by: Ivan Verstyuk; Isaac Webb
Ukraine keeps doing business with Russia
Despite the undeclared war between two countries, Ukraine and Russia are still carrying on several notable business projects.
Ukraine and Russia had previously approved plans to jointly produce 150 An-148 planes worth $4.5 billion. Ukraine’s state-owned aircraft producer Antonov, headquartered in Kyiv, represents the Ukrainian side in this deal and is going to continue selling its production to the Russian Federation.
The same with Zaporizhya-based private company Motor Sich that sells half of its production to Russia, earning some $1 billion yearly on this deal alone, according to data provided by company’s press service. Aircraft engines are a key part of its exports to Russia.
Moreover, Ukrainian companies are reportedly continuing to sell weaponry to Russia, although such deliveries were banned by the government in late March.
Interim Ukrainian Foreign Minister Andriy Deshchytsia said the country will continue its trade relations with Russia since they are mutually beneficial.
The almost business-as-usual attitude by Ukraine, which expects the international community to isolate and sanction Russia, looks hypocritical.
However, it is easier for the West to cut ties with Russia than it is for Ukraine, said Vasyl Yurchyshyn, leading economic analyst for Razumkov Center. Lessening Ukraine’s dependence on Russia will take time, he said.
“Ukrainian goods can’t win the competition on the global markets today,” Yurchyshyn said. “It is necessary to improve their quality to get access to markets other than Russian.”
Last year, Ukraine sold goods worth $15 billion to Russia, down by 14.6 percent from the previous year. These were mostly machinery and metals, but also agriculture-related products and others. Russian goods imports to Ukraine were at $23 billion, energy supplies are the biggest part of it.
A number of Russian banks, including the state-owned Sberbank, VEB and VTB, are still present on the Ukrainian financial market. Russian businessman Mikhail Fridman runs Alfa-Bank and also Kyivstar, one of Ukraine’s leading telecommunication providers.
His compatriot Vagit Alekhperov owns Karpatnaftokhim chemical plant, while Zaporizhya Aluminium Plant belongs to Russian metal mogul Oleg Deripaska.
Billionaire Roman Abramovich has a stake in Southern Ore Enrichment Plant and Andrey Klyamko – in metallurgy giant Metinvest.
None of these Russian businessmen face any sanctions from the Ukrainian side.
Analysts emphasize that substituting Russia’s significant demand for Ukrainian goods will not be an easy task.
However, lessening dependence on Russia is a long-term Ukrainian government policy, which includes energy diversification and reducing Ukraine’s heavy reliance on Russian natural gas imports.
Moscow of late has not been a reliable trade partner for Ukraine. It has slapped on numerous trade restrictions that are a constant headache for Ukrainian exporters.
Besides, the price that Russia charges Ukraine for natural gas has as much or more to do with the state of bilateral.
Kyiv Post associate business editor Ivan Verstyuk.
Russian President Vladimir Putin (L) and former German Chancellor Gerhard Schroeder attend a meeting during the annual Economic Forum in Saint-Petersburg, on June 21, 2012. (AFP) Current Chancellor Angela Merkel has lambasted Schroeder for making “shameful” remarks tacitly endorsing the recent Russian invasion of Crimea. Schroeder’s has a close friendship with Putin and is chair of the board of Nord Stream, a pipeline joint venture with Russian state-controlled energy giant Gazprom. EU and U.S. political leaders are now questioning the extent to which western businesses should continue working with Gazprom and other Russian corporations
The revival of destabilizing, Kremlin-backed separatist movements in eastern Ukraine on April 6 has spurred talk in the West about tougher sanctions to deter Russian aggression and a possible military invasion of eastern Ukraine.
However, many Western governments – and their businesses – are still adopting a business-as-usual attitude towards commercial relationships with Russia, much to the chagrin of Ukrainians who regard such ties as trading with the enemy.
The debate over whether to maintain or cut economic ties with Russia, at the very least, is heating up.
Ukrainian Prime Minister Arseniy Yatsenyuk (R) speaks with British Prime Minister David Cameron (C) and Swedish Prime Minister Fredrik Reinfeldt (L) during the signing of the political provisions of the Association Agreement with Ukraine at the EU headquarters in Brussels on March 21, 2014 on the second day of a two-day European Council summit.
