The Ukraine – Commonwealth of Independent States (CIS) Trade Dynamics As Impact The European Union

June 20, 2023 Posted by Russia Briefing Written by Chris Devonshire-Ellis

With Ukraine looking to join the European Union, a look at its earlier trade bloc commitments with the CIS merits close attention – with some surprising conclusions.

By Emil Avdaliani and Chris Devonshire-Ellis

With the current trade situation concerning Ukraine, to put it mildly, in a state of flux, it is prudent to look at the countries state of play with its prior trade bloc relations with the Commonwealth of Independent States (CIS). This is especially pertinent given that the European Union is preparing a roadmap for Ukraine to gain membership of the EU bloc, with discussions currently taking place.

The EU is expected to release a report this week that states that Ukraine has met two of seven membership criteria as things currently stand. Yet joining the EU is not as simple as eventually fulfilling membership criteria.

Within this article we examine what occurred during Ukraine’s relationship with the CIS as a precursor to a potential EU trade bloc membership. This analysis is intended to be impartial and without political bias.

Ukraine-CIS Background

Ukraine never took full membership of the CIS, as it did not sign the CIS Charter. However, Kiev did sign up to the CIS Creation Agreement in 1991 and continues to be regarded as a Founding Member. Since then, Kiev has been coy about its CIS relations. It took its position and the reduced tariff benefits from being a member of the Commonwealth of Independent States Free Trade Area, yet did so without ratifying the Charter, asking for more time from other CIS members to complete the process. These members included Belarus, and Russia, then from 1993, Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan, Moldova, Turkmenistan, Tajikistan, and Uzbekistan. Georgia joined the bloc in 1995.

The CIS Charter

On 22 January 1993, the Charter (Statutes) of the CIS were signed, setting up the different institutions of the CIS, their functions, the rules and statutes of the CIS. The Charter also defined that all countries have ratified the Agreement on the Establishment of the CIS and its relevant Protocol (as Ukraine did) would be considered to be founding states of the CIS, while those only ratifying, but not signing the Charter would also be considered as member states of the CIS (as referred to in article 7).

Other states could participate as associate members or observers if accepted as such by a decision of the Council of Heads of State to the CIS (article 8). All the founding states apart from Ukraine and Turkmenistan signed the CIS Charter and became member states of it. Nevertheless, Ukraine and Turkmenistan kept their CIS participation, without being full member states of it. Ukraine became an associate member of the CIS Economic Union in April 1994.

Ukraine stopped participating in 2018, however it has not legally withdrawn from the CIS Creation Agreement, a requirement to leave the organisation. In this way Kiev managed to manipulate itself into a unique grey area of CIS commitments, taking the available tariff benefits but avoiding full CIS responsibilities. This created some ongoing frictions between Kiev and other CIS members during the 27 years it was involved in full trade relations with the bloc. Some goods payment disputes, for example, have still not been settled by Kiev.

Ukraine-Russia Trade

Ukraine’s biggest trade partner across the CIS was Russia. Despite difficult relations following the 2014 annexation of Crimea, joint-level pragmatism, rooted in beneficial trade relations, continued to serve as a driving force behind close Moscow-Kiev relations. This situation drastically changed in February 2022 when the Ukraine conflict began.

Immediately prior to this, in 2021, Ukraine ranked 15th in Russia’s foreign trade – its share of Russia’s total global trade close to 2%, while trade turnover between the countries exceeded US$12 billion. That year, Ukraine sent goods worth US$4.2 billion to Russia.

Russia in turn exported goods and services worth US$7 billion to Ukraine. The Ukrainian Customs Service reports that in February 2022, imports from Russia to Ukraine amounted to US$548 million, and exports US$240 million. A month later, in March 2022, those figures precipitously fell to US$43 million and US$4.2 million, declines of nearly 80% in one month for respective Russian and Ukrainian bilateral exports.

Ukraine-Belarus Trade

Another country greatly impacted by the collapse in Ukrainian trade activity was Belarus. Just prior to 2022 the trade turnover between the two countries had slightly decreased, in part due to EU sanctions and political pressure upon Minsk at that time in the wake of political unrest. In fact, bilateral trade had remained somewhat constant from 2016-2022, averaging about US$1 billion of Ukrainian exports to Belarus, and imports of about US$2 billion.

