Ukraine-Led Trio Signs EU Pacts Risking Russia’s Ire

Ukraine was joined by fellow ex-Soviet republics Georgia and Moldova in tying their future to the European Union, risking a widening rift with Russia that threatens to hit their economies.

The three countries signed free-trade agreements with the 28-nation bloc today, while Georgia and Moldova also signed association agreements. Ukraine inked that accord in March after the Kremlin’s opposition helped derail a previous attempt last November, sparking protests that turned deadly and led to the ouster of President Viktor Yanukovych three months later.

Former Soviet countries are deciding on political and economic alliances as the crisis in Ukraine reverberates in the region. While Belarus and Kazakhstan last month joined Russia to form the Eurasian Union, the three countries signing deals in Brussels are anchoring themselves with the EU. They may face economic measures from their former Soviet partner, which has protested being left out of the negotiations.

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“Trade agreements are no policies to deal with short- or medium-term economic problems or security problems,” Fredrik Erixon, director of the European Centre for International Political Economy in Brussels, said by e-mail. “Ukraine and the other countries will be more strongly anchored economically in the EU market, but the EU market can’t substitute these countries’ trade and integration with Russia.”

Russian Threat

Russia has demanded talks with the EU and Ukraine before any deals are signed and said it will take measures if the agreements hurt its trade. The EU deals threaten to damage Russia’s economy because of disruptions in cooperation and reduced trade, the Foreign Ministry in Moscow said yesterday.

While signing the agreements is the sovereign right of every state, it will have “serious consequences” for Ukraine and Moldova, Russian Deputy Foreign Minister Grigory Karasin said today, according to the Interfax news service.

Russian retaliation through tougher trade and migration terms risks pushing Moldova’s economy into recession, according to Dorin Dragutanu, the head of its central bank.

A Snapshot of Ukraine's Past and Future

“There is nothing in these agreements nor in the European Union’s approach that might harm Russia,” EU President Herman Van Rompuy said in Brussels today. “The European Union stands ready to engage with Russia as much as need be.”

By signing the association agreement, Ukraine “underlines its sovereign choice in favor of future membership of the EU,” President Petro Poroshenko said at the ceremony.

Currencies Weaken

Ukraine’s hryvnia has tumbled 30 percent against the dollar this year, the worst performance among 176 currencies tracked by Bloomberg, as the central bank stopped supporting the exchange rate. The Moldovan leu has lost 6.9 percent and Georgia’s lari has slid 1.8 percent.

The yield on Ukraine’s benchmark dollar-denominated government bond due July 2017 fell 3 basis points to 8.69 percent, after climbing 33 basis points in the last two days. The yield on Georgia’s dollar debt due 2021 was little changed at 4.58 percent today, down from 5.63 percent two months ago. Moldova doesn’t have any outstanding international bonds.

Retaliation by the Kremlin may have the deepest effect on Ukraine, which sent about 25 percent of its exports to Russia last year, on par with the share of goods destined for the EU. Shipments to Russia shrank following the ouster of Putin’s ally, Yanukovych.

Duties, Tariffs

EU trade has a bigger weight in the other two countries. Moldova in 2012 shipped 20 percent of goods to Russia and 51 percent to the bloc, while Georgia’s sales to Russia accounted for 6.5 percent of exports last year, compared with 21 percent shipped to EU.

“It is likely that Russia will impose both customs duties and tariffs on various categories of goods and services,” Otilia Dhand, an analyst with Teneo Intelligence in London, said by phone. “The impact will certainly be felt in Ukraine and Moldova, less so in Georgia. However, these losses will likely be balanced by increased trade with the EU.”

As a precursor to the agreement, the EU in April approved scrapping about $750 in million-import duties on Ukrainian goods from May, without demanding a similar move from Ukraine.

The country of more than 40 million already got a taste of Russian economic warfare last year, giving grounds for Yanukovych to eventually pull out of the EU deal.

Carcinogenic Candies

Last July, Russia banned imports of candies produced by Ukraine’s Roshen, owned by Poroshenko, saying consumer regulators had discovered carcinogenic substances. Kazakhstan, Tajikistan and Moldova said later they found no dangerous ingredients after inspecting the company’s goods. Russia’s customs service placed Ukrainian exporters, including steel producer Metinvest, in a higher-risk category last August, subjecting their goods to lengthier checks.

Similar measures continued as the country turned toward Europe again after Yanukovych’s ouster. Russia imposed a ban on Ukrainian potatoes this month and threatened to ban the imports of corn and sunflower from its neighbor, saying it would spread western corn root-worm.

Foreign Minister Sergei Lavrov has repeatedly stated in past weeks Ukraine would “face consequences for its present commitments” under free trade agreements by the Commonwealth of Independent States, an economic collective of former Soviet countries.

Escalating Tensions

“It would be optimistic to think that Russia won’t do anything,” Vadim Khramov, an economist for Ukraine and central-eastern Europe at Bank of America Merrill Lynch in London, said at a June 25 news conference. “Russia started a trade war in August against Ukraine and also Russia escalated tensions significantly in October-November last year when Ukraine wanted to sign this association agreement.”

Moldova, like Ukraine, is part of the CIS. Russia will take protective measures in line with World Trade Organization rules in case there is a “negative impact on the functioning of the CIS free trade zone and on the terms of our WTO entry,” Lavrov said June 25. Moldova’s agreements with EU may become “a serious test‘‘ for relations with Russia, the Foreign Ministry in Moscow said June 10.

Russia may raise import duties to protect its market from European goods flowing through Moldova, two Russian government officials with knowledge of the plans said last month, declining to be named because the deliberations aren’t public.

‘Short-Term Shock’

‘‘The short-term shock of joining the EU free-trade zone amid a slowdown of economic activity and possible measures from Russia may lead to a recession,’’ Dragutanu said in an interview in Chisinau, Moldova’s capital, on June 23. ‘‘But recession isn’t the end of the world. There is life after recession.’’

Georgia has been reducing its reliance on Russia after a five-day war between the neighbors in 2008. Even so, the country is vulnerable to trade sanctions as exports to Russia ‘‘are now higher than at any point since Georgian independence,’’ while remittances from its northern neighbor are growing steadily, Sergi Kapanadze, an analyst with the European Council on Foreign Relations, said in a research note this month.

Russia’s share of Georgian exports more than tripled last year after it lifted a ban on the country’s wine and mineral water. A new barrier would threaten to disrupt trade in these goods as 70 percent of all the nation’s wine and 48 percent of bottled water sent abroad in the first quarter went to Russia.

European Commission President Jose Barroso said June 12 in Tbilisi that Putin assured him there’ll be no negative reaction if Georgia signs EU association agreement.

‘‘The Georgian government’s confidence that it is better able to withstand Russian pressure than Ukraine is misguided and deeply dangerous,” Kapanadze said. Russia can also destabilize the situation by using the Abkhazian and South Ossetian territories it has occupied, he said.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Ott Ummelas in Tallinn at oummelas@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Alan Crawford at acrawford6@bloomberg.net Eddie Buckle

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