The EU-Ukraine arrangement on a free trade zone finally came into effect
on January 1st 2016, following eight years of negotiations. Two years ago,
hundreds of thousands of citizens went out on the streets in Ukraine to protest
against then President Viktor Yanukovych, as he refused to sign the Deep and
Comprehensive Free Trade Agreement with the European Union in November 2013.
The ensuing ouster of Kremlin-backed president Yanukovych and Russia’s
subsequent military intervention in eastern Ukraine changed the post-Soviet
space’s fundamental geopolitical dynamics. Now, what does the FTA with the EU
promise the Ukrainian economy and how could it impact the region?
Since Soviet times the Ukrainian economy was well integrated with the
Russian one, so it will be a lengthy and challenging process for Ukraine to
re-orient into the European market. However, there are several factors that
will help smooth this transition.
According to official statistical data from Ukraine, more than 30 per cent of the country’s
exports are already going to Europe. Additionally, bilateral trade between
Russia and Ukraine has dropped from 50.6 billion US dollars in 2011 to just $13
billion in 2015, according to Russian government statistics. For the past several years, Ukrainian businesses have already been
adjusting their production quality to European standards, in expectation of the
specified agreement.
The EU market is the most demanding in terms of quality and standards,
so establishment of new quality control measures is going to be Ukrainian
producers’ main challenge. Nonetheless, according to the Institute for Economic
Research and Policy Consulting, 71 per cent of Ukrainian businesses are
expecting to make a profit from the FTA within the next five years. Aside from
new quality control measures and open competition with well-established
European companies, the new trade agreement offers Ukraine preferential access
to the biggest consumer market in the world with over 500 million customers.
In the near future, Ukraine has more potential to compete in light
industries and especially the agricultural sector. Ukrainians were responsible
for one-fourth of all agricultural products in the Soviet Union. Even the
Ukrainian flag’s colours can be attributed to agricultural landscapes: fields
of golden grain under a blue sky. In order to modernise and strengthen the
agro-food sector in Ukraine, the European Investment
Bank allocated a
EUR 400 million loan to the country in December 2015.
Modernisation of production facilities and upgrading to European
standards could present Kyiv new opportunities in the CIS markets, where
Ukraine also enjoys tariff free privileges. In 2011, Ukraine signed a Free
Trade Agreement with seven other Commonwealth of Independent States countries:
Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia and Tajikistan.
Normally, any country can partake in several agreements on free trade. For
example, Canada is a cosignatory of 12 FTAs.
However, Russia is intent on challenging Ukraine’s new government via
every possible means. As of January 1st, 2015, Moscow extended its sanctions
against the EU onto Ukraine. During negotiations in Brussels, Russian Prime
Minister Dmitry Medvedev commented that Kyiv cannot be a member of two free trade zones at the same time.
Moscow’s position is that Kyiv should lose its preferential status within the
CIS, as it signs an agreement with the EU.
So far, no other country in the CIS region has joined Russian trade embargos on Ukrainian
products. Back in 2013, Russian presidential adviser Sergey Glazyev said that
members of the Eurasian Economic Union (EEU) will be forced to make customs
procedures more severe for Ukraine and may withdraw from a free trade area with
the country if Kyiv signs the agreement with EU. However, even Belarus and
Kazakhstan, original co-signatories of the EEU, have decided to continue their
free trade arrangements with Ukraine.
After meeting with her Kazakh counterparts, a representative of the
Ukrainian Ministry of Finance mentioned that they reached agreements about mutual co-operation to manufacture
goods in Ukraine for European markets and in Kazakhstan for Central Asian ones.
Belarusian President Lukashenka has also expressed some concerns about European goods imported to Belarus evading tariffs
under the new arrangement. Currently, Ukraine and Belarus are working on
creating an automated intelligent video surveillance system for goods and
vehicles moved though the Ukrainian-Belarusian border.
During their last round of meetings, Eurasian Economic Union member
states decided to observe the consequences of Ukraine’s new arrangement with
the EU and come up with a response plan over the next six months. For now,
Russia is creating challenges even for the transit of Ukrainian products
through its territory, which is going to increase the price of Ukrainian goods
in destination markets.
On January 4th, 2016, the Minister of Economic Development of Ukraine
said they will file a complaint to the World Trade Organisation and described
the new restrictive measures by the Russian Federation as
"non-transparent, unjustified and discriminatory." Kyiv is also looking
for alternative ways to Asia that bypass Russia. One of the options is the
Trans-Caspian route: through Ukraine, Georgia, Azerbaijan, Kazakhstan and
China. The first test container train on this route will depart from Odesa on January 15th.
Kyiv’s arrangement on the free trade zone with the European Union
started a new stage for the Ukrainian economy. However, there is more work
ahead for both Ukrainian businesses and policy-makers to yield profit in this
nascent setting. In the meantime, Ukraine will also help unfold some of the
obscured political cards in the post-Soviet space. 2016 will be an
interesting year for this vibrant region.
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