Vladislav Inozemtsev
Having lost seven months, hundreds of its citizens, and 27,000 square kilometers of territory, and despite Russia’s active opposition, Ukraine nevertheless signed in full an Agreement on Association with the European Union, taking one of the most important steps not only in its 23-year, but also in its centuries-old, history.
Seven chapters of this agreement now regulate political and economic relationships between Ukraine and the world’s largest integration union, guiding them along the path of political association, accepting European norms of democracy and observance of human rights, coordination of foreign and security policy, and, of course, creation of the Free Trade Zone.
What does Ukraine lose?
The prospective—and undoubtedly attainable—goal of this process is Ukraine’s entry into the EU, and Kyiv’s return to the unified European family from which it was wrested back in the 13th century.
Russia has done everything in its power to disrupt the conclusion of this agreement and to stop Ukraine’s departure to Europe. The economic part of the agreement, signed on June 27, was severely criticized by Moscow. At the Kremlin, which had instructed that natural gas be sold to the ‘brotherly’ people at almost the highest price in Europe, they are very distressed by the harm that will be done to the Ukrainian economy by the signing the agreement with the EU. According to the estimates of [Russian] presidential advisor Sergey Glazyev, total losses may reach $11 billion dollars per year, and estimates by the Committee of Civil Initiatives are as high as $33 billion dollars (19% of Ukraine’s GDP). Can this be true?
Let us look at the statistics. First of all, it is worth noting that Ukraine today is not as dependent on Russia and the CIS countries as a whole as it was, for example, in the late 1990s. In 1996, it exported to the post-Soviet countries 2.2 times more than to the EU; in 2013, only 32% more.
As of 2013, Russia was Ukraine’s second largest export market after the EU, ($15.1 billion dollars versus $16.8 billion dollars), and it also lagged behind Europe in the volume of goods supplied to Ukraine ($23.3 billion dollars versus $27.1 billion dollars).In this situation it is unclear how Ukrainian losses from the trade complications with Russia could be assessed at twice the value of Russia’s export into our country, especially taking into account that it cannot be barred voluntarily, since both countries are WTO members.
Of course, Moscow will cancel the Free Trade Zone agreement with Ukraine, but it only means the introduction of WTO’s regular duties at the level of 3% to 8.5%. So, in the worst case scenario, Ukrainian losses would not exceed $0.8-$1.1 billion dollars, which is not critical because export amounts to Russia have been declining already (by 20.6% in the first four months of 2014, in comparison with the same period in 2013).
The gain is more significant
Ukraine’s gains clearly outweigh potential losses. Under the terms of the Association Agreement, duties for Ukrainian goods exported to the EU would be reduced from an average of 7.6% to 0.5%, generally within a year (so the net profit will be $1.18 billion dollars). At the same time, the duties on European goods will decrease from 4.95% to 2.42% in a period of four years. It is a real breakthrough for Ukraine because agricultural goods and foodstuffs constitute 28.3% of its exports and almost one-third of foreign investment in Ukraine is in the agrarian sector. Reorientation of these streams to the EU will be an important step, especially taking into account the fact that the future of the metallurgy industry in the east of the country is unclear.
The Association with the European Union also will become a significant factor in increasing the efficiency of the Ukrainian economy. The corrupt rulers from Donetsk used to appropriate budget funds to the tune of $3.5 billion dollars per year in subsidies for the coal industry and gas subsidies for industrial consumers, using their positions to advance their own interests.
As a result, the economy of the country has remained one of the most energy – consuming in the world (556 tons of crude oil equivalent per $1 million of GDP). If this indicator could be brought to at least the same level as in Poland (at 212.2 tons) then Ukraine would not need to import any Russian natural gas and could cut back oil imports by one third. The Association with Europe and acceptance of European standards, no matter how expensive it may be, within 10 to 15 years will turn Ukraine into a country with a strong economy.
Today the cost of energy consumption in Ukraine based on world market prices is 37.5% of its GDP, in comparison to Germany, where it is a bit more than 9%. That is why all objections regarding “the loss of competitiveness” ofUkrainian enterprises are groundless.
Europe will not stop
Yes, there will be a re-shuffling of ownership in the country – companies will go bust, some will be acquired by European investors and later come back as more viable. But it is the only way forward. Those who do not believe this should compare the fate of Volkswagen’s spin-off Škoda and Izh-Avto, a subsidiary company of Rostekhnologii.In the late 1970s, the latter produced almost 1.5 times more autos than the former, but we all know how it ended…That is why Russia is in no position to teach Ukrainians about future strategy, even in an economic sense.
However there is another point that is usually not considered, and that is corruption. In recent years, Ukraine has been one of the most corrupt countries in the world. Most minimum estimates of losses due to corruption reached 11% of GDP annually.. Strictly speaking, the reduction of such losses along with the nominal increase in economic efficiency will be able to compensate for a possible slump in foreign trade conditions.
Today it is widely mentioned that in 1991 Ukraine had living standards similar to Poland’s, and now the lag behind its neighbor in this index has almost tripled. There are many explanations for this, but obviously, on the Ukrainian side of the border we see Mezhihirya (Yanukovych’s residence) and on the Polish side we see a government in which, in the 900 hours of private communications by Polish government officials that was recorded and recently leaked to the press, there was not a single phrase hinting at any effort to turn a personal profit from being in government service.
That is why the “external governance” from Brussels which Kyiv might be subjected to should not be feared. Rather, it should be welcomed, because the interests of the Ukrainian people do not coincide with the interests of the former (and to some extent present) elites. The quicker the European legal system is introduced into the country, the better it will be for our Ukrainian brethren.
I have no doubt that it will happen. In the period from 1994 to 2013, the EU grew from 12 to 28 members, while during the same 20-year time period Russia was not capable of “integrating” even one country – Belarus. Today, 507 million people live in the EU, while outside of EU, – (not including Russia) – the population of Ukraine, Belarus, Moldova and the Balkan countries, adds up to only 81 million people.
To assume that these 81 million people cannot be “digested” by the European integration would be naïve – especially since most people in these countries are favorably disposed towards the European “vector.” We can talk as much as we want that entry into the EU has a potential for negative consequences, but the score of 16:0 in the match between Europe and Russia speaks volumes.
Having entered into an Association with the European Union, Ukraine has started to move in the direction of the visa-free zone (which, by the way, has been reached by Moldova), uniform economic norms and rules, achievement of the status of candidate (Serbia, Macedonia and Montenegro have this status now) and eventually, full membership. I believe that I will turn out to have been correct in my forecast 10 years ago that Ukraine would achieve membership in the EU before Türkiye does. [Vladislav Inozemtsev.” Russia should apply for the EU membership” – “Nezavisimaya gazeta”, May 2 2004, p.2]
The date June 27, 2014 became a historic day for Ukraine, for the EU and for Russia. For Ukraine because it finished its “post-Soviet” history and started a complicated but very promising journey from its post-Soviet ways into something more concrete. For the EU because it has now staked a claim to full expansion within its natural limits, after which the integration process need not develop in breadth but only in depth in the direction of the creation of a single European nation.
For Russia, because having long proved to everyone the uniqueness of its historic path, it has finally ensured that it remains almost alone. In sum, all parties have achieved their goals.
Vladislav Inozemtsev, Ph.D in economics, director of the Centre for Post-Industrial Society Studies
Source: top.rbc.ru; translated by Anatoliy Shara, edited by Handzia Savytska
