Bypassing Russia’s Iron Curtain

Olesia Safronova

Putin's Russia has dropped the Iron Curtain over the eastern border of Ukraine, not only banning deliveries of Ukrainian products to its market but also their transit to other countries. Kyiv hopes to enlist the support of the West in the fight against yet another act of a the Kremlin’s hybrid war.

In response to Russia’s aggression against Ukraine, the Cabinet of Ministers expanded on January 20 the list of Russian imports. Ukraine embargoed a total of 70 commodity groups. It includes almost the entire range of food imports, tobacco, alcohol, chemical products – from fertilizers to detergents – as well as railway products, subject to litigation with Russia within the WTO framework.

Ukraine’s forced countermeasures followed the closure from January 1, 2016, of the Russian border for the Ukrainian food exports and the introduction of higher taxes on those few industrial products, still supplied to the Russian market. After that, the aggressor state, which had stolen the Ukrainian Crimea and occupied the industrial Donbas in a bloody raid, put a total ban on the transit of the Ukrainian goods via its territory toward Central Asia and the Caucasus. 

Russian border guards and customs officers stop cargo trains and trucks at all of the 25 checkpoints across the Ukrainian-Russian border, the vehicles’ pass is also blocked almost completely. Ukrainian exporters are forced to seek detours and incur significant transport costs.

There will be losses

According to experts, the aim of Putin's Russia is obvious. Moscow is trying to strike another blow to the Ukrainian economy and deprive Kyiv of access not only to its own market but also to the promising markets of Azerbaijan, Kazakhstan, Kyrgyzstan, China and other Asian countries.

Commenting on the new challenge faced by the national economy and business, Minister of Economic Development and Trade of Ukraine Aivaras Abromavicius said: "The overall economic impact of the Russian economic aggression against Ukraine over the last 2.5 years has been enormous, amounting to billions of dollars."

According to the minister, the political decision of the Russian authorities led, among other things, to a reduction of direct Ukrainian exports to the Russian Federation to 12.9% in 2015.

"Direct losses of Ukrainian producers in the form of lost revenue just due to the embargo alone [from the beginning of 2016] amount to $98 million. This is just one figure. In total, including due to the increased tariffs [and duties], we estimate that the revenue shortfall of the Ukrainian producers should be between $420 million and $600 million," said Abromavicius.

The ban of Ukrainian transit through Russian territory will also affect Ukraine’s economy. "In general, a total of $1.8 billion worth of goods was exported [yearly] to the Asian countries through the Russian Federation. We do not expect any negative consequences for all of these goods because we know that some manufacturers have already sent their products on other routes. But there will be losses," said the minister.

"Other routes" means transit through Belarus in the north and via the Black Sea in the south – to Georgia and Azerbaijan. Belarusian detour means the additional 500 km of roads plus 15-20% more transportation costs. Moreover, this route does not ensure total protection from the Russian blockade.

The route through Georgia and Azerbaijan, the New Silk road which welcomed the first cargo train from Ukraine on January 15, bypasses a hostile Russia but requires significant shipment costs. It will take 11 days or more to deliver the goods to China, crossing two seas.

At the same time, we should not forget that Ukraine delivers 24 million tonnes of products to China annually. And although some of these goods are transported on ocean routes, it is clear that the newly-opened Black Sea-Caspian Sea pathway will see a considerable load of cargo shipments.

All options to find detours will first lead to a significant rise in logistics cost of the Ukrainian exports as compared to previously used transit through Russia.

The government understands this. Prime Minister Arseniy Yatsenyuk admitted, that shipment has become costly while commenting on the launch of a new route to China through Georgia and Azerbaijan. However, the prime minister expressed hope that increased efficiency of logistics operations will allow reducing costs over time.

Yatsenyuk called the New Silk Road “the first step to bypass Russia and create alternative routes of supply of the Ukrainian goods.” He added: “I'll be honest, the first phase - is expensive. But if we load the train and increase the volume of traffic, we will get the same logistics cost, as before the introduction of the transit ban by Russia."

Caring for the exporters

The more expensive cost of goods shipped on the New Silk Way road is only due to the logistics component, that is the longer terms of delivery. Meanwhile, the Belarusian transit also carries direct administrative risks.

Actually, there are no problems for the exporters at the Ukrainian-Belarusian border, for which the Ukrainian authorities have already expressed their gratitude to the official Minsk. But difficulties arise further along the route - on the border between Belarus and Russia.

Firstly, the Ukrainian products can only be transported through two checkpoints near the Russian Smolensk - one for the trains, another - for the vehicles. Secondly, as Ukraine’s Trade Representative Natalia Mykolska has told, the clearance of goods at these checkpoints is quite long, and there are even demands to replace the Ukrainian drivers for the Russian nationals. This information is also confirmed by exporters. They also hint that the Russian customs officers do not disdain taking bribes.

