Working With Russia

Economic News

22 Jul 2010
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Ukrainian Foreign Minister Arseniy Yetsenyuk proposed renewing the 1997 Big Treaty with Russia, and urged for a plan of action to improve dialogue between the two countries.

The Big Treaty refers to an agreement on friendship, cooperation and partnership signed in 1997 for a ten-year period, which came into effect in 1999.

The statement followed a meeting between Yetsenyuk and his Russian counterpart, Sergei Lavrov, at a time of political uncertainty in Ukraine, due in part to the question of Ukraine's relationship with its northern neighbour. Kiev is in the middle of a familiar stand-off between President Viktor Yuschenko, whom many consider 'pro-Western', and the parliament under Prime Minister Viktor Yanukovych, who is widely labeled 'pro-Russian.'

Bilateral relations have often been stormy in the years following the break-up of the Soviet Union. Certain political factions in Ukraine have consistently called for a deliberate weakening of ties with Russia, adopting Western-oriented policies and neo-liberal principles. For some Ukrainians, integration of their country into Western institutions such as the EU and the NATO are as important for their symbolic value as statements of independence as for their actual economic or security benefits.

Although 'pro-Russian' sentiment in Ukraine is difficult to define, ranging from those seeking a return to rule from Moscow to those who are wary of perceived Western meddling, there is a widespread resentment in Moscow of Ukrainian calls for greater independence. Russia maintains a lingering sentiment that it not only helped foster Ukraine's development by providing heavy industrial assets to Ukraine during Soviet times, but that the country continues to subsidise Ukraine with cheap energy resources.

Indeed, the question of energy is one of the most politically fraught. The relationship reached a low-ebb in January 2006, when the two neighbours were embroiled in a dispute over gas. Russia accused Ukraine of siphoning off natural gas bound for Europe, in response to Moscow's halt of deliveries to Ukraine. The cut-off stemmed from Ukraine's unwillingness to pay higher tariffs.

Many, at the time, including Yuschenko, accused Russia of using energy prices as a political tool to influence parliamentary elections in March of that year. Though direct Russian influence was not apparent in the 2006 polls, detractors argue that the gas crisis was nonetheless beneficial to pro-Russian parties from the East of Ukraine.

Another politically charged issue is the continued Russian naval presence in the port of Sevastopol in Crimea. Under the 1997 agreement, the Russia's Black Sea fleet is allowed to remain in the port until 2017. In the wake of the gas crisis, Ukraine abruptly raised the rent charged to the Russian government for usage of the port. In response, the Russian government banned the import of Ukrainian dairy and meat products, claiming food safety concerns.

Having said that, the relationship between Russia and Ukraine appears to have evolved significantly since the 2006 dispute, as evidenced by the decreased Russian 'presence' in the current stand-off.

Though some hard-line neo-imperialists in the Russian media and Russia's parliament the Duma have been vocal on behalf of the Yanukovych government, Russia's President Vladimir Putin, who was publicly supportive of Yanukovych during the 2004's 'Orange Revolution,' has maintained a low public profile this time around. Meanwhile, Lavrov recently made an appeal for calm in the current stalemate and indicated that Russia was prepared to intervene in the political crisis only if requested.

Yanukovych himself seems to have tempered his pro-Russian stance. He has discussed the possibility of a Western mediation of the crisis, or potentially an East-West mediation involving countries like Austria, Poland and Russia to help resolve the crisis.

Political turbulence aside, economic relations continue to look robust. Yetsenyuk reassured Russian investors that their investments in Ukraine were not in danger despite the ongoing stand off, and described the current situation as temporary political turbulence.

"The Ukrainian economy is open to Russian capital in whatever currency, we offer guarantees," he said.

Yetsenyuk went on to add that Ukraine was interested in a common economic space with Russia and called for wider cooperation on energy issues, which are particularly important given Ukraine's position as a transit country for Russian gas.

Russia remains Ukraine's most important trading partner. In 2005 the country absorbed 22.1% of Ukrainian exports, and supplied 35.5% of its imports.

According to Ukraine's State Statistics Committee, 42% of Ukraine's investment abroad in 2006 went to the Russian Federation, and the volume of Russian investment in Ukraine in 2006 was around $980m. According to the WTO, from 1995-2005, Ukraine was Russia's third largest destination for exports, after the EU and China, and the second largest source of imports.

Former Minister of Economy Volodymyr Makhuka told OBG that over the last year and a half, improved relations with Russia has been a "major breakthrough" in spite of confusion and misunderstandings. We have resumed effective political and economic dialogue, resolved the issue of energy supply, and are coming to an understanding on several trade disputes."

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