After rejecting to sign the association agreement on Nov. 28-29 in Vilnius, officials in Kyiv said its fragile, antiquated economy wasn’t ready to enter into a free trade deal with the 28-nation bloc and withstand trade sanctions from Russia where roughly a quarter of its exports go.
Prime Minister Mykola Azarov called it a “tactical” move, not a strategic retreat. President Viktor Yanukovych said the country will stay on the pro-European path yet still cooperate with the Kremlin-led Customs Union with whom it enjoys import-free duty trade within the Commonwealth of Independent States. Few believe him.
So despite initialing and supporting a deal with the EU negotiated for three years, Yanukovych and other officials justified their last-minute rejection of it as protecting the best interests of the nation. How can that be?
The potential landmark treaty with the EU, according to top officials, doesn’t take into account that Kyiv stands to lose up to $50-$60 billion in trade with Russia, they say.
“What accusations we’ve heard from Russia recently? Russia accused us that we do not consider their interests in negotiations with the European Union,” said Yanukovych in an interview with four Ukrainian TV channels on Dec. 2. He also believes that Russia had reason to be outraged that Ukraine didn’t consult with it during negotiations with the EU.
“Is this point fair? For sure it is. We do not want to lose trade with Russia, and Russia does not want to lose it with us,” he added.
The reason why Russia’s opinion is so important for Ukraine is quite simple to Yanukovych, who mentioned that higher value-added products go to Russia, including high-technology. In contrast, commodities mostly go to the EU.
Another point Yanukovych stressed is that if trade with Russia deteriorates, jobs would be lost. This year 85,000 people lost their jobs in industry, 32,000 in trade, 17,000 in transport and 15,000 in construction, he said.
The State Statistics Service shows similar figures. In the first nine months of 2013, export to Russia decreased by 13.4 percent compared to the same period in 2012. In terms of money, Ukraine exported $1.6 billion less than in 2012. In general, the Commonwealth of Independent States – made up of several former Soviet republics – accounted for 36.2 percent of total Ukrainian exports and 35.9 percent of total imports during the first nine months of 2013. For EU countries, these numbers are 26 percent and 34.7 percent, respectively.
The most significant export deliveries of such products as ferrous metals, machinery and railway locomotives went to Russia, which alone gets almost a quarter of Ukraine’s export.
However, this year has shown that together with a slight decrease of trade with CIS countries, Ukraine intensified its trade with the EU. Official statistics show that its export increased by almost 2 percent, and imports by 4.3 percent.
Anatoliy Kinakh, head of the Association of Industrialists and Entrepreneurs of Ukraine, whose members were the first to ask Yanukovych to postpone signing the association agreement, also understands the difference in trade structure with the Customs Union and the EU.
A minimum of 60 percent of what Ukraine imports from the Customs Union are raw materials such as oil and gas, whereas 40 percent of what comes from the EU are new technologies and equipment, said Kinakh, according to his organization’s web-site. He added that “we need so much to modernize our economy.”
Meanwhile, if relations worsen with Russia, exports there will slow down, Kinakh warns. It may particularly hit Ukrainian machine building since the country exports 52 percent of the industry’s products to Russia.
Despite the fact that European integration is a civilizational choice for Ukraine – incorporating not just economic issues but values such as rule of law, human rights and democracy – politicians should be pragmatic in their decisions, Deputy Prime Minister Oleksandr Vilkul believes.
“Euro-pragmatists want to preserve what there is today and to find new opportunities and they don’t want to go through shock therapy connected to the state of enterprises, unemployment, inflation, and higher utility prices,” he said on Dec. 3 at the Tiger Conference organized by the Kyiv Post.
The official said that, in particular, the production of machinery, especially heavy machinery, rockets, ships and locomotives would suffer. If such enterprises were to slow or shut down, the fallout might hit entire regions, he believes. “One can’t have a European standard of living in a poor country (like Ukraine). And a poor country isn’t the right market for their (EU) products,” Vilkul added.
However, officials should think not only about companies that are afraid of European competitors, but also about those that are ready to modernize for the EU market, experts say.
“There are businesses that want to go to Europe, and there are large businesses that have not taken elementary steps to be able to go to Europe… They’re struggling, they think that by joining the Customs Union they could still be able to do that, although they don’t realize they don’t have a comparable advantage in that market,” Vice Rector for Strategy and Program Development of Ukrainian Catholic University George Logush emphasized.
Kyiv Post staff writer Kateryna Kapliuk can be reached at [email protected].
