But I think it might be on the edge. This part is almost certainly a scam.
While images of revolution, war, annexation, and invasion remain fresh, it is important to remember that this upheaval actually began as a trade dispute.
The EU and Ukraine wanted to increase trade via the association agreement, and Russia loudly objected, first with words and soon thereafter with guns. A shaky cease-fire is now in place, but any lasting solution to this crisis begins where it started, namely with trade.
The EU implicitly recognized this fact when it decided to only partially implement the association agreement. The EU opened its borders to Ukrainian goods but delayed the implementation of the free trade zone for EU products entering Ukraine until January 1, According to Russia, Ukraine theoretically could bring EU goods into Ukraine duty free and then re-export them to Russia, thereby circumventing Russian tariffs on European products.
Michael Emerson, the former EU ambassador to Russia, insists that there is no real threat of illegal re-exportssince Ukraine must observe all rules of origin and labeling requirements, and that such regulations properly enforced would restrict the re-export of European goods into Russia.
Emerson further argues that new EU standards would not disrupt established Russia-Ukraine trade relations. Russia was openly divided until the very end about the relative merits of joining the World Trade Organization, and it has used the current crisis to introduce an import substitution policy that openly contradicts the comparative advantage principles that underlie international trade.
Western advisors promoted the benefits of free trade in the s, but the most immediate consequence for Russia was the dramatic collapse of its manufacturing sector.
Russia got rich selling oil, gas, and raw materials, not by producing innovative and competitive products that benefit from a more liberal trade regime. The technical rules of international trade provide little reassurance for Russia as well. Since Russia cannot control illegal exports from its trade partner and ally, it is unlikely to be convinced that proper labeling is the answer to its underlying objections to the EU association agreement with Ukraine.
Finally, Russia views international trade primarily in zero-sum terms, so that it instinctively sees the prospect of Ukraine belonging to two adjacent free trade zones as something detrimental to its interests.
Western countries — or at least their political elites — take the opposite approach. On the contrary, the U. On numerous occasions, in fact, the EU has insisted that it will neither renegotiate the agreement nor let Russia interfere with the bilateral trade arrangements between two sovereign partners.
Nevertheless, despite such compelling arguments, the EU blinked by deciding to delay the implementation of the association agreement.
The apparent reason for this hesitation, not surprisingly, is money. Neither the EU nor the U. It will take years for Ukraine to re-orient its trade to the EU. Russia has one more card up its sleeve, namely its threat to raise tariffs on Ukrainian goods if the association agreement is implemented.
Indeed, Prime Minister Medvedev has already signed an order raising Russian tariff rates if the agreement goes into effect.
It is difficult to know what the level of Russian-Ukrainian trade might be going forward, but it has been estimated that increased tariffs could mean three billion euros in lost business for Ukraine.
But the EU enters these negotiations with some leverage as well. Most notably, one assumes that the EU will not ease its current sanctions regime against Russia until these trade differences are resolved.
That would be another 15 months. And make no mistake, these sanctions are having an impact as Russia struggles to find alternative food distribution networks, energy partners, and sources of financial capital. A falling oil price means decreased revenues for the Russian state.
Russia also faces a collapsing ruble, which has lost 18 percent of its value against the dollar this year. Putin has not been swayed by economic arguments during this crisis, and if his goal remains simply to create a frozen conflict in eastern Ukraine, then the current instability will drag on for years to come.
In return, Russia undoubtedly would demand the end of the current sanctions regime, a concession that would clearly test EU and U. All sides would have to compromise — and no doubt many Ukrainian supporters would interpret any settlement as a reward for Russian aggression.
Nevertheless, trade stands out as the one issue where the interests of the parties converge and where some room for negotiation is possible.
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