To minimize the difficulties, the Ukrainian authorities organized the so-called transport convoys. The first convoy of eight trucks set off on January 20."We monitor it to see whether we can move on and whether it can reach the border between Russia and Kazakhstan. The cost of this convoy is  $350 per truck," said Mykolska. She stressed that the convoys are also an experiment in many ways, so they will not be sent on a daily basis.

It remains unclear, whether Kyiv will be able to punch a hole in a Russian trading curtain. Former Deputy Minister of Infrastructure of Ukraine Oleksandr Kava believes that the government has taken not enough measures.

"Using the new routes will undoubtedly lead to higher prices for Ukrainian goods in the Kazakh market, reduce their competitiveness compared with similar products from other countries. This will inevitably reduce the volume of Ukrainian exports to this market,” said Kava. “Only because of the increased cost of transportation, Ukraine may lose about 20% of the volume of exports to Kazakhstan."

Kava also stressed that in this situation, the Ukrainian government may boost exports to Kazakhstan by introducing targeted subsidies to domestic producers who supply their products to the markets of Central Asia. "The amount of state subsidies should be set at the level of the margin between transport costs on a traditional overland route and the cost of transportation on alternative routes. Such a move would allow Ukrainian producers not to reduce their presence in this market so important for Ukraine," the expert said.

Becoming wiser than the enemy

The trade war launched by Russia that followed the military aggression and occupation of part of Ukraine is anything but surprising. The majority of Ukrainians are well aware that Vladimir Putin will not stop at just military aggression, killing tens of thousands of the Ukrainian citizens and looting the assets worth billions of dollars. This is because the ultimate goal against rebellious Ukrainians has not been achieved yet.

So today it is clear to both the official Kyiv and the rest of the world: the harder the Russians are trying to tighten the belts of the Ukrainians, the more vulnerable they become, themselves. The inadequacy of the steps taken by the Kremlin is puzzling to the world, and it will definitely be confronted, but not in the spirit of the "Russian brothers". The latest example is an "emotional" reaction of the Russian Federation to the escalation of relations with Turkey. 

Putin and his team traditionally chose to punish their own citizens with rejecting large-scale projects with the Turkish business and terminating their multibillion-dollar trade.

Ukrainian authorities have decided not to copy Moscow’s actions  - and refused from mirror-banning Russian transit through its territory. One can only imagine how hard it is to resist the greatest temptation to close the valve on the Ukrainian pipes supplying Russian gas and oil to the EU and Turkey…

The economists and historians are drawing parallels between Russia of 2015-2016 and the post-war Soviet Union when the wall was being erected, brick by brick not only in Berlin but also across the perimeter of Eastern Europe in the hope to ensure protection from "the English-speaking world." According to the Soviet leadership, that environment was hostile and carried a whole set of various threats. Everyone knows, what was the outcome of such policy in the end.

Only time can tell, how long will the shadow be of a new "curtain.” And it won’t take long. Late February, the General Council of the World Trade Organization will consider Ukraine’s complaint against discriminatory acts of the Russian Federation - trade embargo, the ban on transit, and breach of bilateral trade agreements. Ukraine has already gained the support of the EU in this regard.

In informal conversations, the Ukrainian negotiators claim that Kyiv does not aim at punishing Moscow economically. The ultimate task is to return common sense in these relations, create a coalition of countries - advocates of Ukraine, abolish discriminatory regulations, and prevent any attempts to pressure the trade in the future. Support of Ukraine's key partners - the U.S., Canada and EU member states would also be really important, in terms of promotion of Ukrainian exports to their markets, as a "compensation" for losses suffered by Ukraine from the Russian ban.

It will not be only the WTO General Council meeting where support for Ukraine will be on the agenda. Ukraine became one of the main topics at the World Economic Forum in Davos. Top government economists – Penny Pritzker from the U.S., Christa Freeland from Canada, and Aivaras Abromavicius from Ukraine – hold direct negotiations on trade. The Ukrainian party has high hopes regarding the outcome of these meetings.

In March 1946, British Prime Minister Winston Churchill gave a famous Fulton speech, warning about the fall of an "Iron Curtain" over Europe and the dangers of tyranny.

“What is needed is a settlement, and the longer this is delayed, the more difficult it will be and the greater our dangers will become. From what I have seen of our Russian friends and Allies during the war, I am convinced that there is nothing they admire so much as strength, and there is nothing for which they have less respect than for weakness, especially military weakness,” said Churchill.

These prophetic words of the great man have not lost their relevance in the XXI century.

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