Kuchma says new Russian tax could result in "economic war" (09/15/96)

Kuchma says new Russian tax could result in "economic war"

by Roman Woronowycz
Kyiv Press Bureau

KYIV - Ukraine's President Leonid Kuchma said on September 7 that Russia's decision to impose a value-added tax (VAT) on Ukrainian goods could result in "economic war," and called the levying of the tariff political in nature.

Beginning on October 1 the Russian Federation will impose a 20 percent tax on all goods entering the country from Ukraine. The decision was made by presidential decree back on August 18. Originally the tariff was to have begun on September 1, but Ukraine's Deputy Prime Minister Viktor Pynzenyk convinced the Kremlin to hold off for 30 days.

Now President Kuchma has said that any VAT would halt the influx of Ukrainian goods into Russia, which is overwhelmingly Ukraine's largest trading partner.

At a press conference held on September 7, the president asserted that "unless the decision is canceled, this will in fact mean an economic war." He tempered the remark by explaining that "one should take into account at the same time that all wars end in peace."

It seems that the president has put up the "beware of dog" sign when no dog lives in the yard. The "economic war" that Mr. Kuchma has threatened could hardly be won by Ukraine; only 10 percent of Russia's trade is with its southern neighbor, while Ukraine sells 60 percent of its goods to Russia. Moscow also has stifling control over the Ukrainian economy because it fulfills much of Ukraine's energy needs.

Four days later the president's chief of staff, Dmytro Tabachnyk, softened the stance taken by President Kuchma. He said the term "economic war" should be used loosely. "I believe that such a term should be used in quotes," said the chief of staff. He gave no specifics as to what action Ukraine might take should Russia proceed with the VAT.

He did call Russia's decision "artificial price control" and said it was implemented in part to help fill Russian coffers and avoid a budget crisis.

Russia has said that, in effect, Ukraine is dumping goods on the Russian market because it is not a member of the CIS Customs Union and therefore does not adhere to the value-added taxes that the participating countries have imposed upon themselves. The Customs Union agreement signed in 1992 by most CIS members, but not Ukraine, stated that the VAT would be collected by the source country rather than the importing country, which is contrary to Western norms. For CIS member-states it is the only option because borders remain open and so it is not possible to track tariffs at customs checkpoints.

On September 2 Russia's Minister of the Economy Yevgeni Yasin said the "market situation and budgetary requirements" conditioned the decision, according to Interfax-Ukraine. He added that if Ukraine would accede to the customs union then the problem, which President Kuchma called the application of political pressure on Ukraine, would disappear.

A working group of Ukrainian and Russian government officials was formed to resolve the issue in August when Ukraine's Prime Minister Pavlo Lazarenko traveled to Moscow with Deputy Prime Minister Pynzenyk. Conventional wisdom holds that once all is said and done, certain goods will be excluded from the VAT, while others will be taxed.