Despite Russian Threats, Ukraine Moves Toward New EU Trade Deal

By Commodity HQ  SEP 19, 2013 10:05 AM

Because of its rich resources, geographical location, and geopolitical standing, Ukraine's decision to enter trade agreements with the EU and not Russia is a big deal.

 


In the commodity world, trade agreements and regulations can either make or break a particular market. Whether it be new alliances, tariffs, or taxes, each decision made by commodity-producing countries can have a significant and material impact on the flow of goods and natural resources. In recent years, one country has struggled to take a concrete stance on its trade agreements, going back and forth between new and forward-looking trade ventures to the West and its long and tangled ties with its neighbor (and once oppressor). This week, however, Ukraine finally took a stand against Russia, giving the formal go-ahead for its landmark trade deal with the European Union.

Though it has been more than two decades since Ukraine formally declared its independence, the country has struggled to gain control of its economic and political independence. This new venture and push toward Westernization, however, will likely be the catalyst toward much needed change in the developing country, opening up new and lucrative avenues for both domestic and international trade.

Inside Ukraine’s Natural Resources

Though the country does not often come to mind with regards to commodity investing, Ukraine is a relatively resource-rich nation and a significant trade partner with major economies throughout the globe. The country, aptly dubbed “The Breadbasket of Europe,” was once an agricultural-based economy, with its rich and fertile black soil providing the perfect landscape for grain, sugar, wheat, vegetables, and sunflower oil production. And though agriculture once comprised nearly 50% of the country’s gross domestic product, it still does account for a significant portion (roughly 10% of GDP) of the economy today.

On the energy front, Ukraine ranks as the seventh largest consumer in Europe and Eurasia. The country is heavily dependent on nuclear energy, and is home to 15 nuclear reactors, which generate roughly half of the total electric power supply. Ukraine also consumes approximately 2.3 trillion cubic feet of natural gas, of which 30% is produced within the country. The Bratstvo and Soyuz pipelines also run through Ukraine, which supply natural gas from Russia to Austria, Bosnia, Bulgaria, Croatia, Czech Republic, Germany, Greece, Hungary, Moldova, Poland, Romania, Slovakia, and Turkey. Ukraine has exhausted most of its natural gas deposits, though earlier this year, Shell agreed to explore an area that holds an estimated 4 trillion cubic feet of untapped shale natural gas reserves.

In recent years, industrial metal production has become a significant part of the country’s economy. Ukraine is currently one of the top 10 steel producers in the world and is also home to the world’s largest reserves of commercial-grade iron ore, which amounts to roughly 30 billion tonnes or about one-fifth of the global total. The country also holds significant reserves in coal, as well as ferrous and non-ferrous metals.

Given Ukraine’s relatively rich resource base and key geographic and geopolitical location, its decision to enter trade agreements with the EU instead of Russia has undoubtedly brought up both political and economic concerns.

Cutting Ties With the Kremlin

Over the years, the Ukraine-Russia relationship has slowly deteriorated as Ukraine continues to take steps to become less dependent on its former oppressor. The developments are more than just economic ones; Ukraine’s government has long been plagued by Kremlin puppeteers, which, through harsh and ruthless tactics, try to control nearly every aspect of the nation’s economy and its ties to Russia. This push toward fostering better relations with the European Union is one of the first times the world has seen Ukraine develop some semblance of a political backbone against Russia.

Not surprisingly, Russia’s government -- which operates under the thumb of Vladimir Putin -- has threatened retaliatory action against Ukraine if the country goes through with joining the EU free trade zone. For Ukraine, these threats are not the first and will certainly not be the last -- and with the backing of the West, Ukraine may finally be able to cut, or at least loosen, its ties with Putin and the Kremlin.

In regards to the economic impacts of the EU trade agreement, many experts believe that in the long-run, both Ukraine and the EU would benefit tremendously. According to a report published by the Peterson Institute for International Economics, “The main advantages for Ukraine will be better access to the vast EU market; increased inflow of foreign direct investment, which will modernize the Ukrainian economy, restructure enterprises, and create jobs; and harmonization of regulatory and institutional standards, which will improve the business environment and rule of law in Ukraine."

While the DCFTA trade agreement with the EU is still not set in stone, Ukraine’s recent actions certainly warrant a closer look by investors, as the deal will more than likely foster much-needed economic and political stability as well as new, lucrative growth opportunities for and within the developing nation.

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Editor's note: This article by Daniela Pylypczak was originally published on Commodity HQ.
No positions in stocks mentioned.