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23 August, 2013 17:09   ▪  

The Economist: Ukraine could benefit from Russian sanctions in the long run but it may not have that long

New Russian trade restrictions with Ukraine were a warning against the “suicidal” step of signing the Association Agreement with the European Union, The Economist quotes President Vladimir Putin’s chief economic adviser Sergey Glazyev. And if it went ahead, the rules could become even tighter

As an EU summit in Vilnius in November nears, Russia’s means to deter the biggest country in its former empire from looking west and to prod it into joining the Kremlin-led Eurasian Customs Union instead include soft power (talk of a shared Orthodox heritage), carrots (cheap gas and access to markets) and sticks (trade sanctions), The Economist writes in Trading Insults.

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“The losses from the trade squeeze may be less than claimed. Dragon Capital, an investment bank in Kiev, put the figure close to $500m,” the publication argues. However, “Ukraine is in no position to wage a trade war. Record payments to redeem foreign debt are due this year. The economy is in recession and foreign-currency reserves have tumbled below the safety threshold of three months’ worth of imports.”

“Russia can also apply pressure on other fronts, such as gas. Ukraine is approaching winter still 3.5 billion cubic metres (bcm) short of the paltry 12.5bcm of reserves it plans to have for the start of the “heating season” on October 1st. Last year it had 20bcm,” The Economist assumes. Wojciech Kononczuk of OSW, a Warsaw think-tank, as quoted by the publication, reckons that “the Kremlin will watch and wait as its negotiating position strengthens, and Ukraine’s weakens. A gas war is unlikely: there will be a deal, the only question being whether, for Ukraine, it will be ‘very bad or just bad’.”

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Yanukovych, who faces re-election in early 2015, is caught between these constraints, the publication claims. “A deal with the EU would be popular, but an economic crisis or conflict with the oligarchs would dash his chances. In the long run Russian sanctions could benefit Ukraine, just as they did when imposed on Georgia in 2008. Its producers were forced to raise standards and compete globally. But Mr Yanukovych and Ukraine may not have that long,” The Economist concludes.

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