Germany
Germany, the economic powerhouse of the European Union, is a case in point.
At the end of March, German Vice Chancellor Sigmar Gabriel mildly criticized Joe Kaeser, the CEO of Siemens, Germany’s largest engineering company, for making long-term commitments to Russia during a meeting with Russian President Vladimir Putin. Gabriel called the meeting “a bit off-key” in light of the ongoing tension between Germany and Russia.
Kaeser has not responded to Gabriel’s remarks and Siemens has not backed away from its highly profitable Russian investments: in the 2013 fiscal year, Siemens’ sales to Russian customers totaled about $3 billion.
On April 8, Andreas Shockenhoff of German Chancellor Angela Merkel’s Social Democrat Party criticized Foreign Minister Frank-Walter Steinmeier’s emphasis on cooperation with Moscow and his suggestion that the EU is forcing Ukraine and other countries in Eastern Europe to choose between East and West.
Former German Chancellor Gerhard Schroeder reportedly did not invite Putin to his 70th birthday party, possibly because Merkel sharply condemned his defense of the Russian invasion of Crimea. Schroeder, a friend of Putin’s, is paid 250,000 euros a year to serve as board chairman of Nord Stream, a pipeline joint venture with Russian gas monopoly Gazprom.
United Kingdom
Meanwhile, the British government has said that it will not interfere with British companies’ activities in Russia. London has been heavily criticized for serving as the banking capital of money launderers, including Russian oligarchs.
Despite saying on April 9 that there would be “serious costs and consequences to Russia’s actions,” British Ambassador to Ukraine Simon Smith said that the British government’s “underlying philosophy” would not allow it to prevent British companies from doing business in Russia.
“Ours is not a government that that puts pressure on companies to take commercial decisions. We have a tradition of working with our companies in a way, which says ‘the commercial decisions are for you to take,’” Smith said.
He suggested that trade between Russia and the United Kingdom might help dissolve political barriers: “There is quite a powerful conviction that successful trade investment is actually one of the ways in which you can get over the barriers to understanding.”
France
Renault-Nissan CEO Carlos Ghosn presents a budget sedan, the first model ever to be made in Russia under the Datsun brand, in Moscow on April 4, 2014.
With no signals coming from Paris, French companies have continued to deepen cooperation with Russian corporations. Carlos Ghosn, the Chairman and CEO of the Renault-Nissan Alliance, said last week that the current crisis would not derail the company’s Russian ventures: “We have absolutely no hesitation on the potential of the Russian market, no matter how many bumps that you have in the road.”
Renault-Nissan has partnered with AvtoVAZ in Russia, producing a combined 1.1 million vehicles per year at three sites. The three companies currently have a 32 percent share in the Russian market, but Ghosn has said they are setting their sights on controlling 40 percent of the market by 2016.
Renault is not the only French company continuing to develop investments in Russia: on April 4, aerospace company Arianespace signed a contract to provide Soyuz carrier rockets to the Russian space agency Roscosmos.
Recently, the most governmental rebuke of Russian aggression has come from Amsterdam. On April 9, the Netherlands announced that it had postponed a trade mission to Russia, citing the annexation of Crimea.
Some cut ties to Russia
However, some European companies are cutting ties on their own with Russia.
On April 8 Volvo, a Swedish company, put on hold a joint venture with Russia state-owned tank manufacturer Uralvagonzavod to build armored infantry fighting vehicles.
Though Swedish political leaders have not publically encouraged Volvo or other Swedish companies to suspend cooperation with Russian companies, Agence France-Presse has suggested that Stockholm would veto a deal between Volvo and Uralvagonzavod.
America
Across the pond, American political leaders have argued that American companies should suspend cooperation with Russian corporations in light of the ongoing crisis in Ukraine.
In an interview with Bloomberg Television on March 28, American Senator John McCain (Republican-Arizona) said that American companies operating in Russia like Pepsi Co., General Electric, Exxon Mobile, and Ford should pull out of Russia, or at least consider the “suspension of business.”
