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Assessing the future of the Russia-Ukraine economic relationship

Stephanie Johnson

Russia-Ukraine tensions continue to affect the global economy (Part 10 of 10)

(Continued from Part 9)

Ukraine in a tight spot

Ukraine is certainly in a tight spot. On one hand, it’s being pushed by popular support (street protests) to form a trading alliance with the EU (European Union). On the other, it has strong economic ties with Russia that are critical for its economy’s basic needs.

Ukraine, which has strong economic ties with both the EU and Russia, wants to forge trade relations with both. Improving economic ties and trade relations between them bodes well for exchange-traded funds (or ETFs) like the Market Vectors Russia ETF (RSX), the iShares MSCI EAFE Index Fund (EFA), the iShares MSCI EMU Index ETF (EZU), the Vanguard FTSE Europe ETF (VGK), and the SPDR EURO STOXX 50 ETF (FEZ) that invest in these economies.

Russia against Ukraine joining EU

Russia is not in favor of Ukraine joining the EU. So far, Russia has warned about Ukraine losing cheap natural gas, a quarter of its economic exports along with 400,000 jobs, to deter Ukraine from any trade agreement with the EU.

Moreover, switching over to EU trade standards and ditching duty-free trade with Russia would cost Ukraine about €165 billion (approximately $206 billion) over the next ten years. Russia’s cancellation of its duty-free relationship with Ukraine would lead to import tariffs of up to 8% for Ukraine, affecting 98% of commodities.

Energy: The strongest yet most delicate Russia-Ukraine trade link

Energy remains the strongest trade link between Russia and Ukraine. Russia’s oil and gas giant Gazprom (OGZPY) have threatened to stop deliveries to Ukraine on account of continual late payment and an unpaid bill of over $5 billion.

Ukraine imports nearly 50% of its gas from Russia, which in 2013 amounted to 27.7 billion cubic meters. Gas imports from Russia are critical to Ukraine’s heating and industrial needs. At the same time, the Russian gas pipelines traversing through Ukraine to other parts of Europe are critical to Russia’s gas exports to the rest of Europe.

So, if Ukraine decides to cut off its Russian gas transit, it would hit Russian exports along with Europe, which sources 15% of its energy from Russia.

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