TRADE BLOG: EU-Ukraine free trade talks with Russia likely to go nowhere

By bne IntelliNews April 27, 2015

Iana Dreyer in Brussels -


The likelihood of trilateral talks involving Ukraine, the EU and Russia over Ukraine’s implementation of the deep and comprehensive free trade area (DCFTA) embedded in its Association Agreement with the EU – the deal that triggered the Ukraine crisis – is low.

The continuing Ukraine conflict as well as Russia and the EU’s greater interest in securing the future of gas exports to Europe go a long way in explaining why the talks, which were revived in Brussels on April 20 ahead of an EU Ukraine Summit in Kyiv on April 27, have shown hardly any signs of progress.

They have clearly failed to satisfy the Russian government: Russian Minister of Economy Alexey Ulyukaev said during a visit to Turkey on April 21 that he did “not [see] enough goodwill” on the side of his counterparts and that Russian concerns remained unaddressed.

Various officials from EU institutions told bne IntelliNews that whereas at bureaucrat-level Russian officials signalled they might be interested in striking a compromise on some areas of the deal, there is not sufficient political support in Moscow. If at all, Commission officials close to the negotiations do not believe there can be any significant movement before the end of 2015, shortly before Ukraine is scheduled to implement the DCFTA.

The talks – stalled in late 2014 after it was decided that Ukraine should postpone implementation of the agreement until January 1, 2016 and as the conflict in East Ukraine intensified – were re-launched as part of a wider process to reinitiate a political dialogue with Russia in the wake of the second ceasefire agreement concluded in Minsk in February.

The fundamental disagreements over the deal between the EU and Ukraine on the one hand and Russia on the other remain. Russia wants changes to the DCFTA text, including the cancellation of a planned phase-out of Soviet-era technical and sanitary standards, and it wants import tariff eliminations in many industrial goods to be cancelled too.

Kyiv and Brussels for their part are ready to offer “confidence building measures” as the agreement comes into force to respond to Russian concerns that it could end up being flooded with cheap EU goods via Ukraine. The EU is also open to the idea of signing up to some flexibility in the deal’s implementation to allay fears that Russia will lose market share in Ukraine.

Russia is threatening to suspend its 2011 free trade agreement with Ukraine if its demands are not met. This means Ukrainian exports could face higher Russian import tariffs.

Trade economists believe Russia’s concerns are largely unjustified, as the DCFTA is not per se incompatible with Ukraine’s current free trade deal with Russia. Russian concerns that the DCFTA could involve cheap EU products flooding its markets do not bear scrutiny, as rules of origin included in the existing bilateral free trade agreement between Ukraine and Russia are precisely designed to avoid trade deflection.

However, if Ukraine phases in EU technical standards and phases out so-called GOST standards as mandated in the DCFTA, some Russian products could indeed lose out on the Ukrainian market. A practical solution to overcome this problem would involve Ukraine signing a mutual recognition agreement with Russia on technical and sanitary standards, to minimise potential risks of trade diversion to the detriment of Russian exports. Another, more long-lasting solution would be to find an arrangement between the EU and Russia on trade ‘from Lisbon to Vladivostok’. But this is an unrealistic prospect in the foreseeable future.

Detailed reading of the DCFTA shows that there is in practice a lot of in-built flexibility for Ukraine in how, and when, it implements EU standards. What is more, legally binding commitments, with hard deadlines, to introduce industrial standards are limited to about 30 sectors. Brussels and Kyiv see this room for flexible implementation as a basis for negotiation with Russia. The EU has recently signalled it is open to the idea of Ukraine and Russia engaging in mutual recognition arrangements.

The deeper question, though, is whether the negotiations will lead anywhere at all.

Economic incentives between Ukraine and Russia to strike a deal have never been so low. Ukraine and Russia’s foreign trade collapsed in 2014 as both countries faced recession and currency depreciation. Russian food import bans, the disruption of trade linkages between the Ukrainian and Russian military industries inherited from the Soviet era, and the war-induced collapse of production in the Donbas region also contributed to this sharp drop.

In 2014 Ukraine’s goods exports fell by 13.5%, and its imports by 28.3%. Trade with Russia declined most dramatically: Ukrainian imports from the neighbouring country with which it is at war fell by 45%, and exports by 35%. As the political standoff between the two countries becomes entrenched, trade relations are not likely recover soon. This means that if Russia were to reinstate import tariffs on its trade with Ukraine, the pain inflicted on Ukraine would be relatively small.

Ukraine itself has signalled it now wants the agreement to be implemented in full, and is not ready to delay the deal yet again. Ukraine is under political pressure from Western financial donors to show it is committed to economic reform, and applying the DCFTA would send a strong signal in that direction. What is more, Kyiv is not in a mood to cave in to Russia. There are indications that Ukraine has balked at EU suggestions it might seek an arrangement with Russia on the standards issue. This means the government in Kyiv is ready to pay the political price of having Russia cancel its trade deal.

Finally, both Russia and the EU are more interested in achieving a deal on other ongoing trilateral discussions, those concerning the gas trade and the gas transited to the EU via Ukraine. Russia is sending signals that it is willing to strike some compromise on this trade area, which is vital to its stagnant economy and to a Gazprom embattled by low oil prices, by its failure to build the South Stream pipeline through Southeast Europe, and by Brussels' antitrust charges filed on April 22. The EU’s own interest is to ensure Russia continues to supply gas via Ukraine. Failing to secure a deal on the DCFTA is a minor price to pay for this.

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