The trap we managed to escape

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2014/08/12 • Politics

By Boris Bakhteyev

Ukraine has signed the Association Agreement with the European Union. The direction of economic development is set, hopefully, once and for all. However, we should examine what Russia, the former Ukrainian government and some officials who are still in office pushed us toward. What we rejected. The road ahead, toward the EU is wrought with both achievements and disappointments. So it is likely that the topic of the Customs Union will reemerge numerous times in the future. Alas, there are still enough supporters of the Customs Union: the EU/CU issue is one of the divisive issues between Donbas and the rest of Ukraine. 

So, what would membership in Russia’s Customs Union (CU) mean for Ukraine? What would this formation look like in its hypothetical form that includes Ukraine?

Let’s calculate. According to the USA CIA data, the population of the Russian Federation constitutes 142 470 000 people (hereinafter, the figures are as of July 2014). Ukraine’s population is 44 291 000; Belarus – 9 608 000. 17 949 000 people live in Kazakhstan, 5 604 000 in Kyrgyzstan, and 3 061 000 in Armenia. The total sum of the populations of Ukraine, Kazakhstan, Belarus, Kyrgyzstan and Armenia constitutes 80 513 000. This means that 63.89% of the CU total population would live in Russia, while the rest of the states put together would have 36.11%.

Next. According to the same USA CIA data Russia’s gross domestic product in 2013, calculated in terms of purchasing power parity, constituted 2.553 trillion USD. Ukraine’s GDP is 337 billion USD, Belarus – 150 billion USD, Kazakhstan – over 243 billion USD, Kyrgyzstan – 14  billion USD, and Armenia – 20 billion USD. The sum GDPs of the five countries excluding Russia would constitute 759 billion USD. And let us compare once again: Russia – 77%, the other five countries – 23%.

If we calculate GDP according to official currency exchange rates, the picture becomes even more telling: Russia – 2.113 trillions 113 USD, Ukraine – slightly more than 175 billion, Belarus – 69 billion, Kazakhstan – almost 225 billion, Kyrgyzstan – 7 billion, Armenia – 10 billion. Let us sum up: Russia – 81.3%, the other five countries – 18.7%.

It becomes quite clear that the Customs Union project, even if we consider it purely economic in nature, would be based on the model of “Russia and its national outskirts,” “Russia and the satellites.” The CU could not become anything else. Despite declarations of equality and mutual benefit between Russia and its partners, objectively, the Russian Federation and only the Russian Federation would define both the strategy of economic unification and its specialization in the global labor distribution.

Even if we disregard Russia’s imperialistic foreign policy, even if we imagine that one fine day Russia’s foreign policy would become civilized, grounded in international law, and Putin’s reincarnation of the “Brezhnev doctrine” would be relegated to history, it would not change a thing: while Russia’s GDP would constitute over three-fourths of the CU total GDP, Russia’s CU partners would remain doomed to play a purely secondary role, a servant’s role. There could hardly be a different scenario . Almost like Rosenbaum’s old song: “Ukraine is my kitchen, this is where I eat.”

For the sake of comparison, in 1957, the European Economic Community, the predecessor of today’s European Union’s, was created by Belgium, West Germany, Italy, Luxembourg, the Netherlands and France: three big countries with approximately equal economical might, two middle countries and one small one.

Since the very beginning, the EEC had no single dominating country, or even a country which would surpass all other countries put together according to its size and gross economic indicators. Had it been the case, the EEC would not have become a successful project, it would have not develop into today’s European Union.

Therefore, if Ukraine joined the CU, Russia would define the directions of development, structure and economic focus of our country. What would those be? Let us look at UNCTAD 2013 data.

70.3% of Russia’s export is energy resources. Their share in Kazakhstan’s export constitutes 69.9%. In Belorussian export, strange as it may seem, it is 35.6%, which is most likely a re-export of Russian energy resources as well as oil products made in Belarus using Russian oil. Moreover, year on year, the share of energy resources in export of these three countries has been growing: for example, it constituted 43.1% in 1995 for Russia, and in 2005 it was 61.8%. Numbers testify: the Customs Union specialty would have been extraction and export of oil and gas.

Energy resources accounted for only 5.3% of Ukraine’s export in 2012. Today, our country has no prospects of exporting oil and gas it extracts. Had Ukraine started actively developing shelf resources and extracting shale gas, it would have immediately turned into Russia’s competitor. Undoubtedly, Ukraine’s membership in the CU would not have saved it from hard Russian pressure; it would have only increased this pressure, as Ukraine would have become more dependent on Russia.

The experience of Kazakhstan, which is successful extracting and exporting its own energy resources, should not fool you: this country can only export fuel to Europe through Russian territory, and is therefore under its full control.

