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27 April, 2011  ▪  Oleksandr Kramar

Economic Takeover

Russian companies quietly taking over Ukrainian industry as Moscow pressures Kyiv to keep it from setting up a free trade zone with the EU

The presidential election a year ago was dominated by Ukrainian–Russian relations. While campaigning, Viktor Yanukovych and other Party of Regions members repeated over and over that the confrontation between the previous government and the “brotherly” Russian state was the main reason gas prices had raised forcing Ukrainian manufacturers out of the Russian market and leading to a lower standard of living for many citizens. Yanukovych’s first year in office has shown that it is utterly naïve to hope that Moscow will recognize Kyiv as an equal partner. Current economic trends and policies show the opposite is in fact true.

On January 31, the Russian government approved a decision to extend what are essentially prohibitive duties on metal pipes imported from Ukraine in excess of set quotas until January 2016. For some categories of pipes the duty was even raised: from 11.4% to 18.9% on casing pipes and from 8.9% to 19.4% on oil pipes produced by Viktor Pinchuk’s Interpipe holding and to 37.8% on oil pipes from other producers. As paradoxical as it seems, Russia lowered the pipe import quota for Yanukovych’s “friendly” government to 300,000 tons in late December 2010 – before this, the quotas had been much higher: 428,000 tons in 2009 and 411,000–419,000 in 2007–2008.

Agriculture Minister Mykola Prysiazhnyk recently voiced his disappointment when he said he could not understand why the government was unable to come to terms with Russia on Ukrainian sugar imports. “The Russian Federation imports over one million tons of cane sugar. You known that its price on the world market is much higher than the price of our sugar. But so far we have not found an understanding on the issue of setting a 100,000-ton duty-free import quota", he said.

The Kremlin has been selective in sanctioning imports from Ukrainian food producers, primarily dairy companies and confectioners. As a result of Russia’s long milk war against Ukrainian producers, which peaked in 2006 with a total ban on milk and meat imports from Ukraine, domestic producers yielded their positions on our “strategic partner's” market to producers from Belarus, Poland, Germany, and other countries.

Meanwhile, as Ukrainian companies lost the Russian sales market, Russia’s expansion in Ukraine gained momentum. The expansion plan was drawn up immediately after the Mykola Azarov government took office. “Russia wants to have the ownership rights to nearly 300 Ukrainian-based companies in the social sphere and industry. The rights for only 12 of them are completely fixed. I hope that now (after power changed hands in Ukraine. – Ed.) the process…will reach a new level,”  Deputy Chief of Rosimushchestvo Yuriy Medvedev said in March 2010. After this, the floodgates opened.

On April 23, 2010, an agreement was signed between Russia’s United Aircraft Construction Company (OAK) and Ukraine’s state-run Antonov to set up a joint venture viewed in Moscow as an intermediate stage on the way to a full “merger” or, rather, acquisition. Within a week, OAK CEO Alexey Fedorov said that the Russians had agreed with their Ukrainian partners that the assembly of AN-148s would take place largely in Russia. In the summer, in an effort to please the Kremlin, Antonov sparked a true scandal when it said it would discontinue cooperation with Zaporizhia-based Motor-Sich — not only a “national producer” but also a company owned by Party of Regions MP Viacheslav Bohuslaiev. OAK then set a demand before Antonov that D-436-148 aircraft engines produced by Motor-Sich be replaced with SaM146 engines manufactured by Russia's Saturn jointly with French Snecma. In November, the four-month long conflict was partly settled: Motor-Sich withdrew its lawsuit in exchange for Antonov’s commitment to install its engines on the first 50 AN-148 aircraft.

The Russians made exceedingly rapid progress in the past year toward the goal set by Vladimir Putin: acquiring Ukraine's nuclear power energy sector by setting up a powerful holding including energy generation facilities, machine construction and the fuel cycle. On June 1, Ukraine’s Enerhoatom and Russia’s TVEL agreed to have Russian fuel assemblies supplied to Ukrainian nuclear power plants starting from 2011. It was crucial for Moscow to see Ukrainian nuclear power plants (15 power-generating units with the total output of 13.8 GW) built to use fuel produced by Rosatom and thus legally secure the Russian company's biggest stable foreign sales market. This was evidently why the Russians were prepared to finance the construction of the third and fourth generating units at the Khmelnytsky Nuclear Power Plant. On June 9, 2010, the Ukrainian and Russian governments signed an agreement on cooperation to this effect, and the Verkhovna Rada ratified it on January 12. These two units will be built at Russia's cost, using Russian technology and equipment and involving Russian specialists, all of which would rule out the possibility of purchasing fuel from any other source for the plant, for example from American Westinghouse.

Russia's Vnesheconombank, whose board of supervisors is headed by Putin, is involved in a scheme to monopolize Ukraine's grain sector by Khlib Investbud, a company which appears to be owned by the state but is in fact more controlled by private entities (see UW, 9/2011). This may be a step on the way to integrating the countries' grain sectors as previously suggested by Moscow.

In early February, some mass media outlets suggested that Ukrainian energy and chemicals magnate Dmytro Firtash would sell his chemical assets which had greatly increased over the past year to structures affiliated with Gazprom. If this transaction becomes a reality, Russian business will monopolize Ukraine's mineral fertilizer market and would thus be able to easily conquer the country's agroindustrial sector by dictating fertilizer prices to domestic producers.

A clearly identifiable wider trend is lurking behind these specific cases. While the trade deficit with Russia was steadily falling during the “Orange confrontation” due to Ukraine’s faster growing exports, the opposite trend is prevailing under the current period of “pragmatic relations.”

Ukraineis essentially turning into a source of hard-currency income for Russia's economy and Russia is using this currency to take control of Ukrainian companies. Russia's direct investments in Ukraine stood at USD 2.96 billion as of early October 2010, up USD 0.9 billion over the previous year. This represents less than one-eighth of the hard-currency flows from our country to Russia over the same period. Material assets are being purchased in Ukraine at Ukrainians’ cost.

Concealed by the slogans of trade and economic cooperation, the refusal to steadfastly protect national interests is coupled with the Ukrainian government's giving in to Russia's view on how Soviet property abroad and economically attractive border territories should be handled. In early February, Ukrainian Ambassador to Russia Volodymyr Yelchenko said that because Russia had refused to meet Ukraine halfway in dividing Soviet property abroad, the decision had been made to … drop the negotiations altogether. “These negotiations recently stalled: the sides took opposite positions and failed to reach any understanding,” the diplomat said. In light of the fact that this results in Russia keeping all of this property along with the rights to use it and sell it, it is obvious who will gain from this lack of determination.

All these facts point to the Ukrainian government’s inability to defend Ukraine's economic interests from Russia. Ukrainian experts more and more frequently point out that the situation in Ukraine-Russian relations matches the model once voiced by such imperial theoreticians as Alexandr Dugin and certain Russian oligarchs, particularly Oleg Deripaska. These Russians argue that it is vitally important that Russian transnational corporations take control of the economies of Russia’s neighbors, including Ukraine. This, they say, will allow Russia to put people in government seats that will pursue policies in Russia's favor.

Remarkably, a Razumkov Center poll in October 2010 revealed that most Ukrainians believe that Ukrainian citizens and businessman have much less influence on state policymaking in the country than does Russia. While 30.3% of the respondents think these two sources have an equal impact, 15.2% are convinced that Russia's government has more of a say on Ukraine's state policy making than their own Ukrainian government does.


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