing consumer and regulatory links west — and derived real benefit from both. That balancing act required both partners to tolerate it. As of this August, one of them has said clearly that it will not.
What follows from that will define the decade, and the archive will be following it closely.
Related in this archive
Share this analysis
Comments