Sanctions announced: How will Russia hit Ukrainian economy

Viktor Suslov
19:10, 23 October 2018
2620 0

Russian President Vladimir Putin signed off a decree on special economic measures to be taken in response to Ukrainian sanctions earlier imposed against the Russian Federation. Indeed, Russia is able to introduce restrictions that are sensitive to Ukraine, even more sensitive than whatever Russia has already done before – all those trade wars and previous sanctions.

First, despite the sharp drop in the volume of bilateral trade, Russia remains Ukraine's largest trading partner (if compared with other individual countries rather than associations like the EU). In January-August 2018, Ukraine exported to Russia goods worth $ 2.448 billion, and imported goods worth $5.094 billion. It is important that Russia has always been the main consumer of Ukrainian industrial products, including high-tech. This means that, of all countries, it is Russia that is able to impose sanctions most painful for Ukraine. And it is precisely the loss of the Russian markets that would be the hardest to compensate for.

It is known that as a result of the restrictions imposed on trade, losses are always incurred by both parties. Therefore, restrictions are usually introduced gradually, while the country implements its import substitution policy. However, in the current situation, when political considerations come to the fore, especially in connection with the desire to influence the course and outcome of the presidential and parliamentary elections in Ukraine, Russia could go for drastically limiting the supply of goods critical for Ukraine.

In general, there are several areas most sensitive for Ukraine.

For example, Russia is already proceeding and will proceed on the path of reducing (possibly completely halting) gas transit via Ukraine. Gas transit services provided Ukraine with annual revenues of up to $3 billion. Without these revenues, Ukraine will face catastrophic problems with the balance of payments, and the real threat will be a deep devaluation of the hryvnia and an actual default.

For example, Russia is already proceeding and will proceed on the path of reducing (possibly completely halting) gas transit via Ukraine

At the end of 2019, the transit contract between Gazprom and Naftogaz will expire, while the construction of Nord Stream-2 and Turk Stream will be completed. In this sense, the threat of Ukraine losing all gas transit volumes is becoming quite real.

Ukraine is also dependent on the supply of Russian nuclear fuel. It is yet hard to say whether Russia will resort to any measures related to nuclear fuel. Ukraine is completing the tests of U.S.-made fuel by Westinghouse, and it is possible that substitution is possible here. And if there is a replacement, then such sanctions for Ukraine will not be so sensitive.

In addition, the winter is coming, and Ukraine traditionally buys in Russia large amounts of thermal coal, including hard coals of anthracite group. Restricting coal supplies could put our thermal power plants in a difficult position and cause major disruptions in the Ukrainian economy.

Then there is a number of other areas. In particular, Russia still buys a significant part of Ukrainian products. For example, restrictions may be imposed on the supply of metal products, including pipes.

Secondly, as is well known, Russia remains the largest investor in the Ukrainian economy. Therefore, the sanctions associated with the restriction of these investments will also be very sensitive for Ukraine.

Restricting coal supplies could put our thermal power plants in a difficult position and cause major disruptions in the Ukrainian economy

We still have several large Ukrainian banks operating with Russian capital. It is possible to move towards reducing their operations, up to the complete liquidation of these banks.

It is worth noting that Putin’s decree implies the introduction of targeted sanctions against legal entities and individuals. Therefore, it is possible that some restrictions will be imposed related to the investments of Ukrainian oligarchs in Russia. It is also possible that Ukraine's accounts and other assets will be blocked in Russia.

Many are discussing the possibility of Russia imposing restrictions on the use of Ukrainian labor. After all, a fairly large number of Ukrainian citizens work in Russia (according to various estimates, it's up to 3 million people). I don't think that this will happen though, because Russia is experiencing a great shortage of manpower, and will hardly refuse to use the Ukrainians, because this would greatly affect not only Ukraine, but also Russia itself. In addition, it is believed that Ukrainians working in Russia are more loyal to Russia.

In general, further deterioration of relations between Ukraine and Russia and the curtailment of economic relations are likely to lead to a further decline in the living standards of Ukrainians and will have a negative impact on the Ukrainian internal political situation.

Viktor Suslov is an Honored Economist of Ukraine, ex-Minister of Economy

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