Debt and trade disputes further erode economic relations between Russia and Ukraine; EU decides to keep Russian sanctions in place

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/52

​As expected, Ukraine announced late last week that it cannot pay back Russia a $3 billion loan, which came due on December 20, as agreed under the original loan conditions. While the IMF has said it interprets the debt as public sector debt, it made a rule-change at the start of the month so that public sector debt arrears do not automatically disqualify a country from receiving IMF aid, thus allowing Ukraine’s current program to continue. Russia fiercely criticised the decision. Ukraine and Russia have failed to reach a compromise on restructuring of the debt and Russia has threatened to commence legal proceedings if Ukraine does not pay by the end of this month.

Russia also announced it would end its free-trade arrangements with Ukraine from the start of next year, when Ukraine’s free-trade agreement with the EU enters into force. In addition, Russia bans imports of Ukrainian agricultural and food products. Russia-Ukraine bilateral trade has contracted strongly since Russia annexed Crimea in 2014. In the first nine months of this year, trade with Ukraine accounted for about 3 % of Russia’s total imports and exports. Russia accounted for 13 % of Ukraine’s exports and 20 % of its imports. The EU’s trade share has risen this year to 33 % of Ukraine’s exports and 41 % of its imports.

The EU decided to keep its restrictions on Russian foreign trade and financial markets in place until July 31, 2016.

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