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Not-So-Friendly Neighbors: Russia's Two-Front Trade War

Things are getting nasty between Russia and bordering countries Belarus and Ukraine. And then there's the Syrian factor.

Trouble on the border
Trouble on the border
Maksim Kvasha

MOSCOW — A modern tank would take about 10 hours to get from Moscow to Minsk, and 12 to 14 hours to get to Kiev — assuming there is no resistance. The road to Kiev is in such poor condition that it looks like heavy machinery drives over it regularly, but it would be too bad if tanks took to the road toward Minsk, which is one of the most beautiful thoroughfares in Russia. Not that anyone would worry about aesthetics during a war.

Of course, there is no actual war between Russia and its Slavic neighbors Belarus and Ukraine, so this scenario might sound fantastical. But in August it finally became clear that there was an ever-worsening trade relationship between Russia and its bordering countries.

It’s not just that Russia is trying to throw its weight around. On the contrary: Our neighbors, perhaps sensing Russia’s economic weakness, are behaving increasingly cynically toward their historic trading partner. Russia has yet to offer a convincingly strong response because it fears losing its regional influence.

Vladislav Baumgartner, the general director of the major Russian fertilizer company Uralkali, was arrested in Minsk Aug. 26. He had flown there at the invitation of the Belarusian prime minister and was arrested immediately after their meeting.

The topic of the meeting is well-known — it was about the fate of the the Belarusian Potash Company, which until recently had been a trading partner of Uralkali and another company. The cartel controlled some 40% of the world fertilizer market, which allowed it to keep prices high. According to the Belarusian prosecutor, the Russian businessman is guilty of “economic damages” against the Belarusian Potash Company and misuse of his position as the head of the board of directors of the Belarusian company.

On June 30, Uralkali had announced that it was ceasing to export through the Belarusian Potash Company because the relationship had come to a “dead end.” This decision was apparently motivated by the Belarus president’s decision to end the Potash Company’s export monopoly.

At the time, Baumgartner warned that the prices for potash would likely drop by 25%. In Belarus, the losses are estimated at around $1.5 billion, or 10% of the country’s whole export market.

Things got surreal after the arrest. Moscow reacted sluggishly, in a way that seemed inappropriate considering the stature of the people involved.

At the same time, the first Russian Air Force Base in Belarus was being opened, and the Belarusian president was asking for his last transfer of credit from the crisis fund, formally run by the EuroAsian Economic Community but largely controlled by Russia, as well as for additional funds that had not yet been agreed upon.

The chocolate divorce

It began to seem like Minsk had taken a hostage and was not even trying to disguise it. Nonetheless, there are no tanks headed toward Minsk in response to these very unfriendly actions. Instead, the only response has come from the Consumer Protection Bureau, which discovered that milk products from Belarus are hazardous. It’s not a very symmetrical response, and one that will mostly hurt the utterly innocent Belarus farmers.

If the front with Belarus is mostly still deflecting maneuvers, then the Ukrainian situation has come to a trench war, in which neither side can move an inch. The dead end comes from Russia’s absolute certainty that Ukraine would not be able to refuse membership in the Russian-led Customs Union, and on the other hand, Ukraine’s no less stubborn striving toward European Union membership.

In the long-term, many in Kiev think that orienting the country toward the large and relatively liberal economy of the European Union is more logical than an economic partnership with Russia. Kiev needs investment and technology, on a sort of mid-level business level, not megaprojects. It also needs growth based on a radically improved business climate, which Ukraine thinks will be easier by adopting the European rules of the game.

In the short term, the loss of the Russian market will hurt Ukrainian producers. That’s something that the Russian Consumer Protection Bureau demonstrated recently when it decided that Ukrainian chocolate was just as dangerous as Belarusian sour cream. That wasn’t enough, because Russia pulled out the big customs guns and subjected Ukrainian goods to comprehensive tests at all of the borders. Ukrainian exports to Russia tanked.

Characteristically, the Russian government is not hiding the fact that this is a warning shot. “Ukraine is depriving itself of the right of sovereignty in all trade issues,” Vladimir Putin’s economic advisor Sergei Glasev said Aug. 26. “It will no longer be our strategic partner and will disappear as a subject of international law.”

Other high-level Russian officials were more careful with their words, avoiding the term “trade war.”

Thirdly, and most importantly

What the two developing trade wars have in common is that Russia’s neighbors and traditional trading partners have become impractical trade partners. On the one hand, the situation on the border is a bad sign for Russia’s economy. It is also a sign of acute demands on Russia’s political allies in light of a worsening in Russia’s relationship with the U.S. and Europe on the Syria question.

The reality is that the war in Syria is actually the most important war for Russia at the moment. Conflict in the Middle East is manna from heaven for Russia, because it increases oil prices. Objectively, the Kremlin’s best interests are served by prolonged conflicts.

If the West does intervene in Syria, it is likely to cause oil prices to spike, though the long-term effects are harder to predict.

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