President Petro Poroshenko has submitted the EU-Ukraine Association Agreement to parliament for ratification, 10 months after his predecessor Viktor Yanukvych backed out of the deal, triggering mass protests that led to his ousting in February. Parliament is expected to ratify the agreement overwhelmingly but the historic event has been overshadowed by the agreement between Ukraine and the EU on September 12 to postpone implementation of the free trade deal - a core component of the Association Agreement - until 2016.
The postponement is apparently at the behest of Russia, which was a co-signatory of the joint statement with the European Commission and Ukraine on September 12. "To be able to fully support the stabilisation of Ukraine, the Commission is ready, in the event that Ukraine ratifies the Association Agreement with the EU, to propose additional flexibility," says the joint statement issued by Commissioner for Trade Karel De Gucht, Ukraine's foreign minister Pavlo Klimkin, and Russian economy development minister Alexei Ulyukayev on September 12. "Such flexibility will consist in delaying until 31 December 2015 the provisional application of the DCFTA while continuing autonomous trade measures of the EU to the benefit of Ukraine during this period," the statement concluded.
The apparent retreat from immediate full implementation of the agreement - which was strongly opposed by Russia and rejected by ousted president Yanukovych in November 2013 as potentially economically disastrous for Ukraine - may be seized on by Russia "as a diplomatic victory and proof that the free trade area was full of faults when it was drafted", fears Concord Capital analyst Zenon Zawada.
According to media reports, Russia had filed 60 pages of requested amendments to the free trade agreement, purportedly to protect Russia's market - which also has a free trade agreement with Ukraine - from being flooded with EU goods.
Around half of Ukrainian exports, around $12bn worth per year - including those with the highest value added such as engineering products - are sold to the Russian market, with most of Ukraine's grain and metallurgy exports going to the Middle East.
Behind the scenes the Russians have threatened to close their market entirely to Ukrainian exports. Most of Ukrainian high value-added exports to Russia are purchased by Russian state companies, especially Gazprom, making implementation of such a boycott easy, say experts. In comments made on February 12 to a conference, head of the National Bank of Ukraine Valeriya Gontareva said that Ukrainian exports to Russia would fall by 35% in 2014 and by 40% in 2015, causing a significant deterioration in Ukraine's trade balance, despite the nearly 50% devaluation of the hryvnia since February 2014. She also said Ukraine's GDP would fall by 9% in 2014.
The EU already in May 2014 voluntarily implemented the removal of tariff barriers for Ukrainian imports, as envisaged in the free trade agreement. EU's de Guchta at the time valued the EU's unilateral trade concession at €483m per year. But it is still too early for there to be any noticeable effect, Ukrainian prime minister Arseny Yatsenyuk has conceded.
Removing Ukraine's tariff barrier for EU imports in 2016 is also likely to hit Ukrainian tax revenues, at a time when the International Monetary Fund is requiring austerity measures to balance the budget. Ukraine imports large volumes of goods from the EU and customs payments contribute significantly to the cash strapped budget. A greater market share for imported goods will also lead to shortfalls in tax revenues from domestic companies, though devaluation of the hryvnia has already provided some defence against imports.
The decision to postpone implementation of the free trade agreement has sparked a political backlash in Kyiv. The move triggered a high level resignation, with deputy foreign minister minister Danylo Lubkivskiy quitting his job after what he called an "unexpected decision".
"The declaration sends the wrong signals to everyone: to the aggressor, allies and most importantly, to Ukrainian citizens. Our economy still has a chance of pulling itself out of a fatal sickness. A choice cannot be postponed - otherwise it is not a choice," Lubkivskiy wrote on Facebook.
Opponents of Poroshenko in the campaign ahead of the early elections also criticised the decision. Former prime minister Yulia Tymoshenko, who lost presidential elections in May to Poroshenko, called the postponement in implementing the EU free-trade pact "a betrayal of national interests".
"Ukraine’s government has agreed to a pragmatic approach to a very complex problem. (…) The Ukrainian economy essentially gets another 14 months of customs-free exports to Europe while collecting duties from EU imports, all the while maintaining the current free trade regime with the CIS," wrote Concorde Capital's Zenon Zawada.
"A big risk is (…) sending the dangerous message that invading and occupying Ukraine provides geopolitical dividends. And it also has the potential to lead to future diplomatic rows on amended tariffs or additions planned, despite Klimkin’s attempts to downplay these further possible changes," Zawada adds.
"[Pro-EU protests on Kyiv's central square] Maidan, and arguably the war that has been fought, with the loss of many lives, was all about Ukraine's European orientation. Many would argue that such action [postponing implementation] is a total sell out to Russian aggression, and muddies Ukraine's future course," Standard Bank's Tim Ash wrote in a research note.
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