Kiev's Epiphany: Russia Trade Losses Equal to Country's Entire Budget

Last week, Ukrainian President Petro Poroshenko admitted that Ukraine had lost $15 billion as a result of the loss of trade ties with Russia. Ukrainian and Russian political economists have broken down exactly where and what Ukraine has lost, and what the country's leaders can do to try and salvage the catastrophic situation.

Speaking before the Ukrainian parliament last week at the opening of its fall session, Poroshenko explained that in the last two years, Ukraine's exports to Russia have fallen by 80%. Trying to put a brave face on things by saying that Ukraine continues to "search for and find other markets," the leader nonetheless admitted that Ukraine's economy has suffered a serious "shock," with losses amounting to the equivalent of $15 billion US. 

Pro-government analysts soon rushed to correct the president, calculating that the losses amounted to "a little more" – a minimum of $16.5 billion, and that's not including 2016. Experts went on to explain that "the conflict with its northern neighbor resulted in losses for almost every major domestic industry: agriculture, commodities, retail, and banking."

Citing Ukrainian market expert Andrei Shevchishin, Ukrainian news portal Apostrophe laid out the figures: "compared with the pre-crisis period in relations, exports of food [from Ukraine to Russia] have fallen virtually to zero. Export of textiles and chemical products has fallen by an average of 70%, glass and ceramics – 76%, metals – 86%. Exports of Ukrainian machine-building products have fallen by 85%."

"Ukraine's leaders had repeatedly commented on the need for a large scale expansion and diversification," and "had high hopes for the free trade area with the European Union," Apostrophe recalled. However, that too has not panned out as planned, with the EU's agricultural subsidies and quotas on Ukrainian agriculture forcing Kiev to try to reorient to Middle Eastern and Asian markets. 

In machine-building, things are even worse. "The problem is that domestic machine-building enterprises cannot compete with producers in the developed European countries," the portal candidly admitted.

Ultimately, Apostrophe noted, "while the government is holding talks with European officials on easing quotas on a number of export products, the reduction in exports has led to a weakened balance of trade and balance of payments. This in turn weakens the national currency, and stimulates the growth of unemployment, resulting in reduced consumer activity and a lowered standard of living for Ukrainians."

Commenting on Ukrainian officials' admission in an analysis for PolitRussia, blogger and independent journalist Sviatoslav Knyazev emphasized that for a country like Ukraine, the figure of $15-16.5 billion in losses is nothing short of catastrophic. "This is roughly equal to the country's [entire] annual budget."

"Poroshenko managed to honestly admit that the deterioration of relations with Russia resulted in a sharp decrease in the standard of living and the disappearance of hundreds of thousands of jobs. At the same time, the leader…attempted to add at least a hint of optimism to his speech, saying that in 2016, exports from Ukraine to the EU have increased by 7%," Knyazev recalled.

But this, according to the journalist, is a deceptive figure. "First of all, we are talking about growth following a catastrophic decline. In 2015, exports from Ukraine to the EU fell by 30%…Second, in annual terms this positive dynamic may disappear, [since] growth took place due to export quotas on agricultural products, which were exhausted as soon as January and February. Thirdly, the very structure of exports is characteristic for third world countries, and does not give Ukraine's producers serious value-added income."

Overall, the journalist lamented, "against the backdrop of the overall export statistics, talk of 'Eurogrowth' looks more like blatant mockery. In July 2016, the decline in exports accelerated to 10.1%; hardest hit, once again, was machine-building, which fell by 24.8%. Taking account of the fact that Ukraine's exports collapsed a record 29.3% in 2015, their further drop observed today amounts quite simply to a total catastrophe."

In the course of his speech to parliament, Poroshenko admitted that "one of the drivers of our economic growth has been our forced militarization."

In other words, Knyazev suggested, "as the rocket, aircraft, shipbuilding and other high-tech industries die out, the Ukrainian government is using [the budget] to repair the old Soviet APCs and defective armored cars which were wrecked in Donbass. It's obvious that there was no positive effect as far as people's standard of living, or foreign exchange earnings are concerned. But in this way it is possible to falsify statistics and to say that GDP is not continuing to fall (as is the case in reality), and to say that it remains stable, or is even growing a little…"

The catastrophe in Ukraine's machine-building sector is most tragic of all, in the journalist's view. As for the problem of Ukraine's high value added goods being blocked out of Western markets, "it's not just an issue of quality, but rather the harsh laws of the Western market. Machine-building means high added value, and is the prerequisite for the development of the intellectual potential of the manufacturer country. For this reason, [the Western] market only has a place for European and American companies."

"It was Russian kind-heartedness which allowed Ukraine, considered 'one and the same people', into the Russian market, and even saw lobbying of joint production for foreign markets. Ukraine's present Western 'masters' will not engage in such nonsense."

"Of course, making the same mistakes again and again is a fascinating exercise," Knyazev noted. "But Ukraine's own official statistics show that without Russia, the country's economy is simply dying. And even if they manage to get another IMF loan tranche, this will only delay the fatal result, not cancel it."

Ultimately, the journalist suggested that if Ukraine's leaders want to correct the situation, they will have to think about how to normalize relations with Russia. "And more – to prepare for a complete reform of the state into a federation, with the broadest possible powers for its regions." That measure, hopefully, can help to end the civil war in the country's southeast. "Otherwise, there will be little point in continuing to talk to Ukraine, while it even exists" in its present form, Knyazev concluded.