The largest category of goods that Ukraine had been selling to Belarus were leftovers and waste from the food industry, ferrous metals, seeds and fruits of oil plants, nuclear reactors, boilers and cars, railway locomotives, plastics and polymeric materials, paper and cardboard, electrical machines, and copper. Nearly half of all imports from Belarus traditionally were mineral fuels, oil and products of its distillation. This has also decreased to about 10% of the previous values.

Other Ukraine-CIS Trade

Ukraine’s trade with other CIS member states has likewise suffered. For instance, all Central Asian states (except for Turkmenistan) are CIS member states and their trade with Ukraine has mostly been transiting through Russia. It is therefore no surprise that Ukraine’s economic ties with Central Asia have been downgraded.

Prior to the annexation of Crimea in 2014, Ukraine was among the top 6 foreign trade partners of Kazakhstan with bilateral trade reaching US$2.9 billion. By the end of 2021, Ukraine was in 15th place in terms of Kazakhstan’s trade partners, with its bilateral trade volume having declined to US$1 billion, mainly as a result of Ukrainian trade policies wishing to diversify away from the CIS and attach greater importance to the EU from 2014 in the form of an EU ‘Deep and Comprehensive Free Trade Area (DCFTA)’ that nullified Ukraine from export duties to the EU.

The EU has also supplied considerable aid to Ukraine since then, commencing with an initial US$11 billion that year. (Interestingly, part of the EU’s standards for Ukrainian membership include serious concerns of institutional corruption).

Meanwhile, in 2021, Ukraine became a top ten trade and economic partner with Uzbekistan (8th place) with a turnover of US$737.1 million – an increase in volume which included US$472.4 million of Ukrainian exports, and US$231.6 million of Uzbeki exports, in addition to the services industry.

Exports of Ukrainian goods to Uzbekistan increased by 45.5% compared to 2020, while the import of goods from Uzbekistan to Ukraine increased by 99.4% compared to the previous year. This was also in part due to relations with the European Union – Uzbekistan began an Enhanced Partnership and Cooperation Agreement (EPCA) with the EU at that time, with Ukraine acting as a de facto middle-man through its own EU deal. Since then, however, trade has collapsed, again by about 90% over the past 18 months.

However, there are some bright spots. Oil, sugar, equipment for the production of beverages, processing of fruits, vegetables, milk, small mobile factories for food production are exported from Ukraine to Uzbekistan. Despite these deliveries facing Russian sanctions issues, both countries are looking for new ways to deliver goods through Kazakhstan, via the Caspian Sea. It remains an absurdity that in some cases, anti-Russian sanctions, especially involving ports and transportation issues, and the threat of secondary sanctions, have also negatively affected Ukraine’s ability to reach its own export markets.

Concerning Armenia and Azerbaijan, other CIS member states, Ukraine’s trade has likewise suffered. Ukraine’s bilateral trade relations with Armenia were never extensive and it had ignored this market. For example, in 2021, Ukraine’s exports only reached 2.7% of Armenia’s total, with values of just US$143 million. In 2020, Armenia exported only US$26 million worth of goods to Ukraine.

Yet in Azerbaijan the situation was different. In February 2022, Azerbaijan and Ukraine had pledged to double bilateral trade by the end of 2024 to US$1 billion. Reaching this goal now seem unlikely, but Ukraine has attempted to correct the situation by signing of an agreement by the Ministers of Foreign Affairs of Georgia, Azerbaijan, Ukraine and Moldova on the establishment of a free trade zone within the framework of the GUAM – a multilateral body involving Azerbaijan, Georgia, Moldova, and Ukraine, and aiming at closer economic and political integration of the wider Black Sea region. That will take time to accomplish, but the willingness is there.

Ukraine’s Global Trade: Negatives and Positives

These immediate declines coincide with Ukraine’s overall deep reduction in global trade. Exports declined by -35.1% and imports -24.2% during 2022. The blockade of Ukraine’s Black Sea ports, through which Kiev had shipped roughly two thirds of its exports, has been the main reason for this, aside from factors directly related to the conflict – losing control over a quarter of its territory, and damage caused to its industrial facilities in export-oriented sectors.