As opposed to Kazakhstan, our country could export oil and gas to Europe directly, and therefore independently. So it is quite probable that had Ukraine joined the CU, Russia would have made all efforts possible in order to prevent Ukraine from developing its own powerful fuel extraction sector.

But let’s look further.

Machinery and equipment constitute 18.8% of Ukraine’s export. In Russia this number is 2.7%. In Kazakhstan – 1.4%. In Belarus – 15.3%, so less than in Ukraine, despite the quite widespread stereotype that our northern neighbor, as opposed to us, lives off its high-tech exports.

The same picture emerges in industrial goods export in general: Ukraine – 59.5%, Russia – 14.2%, Kazakhstan – 12.5%, Belarus – 48.7%. In CU countries both indicators are steadily declining. For example, in 1995, machinery and equipment constituted 7% of Russia’s export, and in 2005 the number was 4.1%; industrial goods in 1995 – 26.1% and 18.2% in 2005.

These two indicators, by the way, are some of the most important when determining the level of a country’s development. So here we are: from this point of view, Ukraine is more developed than Russia! Or at least, potentially more developed. Yes, Ukraine is poorer than the Russian Federation. However, Russian riches, which are, by the way, quite relative, are the same in nature as the riches of, say, Saudi Arabia, the country that no economist would regard as industrially developed.

And now let us compare the CU member states’ indicators to those of our neighbors. Machinery and equipment: Poland – 37.6% of overall export, Slovakia – 54.8%, Hungary – 51.9%, Romania – 39.8%. Industrial goods: Poland – 76.5%, Slovakia – 83.8%, Hungary – 80.2%, Romania – 77.1%. In all four countries both indicators are showing stable positive dynamics annually.

So maybe this is why our only path is towards the East, as Ukraine’s numbers are significantly lower than those of its western neighbors, and our country would look like the poor “cinderella” in comparison?

Let’s now take a look at the Baltic states. Machinery and equipment: Lithuania – 17.4%, Latvia – 17.5%, Estonia – 32.3%. Industrial goods: Lithuania – 52.3%, Latvia – 52.6%, Estonia – 63.8%. Approximately the same as Ukraine. And no collapse happened, Baltic citizens don’t feel alien compared to other EU countries and transition to European standards did not cause mass poverty.

According to the USA CIA data, by GDP per capita (which is adjusted here in for purchasing power), Slovakia is in 61st place in the world, Lithuania – 65th, Estonia – 66th, Poland – 69th, Hungary – 71st, Latvia – 74th, Romania – 94th. There is no lag among the Baltic states, as we can see. Meanwhile, Russia takes 77th place, Belarus – 85th, Kazakhstan – 96th, Armenia – 148th, Kyrgyzstan – 185th. Telling, isn’t it?

As a result of 20 years of  in-betweenness, Ukraine is in 139th place in the world by GDP per capita. In the past three years our country was surpassed by Albania, Bosnia and Herzegovina, and now even Kosovo. Yet another “achievement” of the Yanukovich-Azarov regime.

The story with the EU standards is quite remarkable as well. When Euromaidan erupted in Ukraine, Vladimir Putin cautioned: once Ukraine’s food industry conforms to the EU standards, Ukraine would be unable to export food to Russia. What did he mean? Do European foods not fit Russian mouths? Are they not digested by Russian stomachs?

Clearly, the standards have to do with quality. EU foods are sold all over the world and have a good reputation. By comparison, Russian foodstuffs except for caviar, hard liquor and beer somehow have not gained much international renown. What Putin demonstrated was a frivolous, politically motivated manipulation of the issue of EU standards as a way to cobble together his Eurasian “partnership.”

So what have we here?

What we have is this: the type and structure of the Ukrainian economy are different from the type and structure of the economies of the CU countries. The type and structure of Ukraine’s economy does not correspond to the CU specialization in global labor distribution. And if Ukraine joines the CU, its entire economy would be transformed to service Russia and work for the oil and gas industry, which is very insignificant in Ukraine.

In other words, Ukraine’s economy would be forced to work for something we don’t have. It would not be a function of our own interests, plans and intentions. It would be made to adapt to foreign legislative and economic changes and innovations, to the thoughts and fancies of foreign leaders. It would be forced to adapt to what Russia dictates.

Our country might as well have joined OPEC.

I venture to make an assumption: the shamefully low GDP per capita in Ukraine, in addition to everything else, is also a function of many years of Russian-style mismanagement of the national economy; during Yanukovich and Azarov’s time this copy-paste approach reached almost absurd levels. They attempted to remodel the country which is not so rich in export raw material and survives on exporting industrial goods for the most part to the paradigm of Russia, a country whose economy is based strictly on raw materials.

