Russia retaliates over new EU-Ukraine free trade zone

Trade & Policy

Russia retaliates over new EU-Ukraine free trade zone

Debt and energy disputes fuel deep rancour between Kiev and Moscow

The European Union and Ukraine have fully launched a historic free trade deal, marking another key stage in the country’s pivot away from Russia and prompting immediate retaliation from Moscow. The tariff-free zone is part of a broad political and economic pact between Kiev and Brussels that infuriated the Kremlin, and helped trigger a Ukrainian revolution that led to Russia annexing Crimea and fomenting a separatist conflict in eastern Ukraine.

To coincide with the January 1st launch of the deal, Russia re-imposed import taxes on a wide range of Ukrainian goods, and banned outright the import of many food products from its neighbour. Ukraine’s pro-western government has vowed to respond in kind to any Russian embargo, and is expected to restrict imports from Russia in the coming days, as the countries’ struggle ravages their long-standing trade and economic ties.

The European Commission said the free trade zone with Ukraine was a “milestone in the bilateral relationship. Ukrainian businesses receive stable and predictable preferential access to the largest market in the world with 500 million customers, while EU businesses will be able to benefit from easier access to the Ukrainian market of 45 million people. Brussels insists the deal will introduce more competition and better quality goods to Ukraine, driving local manufacturers to modernise, improve products and stamp out inefficiency and corruption.

Unique opportunities

Cecilia Malmstrom, the EU’s trade commissioner, said the agreement offered “unique opportunities for Ukraine to stabilise, diversify and develop its economy to the benefit of all its citizens. The change will not occur overnight, it will require work and investment. Gradually, the pact will contribute to a prosperous Ukraine and to stronger economic integration with the EU.”

In his New Year address to the nation, Ukrainian president Petro Poroshenkosaid the EU deal would help “compensate in a few years for the enormous losses that Russia has caused Ukraine”. “The closure of markets to Ukrainian goods and producers by Moscow is powerful economic aggression – and another component of Russia’s hybrid war against us,” he declared.

Moscow also announced that it had launched legal action against Kiev over its refusal to repay US$ 3 billion (€2.76 billion) that Russia loaned in late-2013 to Kiev’s then pro-Kremlin president, Viktor Yanukovich, as protests threatened to oust him. He fled to Russia amid violent clashes in February the following year.

Ukraine has offered to restructure the bond, but given its current financial difficulties and the onerous political nature of the so-called Yanukovich-debt, the country’s leaders are reluctant to pay now in full, as Moscow demands.

The two states are also at odds over energy supplies, with parts of annexed Crimea plunged into darkness again in recent days after Ukrainian power lines leading to the peninsula were felled by an explosion, for the second time in six weeks. In a snap survey ordered by the Kremlin, almost all the 1,000 Crimean residents polled reportedly said they would prefer blackouts to an electricity contract with Kiev which stated that the region was Ukrainian territory.