Ukraine's Costly European Dream
Ukraine President Petro Poroshenko just signed a major trade agreement with the European Union. The EU also set out specific, Poroshenko-suggested terms for a new round of sanctions against Russia. There is no question where European leaders' sympathies lie, but Ukraine will have to pay a price for abandoning its role as a bridge between Russia and Europe and embracing the EU so completely.
Poroshenko had no choice but to sign the deal. Former President Viktor Yanukovych's last-minute refusal to approve it last November sparked the protests that resulted in his overthrow. Poroshenko, a billionaire confectioner, was swept into power by the revolutionary wave. He made the most of his moment of vindication, and signed the document with the pen Yanukovych was supposed to have used last November.
The deal is only a small step toward joining the EU. Serbia, Macedonia, Bosnia and Kosovo, for example, have more comprehensive association agreements with the EU, and their membership is far from assured. Ukraine's deal requires the EU to cancel or lower import duties on most Ukrainian non-agricultural goods and introduce quotas for the duty-free import of agricultural ones. Ukraine, for its part, has to reciprocate on most goods within seven years and on cars within 15 years.
According to the EU, Ukrainian producers will gain between $1.1 billion and $1.36 billion a year from the duty reductions once the agreement is ratified by all the EU member parliaments as well as Ukraine's. That's a significant amount, but not world-changing. Last year, Ukraine exported $18.8 billion in goods to the EU. The absolute benefits of removing trade barriers are potentially greater for the Europeans, because EU exports to Ukraine were almost twice as valuable, at $32.6 billion. Relatively speaking, however, Ukraine is the bigger winner because the European market is about 100 times as large as Ukraine's.
In a document meant to dispel myths about the association agreement, the European Commission stressed that "there is nothing in the Agreement which will affect trade with any other trade partner of Ukraine, including Russia. Therefore no negative economic effects regarding trade with other trade partners of Ukraine can be expected as a result of the Agreement itself. Threats by Russia to raise its tariffs if Ukraine signs the Agreement are not based on economic reasoning".
That isn't strictly true. Russia and Ukraine already have a free-trade agreement, signed under the auspices of the post-Soviet Commonwealth of Independent States. What scares Russia about Ukraine's EU deal is the possibility that duty-free EU goods, passed off as Ukrainian ones, will flood the Russian market.
"It's technically impossible for Ukraine to be part of the EU trade zone with Russia pretending this has no impact on it," Dmitry Mityayev, a financial expert at the Russian Academy of Sciences, told Moscow's state news agency, RIA Novosti.
In 2012, the latest year for which detailed Russian data are available, Ukraine exported $17.6 billion worth of goods to Russia, almost as much as to the EU. If Russia raises trade barriers, as it has warned repeatedly it would do, losses to Ukrainian producers will be comparable to the gains from European trade preferences. Besides, the EU has higher standards for many of Ukraine's imports than Russia does, and complying with them will require billions of dollars in investment -- one of the the reasons that Yanukovych believed made the EU deal unprofitable for Ukraine.
Poroshenko, who owns candy factories both in Russia and in the EU, knows better than most people that EU association isn't going to be an economic bonanza for his country.
"We would have liked to sign the deal on better terms than the ones we have now," he said in Brussels, "but external aggression against Ukraine motivates us strongly to make this important step."
By external aggression he meant the pro-Russian, Moscow-sponsored rebellion in Ukraine's eastern regions. European leaders heard him, and adopted a statement that threatened new sanctions against Russia unless it allowed the Organization for Security and Cooperation in Europe to control the border between the two countries and monitor a cease-fire, assured the release of hostages held by the rebels and "substantial negotiations" on Poroshenko's peace plan.
Russian President Vladimir Putin won't find it hard to comply with most of the terms, or at least pretend to do so. Substantial European sanctions against Russia are as unlikely as they were three months ago, after the annexation of Crimea. Russian trade sanctions against Ukraine, however, are almost assured. Europe will need to provide more than supportive statements and a few billion euros in technical assistance to ensure that Ukraine still finds the association deal worthwhile in two years. Otherwise, Poroshenko may well face a backlash, and Ukraine's European dream may fade.
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