COMMENT: EU ban on Crimean goods ahead of free trade accord won’t crimp Ukraine exports

By bne IntelliNews June 26, 2014

Iana Dreyer of borderlex.eu -

 

The EU Council's decision on June 23 to exclude the Crimean peninsula annexed by Russia from trade benefits that have been granted to Ukraine probably won’t significantly affect the country’s exports to Europe. The greater threat stems from instability in eastern Ukraine, which is part of the country’s industrial heartland.

Brussels and Kyiv are expected to sign a long-awaited free trade and association agreement on June 27. The so-called Deep and Comprehensive Free Trade Agreement (DCFTA) is the pillar of the Association Agreement between Ukraine and the EU. It will reduce barriers to trade in goods and services, and induce Ukraine to implement a series of EU laws and product standards.

On June 23, the EU announced that Crimea, the Black Sea peninsula annexed by Russia in March, will lose access to European markets. This decision was taken as EU sanctions against Russia were extended to the peninsula. The measure, which came into force June 25, supports recent steps by Kyiv to restrict the operations of Ukrainian firms in Crimea.

According to the European Commission, “the measures adopted… by the Council give a concrete expression to the EU's position of not recognising the annexation of the Crimea and Sevastopol by the Russian Federation.”

From June 25, products originating in Crimea and Sevastopol aren't allowed into the EU unless they have been granted a certificate of origin by the Ukrainian authorities. Financial and insurance services related to the importation of the banned goods are also prohibited. The measures will remain in force until June 23, 2015, and will be reviewed regularly.

Although the ban isn’t all-encompassing – the door is open to certified products – it is unclear how exporting via Ukraine could work. The peninsula has largely been cut off from the mainland, and Russia controls the territory. According to Anna Derevyanko, executive director of the European Business Association in Kyiv, “as long as Crimea is under annexation pressures, basically it will not feel any benefits of the DCFTA”.

Little wider effect

The exclusion of Crimea isn’t likely to have a major impact on EU-Ukraine trade. Crimea’s economy is dominated by tourism and real estate services geared to a regional, largely Russian, clientele. According to very recent data published by the official Crimean investment portal, industry represents only 16% of the region’s output. Its other major economic activity is agriculture, dominated by fruit cultivation (grapes, melons) and animal husbandry (sheep for meat and wool) traditionally produced for Ukraine’s national market. Crimea is home to significant gas reserves.

Crimea is also poor. Its per-capita GDP of about $2,500 is around a quarter of the level in Kyiv. Vasyl Povoroznyk, economist at the Kyiv-based International Centre for Policy Studies, says close to 80% of the products consumed in Crimea came from mainland Ukraine before the annexation. Import restrictions imposed by Russia have reduced supplies to Crimea, making it difficult for Crimeans to purchase certain foodstuffs, for example. This has hurt the population, as replacement by Russian supplies has been slow in coming for logistical and legal reasons. Ukrainian banks have stopped operating in Crimea and servicing its population.

The peninsula’s isolation from Ukraine and from the DCFTA could delay the local agribusiness and industrial sector’s adoption of EU standards, a requirement to be able to export to the bloc. Furthermore, the DCFTA has maintained EU quotas on imports of live lambs and table grapes.

Deryvanko argues that what Ukraine needs as a priority is to upgrade its business environment to attract investment. This would help the country’s industry adopt international standards. The DCFTA is an opportunity to do so. But security is an essential prerequisite.

Hence, it is the situation in the eastern region of Donbass that could jeopardise the benefits of the deal. If security isn’t restored in the east of Ukraine, “it would be damaging for the whole country”, Deryvanko says.

Povoroznyk concurs: “The more serious situation is in Donbass. All economic activities were stopped there.”

The central government’s tax take from the region has stopped, too. This makes Kyiv's task to restore its public finances amidst a severe recession particularly difficult. Donetsk, Luhansk and Kharkiv – the three cities affected by the conflict between pro-Russian separatist forces and the Ukrainian state – account for 20% of Ukrainian output, according to Povoroznyk. Their main production is iron ore mining and steel production.

 

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