Ukraine’s trade with its previous non-CIS trading partners have also significantly decreased as a result of these negative circumstances, particularly to China (-69%) and India (-64%). Additionally, the Black Sea port blockade has forced Ukraine to seek new markets. This has though led to a rise in exports to its neighbours: shipments to Romania rose 150%, to Slovakia 51%, Hungary 40%, and Poland by 27%.

In terms of the EU as a whole, total trade between them reached almost €52.4 billion in 2021, with Ukraine’s exports to the EU amounting to €24.1 billion. That increased to €26.5 billion during 2022. EU exports to Ukraine however have declined (excepting military equipment).

Kiev’s Pragmatic Approach

From the beginning Ukraine has engineered a special status within the CIS, sitting on the fence as concerns taking advantage of trade benefits yet staying away from legal commitments. While it became, along with Russia and Belarus, a founding state of the organization back in 1991, it never signed the CIS charter.

Nevertheless, Ukraine continues to take advantage of its prestigious status as a founding member, on a par with Belarus and Russia. This partially explains Ukraine’s behaviour toward the CIS in recent months.

While the current conflict has served as a watershed moment, testing Ukraine’s ties with CIS institutions and the organization’s member states, Kiev is legally still part of the organization as no official request for withdrawal has been submitted. Until it does so, it is unable to join the EU. This is because the EU and CIS respective Charter’s prevent countries from adopting different tariff regimes simultaneously. While Ukraine continues to follow a non-resignation CIS policy, it cannot join the EU in any event.

Ukraine has pushed for breaking ties with the CIS, starting in 2014, when its National Security and Defense Council decided to prevent Ukraine taking the Chairmanship of the CIS for that year. In 2018, the then Ukrainian president Petro Poroshenko ended Kiev’s participation in the statutory bodies of the multilateral organization. This means that Ukraine is currently in a state of partial, but not full, CIS limbo.

But there remain considerable ties. Within the CIS, Ukraine concluded 301 international agreements. To date, Kiev has so far pulled out of just 20% of these, mainly related to economic integration, education, space, and military-political activities. The present thinking in Kiev appears to be following the concept that there are still benefits to be obtained from Ukraine’s participation in the CIS.

Firstly, for Ukraine it is critical to use the platform as a stage for promoting its geopolitical interests vis-à-vis Russia. Secondly, the CIS could be a good instrument to redevelop economic ties with the CIS member states and use these to demand better terms from the EU. Then there is prestige. As a founding CIS member state, in the event of any regime change in Russia, Kiev would likely try to claim a larger CIS role, possibly with the intent to eclipse the Kremlin. A clue to this lies in the (controversial) belief in which Kiev depicts itself as the legitimate heir to ‘Kievan Rus’ as opposed to Moscow.

Ukraine’s strategy not to submit a formal CIS withdrawal application is therefore dictated by pragmatism. It can use this to extract additional concessions from the EU, while hedging its bets if – should the military or Kiev governmental situation change – it ends up being closer to Russia should Moscow prevail. There is also the issue of a divided Ukraine emerging – with the Western Ukraine opting to join the EU, while the Eastern regions, if retaining autonomy away from Kiev or Moscow, opting to regenerate CIS ties, or doing so as new parts of Russia.

Alternatively, following a Russia collapse, a CIS with a lead role for Ukraine and the potential for the entire bloc to be subsumed into the EU in stages may appeal to expansionist EU and NATO thought.

Quite how Brussels negotiates its way with the EU as concerns Ukraine is far easier said than done. For now, the only way forward it appears from this Ukraine-CIS conundrum would be changes of regimes – in Brussels, Moscow – or Kiev. Treading warily would be highly advisable.

Emil Avdaliani is a professor at European University and the Director of Middle East Studies at the Georgian think-tank, Geocase. Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates. To contact them please email: silkroad@dezshira.com

The Ukraine – Commonwealth of Independent States (CIS) Trade Dynamics As Impact The European Union