For good
reasons, much of the attention of the Ukrainian protests has been put on being
pro-civil rights and not necessarily on pro-European integration; yet, it is
also important not to forget the economic consequences of Ukraine’s only two
options – the EU or Russia’s Customs Union.
At a
quick glance, here is an overview of Ukraine’s economy. According to the World Bank,
Ukraine is in the lower middle-income level with a $3,500 GNI per capita. The
income share held by the lowest 20% slightly increased since 2004 to 2010 from
9.0% to 9.9% respectively. In contrast, the income share held by the highest
20% decreased from 37.3% to 35.7%. This means that almost no progress at all
has been made in decreasing the gap since the Orange Revolution. In addition, Ukraine
is expected to experience a 15% devaluation of the hryvnia peg to relieve
pressure on Ukraine’s foreign-exchange reserves. Ukraine’s economy has been in
sharp decline in the past two years and its near-term growth outlook and
stability are worrisome. Lastly, nominal incomes of Ukrainian citizens are
being strongly underestimated relative to their real purchasing power.
Ukraine’s
proximity to Russia has always been a concern for the EU. The two countries’ relatively high social
integration ties are a strong factor in evaluating Ukraine’s economic institutions
with Russia.
The CIS has been a handy tool for Russia to achieve
these integration attempts since the perestroika. Putin has been attempting to build
unions similar to those of EU yet with some “minor” differences. Though it
might seem attractive at first glance, bringing
back an economic union between post-Soviet states is far from realistic.
Conveniently for Russia, most of the treaties are
structured in a form of economic dependency on Russia. Therefore, institutional
formality of the CIS is not helpful since Russia will do what is best for
Russia. Most importantly, cooperation does not exist to any great extent, and
Russia’s bullyism does not help. The 2006 trade wars on gas pipes between Russia
and Ukraine are one example. The share of intraregional exports in the CIS
region majorly declined from 57% in 1994 to 31% in 2004 while imports declined
from 59% to 46% respectively. Sociological surveys confirm that post-Soviet
citizens do not have confidence in the CIS integration projects. Economic reforms cannot work on the
basis of CIS: the states are too weak and Russia is too bossy.
Without doubt, corruption has a significant negative effect on
Ukraine’s economy. Unlike tax, corruption is not transparent, creating
arbitrariness and uncertainty and therefore a decrease in FDI. With low democracy there is a strong correlation
with lower demand for regional cooperation. If Russia would increase the
quality of its institutions then the share and volume of Russian investments
would increase. Yet, the likelihood of this happening in the near future is
very unlikely.
Russia
does not have much to offer, and Ukraine
has an attractive alternative – join the EU – the economic benefits of
which include aid and trade. As for the EU, Western policymakers affirm that
Ukraine is crucial for stability in Europe, and that uncertainty in Ukraine is
uncertainty in Europe. This means that support and assistance toward Ukraine
means a more stable and prosperous Europe.
The EU
is Ukraine’s largest trading partner. Ukraine receives EU protection and preferences
for key products such as animal and vegetable oils, processed vegetables and
fruits, clothing and certain steel products. EU trade policies are not a
significant barrier for Ukrainian exports, and the primary constraints are
internal. EU’s recent border expansion is a positive result for Ukraine, which
contributed to additional FDI attraction and positively impacting Ukraine’s industrial
products. These results will only accelerate if Ukraine joins the EU.
Ukraine’s
export relationship with the EU has been growing while declining with Russia.
2002 was the first year when Ukraine’s exports to the EU were greater than
those to Russia. Standard trade models highly predict that the EU market will
be of much more importance for Ukraine. According to the World Bank, these
estimates predict that a trading country of Ukraine’s economic size and
proximity to major markets has a potential of exporting more than 40% of its
total exports to the EU. Lets not forget that economically Russia is very small relative to the EU: its GDP mass
is approximately 40-50 times larger than that of Russia!
Other
countries in the region have much stronger trade with the EU. For example, more
than 50% of Poland’s exports go to the EU. During the period of 1996-2002 the
net FDI per capita in Poland were approximately 8 times larger than in Ukraine.
The geographical reorientation of the trade of these countries toward the EU
happened relatively fast and early because they signed FTA’s and association
agreements.
In order
to strengthen the Ukraine-EU trade policy relationship, Ukraine must improve
the competitiveness of Ukrainian firms on international markets, its domestic
business environment and strongly aim to attract FDI (something Yanukovych
failed at doing). Ukraine must also seriously restructure its trade toward more
diversification and specialization since it seriously underutilizes its
geographic advantages. Though EU’s strictness is a key factor in delaying
Ukraine’s access to the EU, it also plays a major role in improving Ukraine’s
quality of standards and efficiency of its economy.
EU is
Ukraine’s only best option. To a great extent, Ukraine’s upcoming inflation could
be offset through applying a competitiveness boost – something the EU partnership
can provide. Ukraine not being a part of the EU, places the country in a clear
disadvantage compared to its Western neighboring countries. The associations agreement
that Yanukovych failed to sign was meant to wax Ukraine’s exports and provide
more economic stability. Corruption will plummet. In turn, this will attract
trade not only with the EU but will open windows to the rest of the world’s largest
and most successful economies.
Ilya Timtchenko is an undergraduate senior currently pursuing a double major in International Affairs and Economics at Gordon College in Wenham, Massachusetts.
