Marcus Svedberg and Aivaras Abromavicius of East Capital -
Ukraine signed an Association Agreement (AA) and a Deep and Comprehensive Free Trade Area (DCFTA) with the EU in Brussels on June 27. President Petro Poroshenko, in his signing speech, claimed it was the most important event for his country since independence in 1991. It should not be seen as a victory of the EU over Russia, yet Ukraine has clearly chosen its strategic direction.
Now that the fireworks are over, there is work to be done. Ukraine is clearly moving towards the EU and there is now broad and widespread support in the country for this policy. But the new agreement lacks one important element: the promise of eventually joining the European Union is not and has never been on the table. The AA/DCFTA is a second-tier programme that will not bring as many benefits as full membership of the EU. Ukrainians understand this, although Poroshenko referred to the EU charter in his speech that allows any country the prospect of EU membership. But similar to Turkey, whose prospect of EU membership looks distant at best, the more important element is the journey rather the destination. Just as Turkey has been negotiating many of the 35 chapters to get its institutions and laws in line with those in the EU, Ukraine, which is currently one of the continent’s poorest and most corrupt countries, needs Europe’s help in reforming just about every institution and dozens of laws in its country.
It must be stressed that this Association Agreement is not the same thing as gaining "candidate status" that ends with eventual membership, which was awarded to Albania on the same day. Without the EU membership perspective, the AA is a much less powerful reform anchor. The EU, despite all its rhetoric, is not necessarily prepared to offer Ukraine what it arguably wants the most: removal of visas in the short term and EU membership in the longer term. The point is not to promise Ukraine an accession date – it could very well take 10 or even 20 years to become a member – but a credible goal. Put differently, the AA has most of the sticks in the EU accession process but not the carrot.
We also think it is positive that Ukraine gets a free trade agreement, but the problem with the DCFTA is that the net effect is likely to be negative given the expected response from Russia. More fundamentally, by signing the DCFTA, it will be more difficult to achieve what Ukraine really needs: a free trade agreement with Russia and the EU.
It is somewhat sad that Ukraine had to choose between one or the other of its two largest trading partners. The Russian-led Customs Union and the DCFTA are not compatible in their current form, but that could easily be solved. Trade is not a zero sum game and it should be in everyone’s interest to ensure that Ukraine is as prosperous and stable as possible. Especially as all the players are deeply dependent on the gas that flows through Ukraine. Three-party talks on how the agreement affects Russia-Ukraine trade are about to commence in the coming week, according to President Putin.
The problem with these half-measures is that they run the risk of getting off-track once the initial political excitement is replaced by hard economic realities. We have seen this repeatedly in Ukraine over the past 10 years. This time is arguably different, but it does not mean that we should not try to give Ukraine the best possible conditions in which to develop.
Marcus Svedberg is Chief Economist, and Aivaras Abromavicius is Partner, of East Capital
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