If Ukraine joined the CU, its economy would become even more closely tied to Russian and it would be much more difficult to turn it towards the EU, or in any other direction, for that matter. It would become further fragmented, with a random collection of partial cycle producers lacking independent reasons to exist.

The end goods, the cash commodity – oil and gas – would be exported by Russia, which would receive for it oil-and-gas dollars and oil-and-gas euros. Ukraine would export parts and equipment to Russia, servicing its oil and gas complex, the payment for which would be at Russia’s mercy. The Russian Federation would turn into an economic intermediary of sorts, a middle man between Ukraine and the outside world.

By the way, look closely at the aforementioned GDP measures. It is not by accident that in Russia and Kazakhstan, countries that extract and export energy resources, the numbers calculated according to purchasing power and official currency exchange rates are almost the same, while the other four countries that only “foster historical economic ties” have exponential differences between these numbers.

…Today still Ukraine’s machine building is oriented mostly towards the east. Joining the CU would have reinforced this orientation irreversibly. It would have put an end to hopes for modernization, as high technologies are unnecessary to service the oil and gas industries. And where they are necessary, Russia would develop its own capabilities. Most definitely, it would not make its core industries dependent on Ukrainian technologies.

Let’s not forget another correlation: economies that rely on primary resource exports are most conducive to oligarchical neofeudalism. I dare make another argument: Ukraine, until not too long ago, had remained freer and more democratic than other post-Soviet states simply because the share of industrial production in its economy is much greater than the share of primary resources. If we joined the CU, oligarchical neofeudalism would not only have been preserved but would become entrenched.

Source: Ukrajynska Pravda
Translated by Mariya Shcherbinina, edited by Mariana Budjeryn

 

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  • Milton Devonair

    ” And if Ukraine joines the CU, its entire economy would be
    transformed to service Russia and work for the oil and gas industry,
    which is very insignificant in Ukraine.”

    That. Putin and his kgb and their criminals are interested in doing nothing but exporting the natural resources of russia and selling them. Resource extraction industry has one of the lowest job multipliers, and that will just get worse as technology improves.

    Once you set up a gas well and run the pipe, it operates it takes very few people to keep things going and the gas goes by itself, elsewhere. Money comes back. And so a very few russians will be able to have a lot of money to spend because they will also be in the service industries, serving the few putin buddies and their friends.

    Ukraine’s best chance at being an independent, prosperous nation is to develop its own gas resources, manufacturing, then tourism/retirement along the Black Sea coast.
    Tourism/retirement communites are the most wanted as the money that as earned (at a cost) elsewhere is spent in your market area. With the russian apes and their criminals infesting Crimea, no one would want to go there but those primates.

  • steve34609

    I’ve visited and lived in Ukraine. It’s a great country but the PEOPLE are what makes Ukraine a wonderful place to visit. And Roshen chocolates. Your Carpathian mountains should be marketed to the west. It’s just beautiful. In W Ukraine you have billions of mcf of shale gas trapped in the Oleska block. Lviv is a great city for tourists. Kyiv as well. With Ukraine moving solidly towards the west by committing to an association agreement with the EU, it’s time to start considering your strengths and how they can be introduced to the west. Personally, I love Ukraine because it’s a place we can go for a month every other year, visit family, relax, walk see sights, lunch with friends, have coffee and drinks out, slow down and relax. But others might want the fast life in Kyiv. You guys need to get rid of the Mafioso figures in Kyiv and elsewhere. The prices are artificially forced upwards and a poor product is delivered by the distortions in the economic equation caused by corruption. It’s true that Ukraine is a better fit for the EU than the CU. Unfortunately for Putin, his BRICS bloc position puts him in third place behind India and China. Also, he would have ‘played second fiddle’ in an EU membership bid. Ah, those Russians and their huge pride and egos. I have always said it will be their undoing;their fall. Ukraine, according to stats, is already out-doing Russia in many ways. Ukraine is not only the bread basket but the brains of the former USSR countries. A great asset for the EU! I hope they realize what they have received. Ukraine’s level will be brought up to equal status with the other eastern European nations/member states…a net recipient of aid as time goes by, until full membership.

    • Milton Devonair

      You mentioned something very valid and real….and a lot of russians are completely clueless about. I’ve worked with a lot of eastern europeans and russians in the USA and to a person, all the eastern europeans (poles/ukrainians/bulgarians) were friendly, talkative, and intelligent. Also, to a russian, every one of them were stubborn, hard headed, sullen, arrogant and thought russia was the best thing in the world…yet they voluntarily emigrated to the USA…..

      We used to joke that we now know why nobody likes russians and that that saying is indeed true because we also, once we met them and interacted with them, didn’t like them.

  • Bynk

    Only you and you own ukrain politics are guilted for that, what you have today in ukrajine. Not russians. Why you giving you own failt to another nation?

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