NASA announced on April 2 that it had suspended contact with officials from Roscosmos, though it said the two agencies would continue collaboration on the International Space Station.
U.S. Senator Dan Coats (Republican - Indiana) has proposed sanctioning Rosoboronexport, Russia’s agency responsible for the export of arms. Coats’ amendment to a bill providing aid to Ukraine could also affect American companies hoping to do business with Rosoboronexport: the amendment prohibits “contracts with any domestic or foreign company that cooperates with Rosoboronexport to design, manufacture, or sell military equipment.” According to Radio Free Europe, the Pentagon has contracted with Rosoboronexport for more than $1 billion worth of military aircraft since 2011, largely for deployment in Afghanistan.
Energy giants cling to Gazprom
European energy companies have been particularly resistant to pressure to suspend work on oil and natural gas development and transportation with Gazprom.
Energy development and transportation between the EU and Russia is important to both economies. Thirty percent of European gas comes from Russia and eighty percent of Gazprom exports go to Ukraine and the EU. This makes European companies reluctant to suspend cooperation with Russia as they have their own market interests and expect high returns on the investments in joint projects.
Foreign energy giants ENI of Italy, EDF of France, Wintershall of Germany, and Siemens are currently working with Gazprom on the construction of the South Stream gas pipeline worth $73 billion, which will run under the Black Sea from Russia to Bulgaria and other parts of Europe.
The pipeline will be crucial in maintaining Russia’s 30 percent share in the European gas market.
The companies involved with the construction of the South Stream vehemently oppose sanctions against Gazprom.
Wintershall CEO Rainer Seele said in a press conference in March, “Nobody is helped by economic sanctions. They would hit not just Russia but also Germany and the whole of Europe in economic terms. The current situation cannot be viewed in black and white terms.”
Speaking to the Kyiv Post, a representative from ENI reiterated CEO Paolo Scaroni’s statement that financial, not political, interests would dictate his company’s investments in Russia: “the South Stream project has commercial rationale even if tensions between EU and Russia might represent an obstacle to its realization. Nothing more, nothing less.”
With most EU countries unwilling to inhibit European companies’ business in Russia, sanctioning Russian corporations may prove to be the most effective means of deterring Moscow’s aggression. Such sanctions would have significant costs, however.
This NASA handout photo shows security as they monitor the Soyuz TMA-11M rocket as it is rolled out on the launchpad by train on November 5, 2013, Baikonur Cosmodrome in Kazakhstan. The launch of the Soyuz rocket is scheduled for November 7 and will send Expedition 38 Soyuz Commander Mikhail Tyurin of Roscosmos, Flight Engineer Rick Mastracchio of NASA and Flight Engineer Koichi Wakata of the Japan Aerospace Exploration Agency on a six-month mission aboard the International Space Station.
According to Chris Weafer, a senior analyst at Macro Advisory Ltd. in Moscow, sanctioning Gazprom “would be the nuclear option if that meant actually blocking all Russian gas exports to Europe.”
Still, Weafer told the Kyiv Post that the EU could employ targeted sanctions, focusing on Gazprom’s monopoly on supply of gas to Europe and the ‘take-or-pay’ contracts it uses to corner countries on the continent: “Brussels could take a much tougher line on those issues…and impose heavy financial penalties and block the South Stream pipeline.”
To make up for the postponement of the South Stream pipeline, Weafer says Europe could “engage with Iran immediately and source that gas via Azerbaijan, Georgia, and across the Black Sea,” though the cost of such an investment would be enormous.
Alternatively, the EU could begin development of continental reserves of shale gas to make Europe more energy secure and less dependent on Russian supplies. The environmental fallout of the extraction of shale gas in the U.S., however, may deter development in Europe.
American shale gas does not seem to be the solution to the European energy crisis: the U.S. reportedly could provide only 70 billion cubic meters of gas by 2020 while the EU’s needs stand at 540 billion cubic meters annually.
Receiving liquefied natural gas from Qatar may be another diversification option. Countries in North Africa may also be able to provide oil to Europe, though they have been unreliable providers thus far, beset by terrorist threats and other unrest.
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