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The “delayed” Association Agreement — the hidden details

The “delayed” Association Agreement — the hidden details
Translated by: Anna Mostovych

by Serhiy Sydorenko

On Friday evening, September 12, Ukrainian social networks were filled with messages on the order of, “We’re being betrayed again. They sold the Association Agreement to Russia.”

These nervous discussions had their justification. The tripartite agreement Ukraine-Russia- EU on postponing the launch of the free trade agreement was unexpected for everyone. And for most pro-European citizens, the meaning and consequences of this delay were and remain unclear.

The lack of information creates suspicion. Therefore, the charges that are being made against President Poroshenko are quite understandable. In addition, certain actions taken by the president and his team over the past several months have caused their statements on the association to be seen with some suspicion.

For this reason, European Pravda (EP — a section of Ukrainska Pravda — Ed.) in response to numerous requests from readers will attempt to explain the Brussels agreements without hysteria but also without ignoring real problems.

What happened?

Ukraine’s Ministry of Foreign Affairs outlined the essence of the agreement correctly (even if not immediately).

We will present the key messages and explanations for them and only later describe how this far from ordinary decision was reached and how it will affect Ukraine.

1) The Association Agreement (AA), as conditionally accepted, is divided into two parts — political and trade. According to the existing EU procedures, the two sides were supposed to begin the “temporary implementation” of the trade part of the agreement. Now this date has been postponed till January 1, 2016.

2) The Association Agreement will be ratified by the Verkhovna Rada on Tuesday, September 16. The ratification will be in full.

3) The agreement remains intact. There is NO legal way that in 2016 Ukraine, after the completion of the transitional period, could “cancel” the trade portion of the agreement or decide to “adjust” it, leaving the remainder of the document ratified.

It is either everything or nothing.

The rejection by Kyiv (or Brussels) during 2015 of any obligation contained in the document would mean that the entire agreement would be cancelled and negotiations would have to begin from scratch.

4) The current situation cannot be compared with 2013, when Yanukovych not only froze the agreement, but announced that he intended to change Ukraine’s obligations. In other words, he intended to destroy the agreement and start negotiations from scratch.

In its official statements Kyiv excludes the possibility that during 2015 any changes could be initiated to the agreement. This is very important.

5) The trade portion of the AA is only one of eight sections of the contract, but it represents 80% of the document. The trade section is the essence of the Association Agreement. It not only creates a free trade area (FTA) but it also discussed the adaptation of Ukraine’s economy to European standards.

Without the implementation of this section the agreement loses meaning and importance. So ii is important not to diminish the significance of the Brussels agreements. And it is  important not to limit the discussion to questions of export and import. The economic reforms are no less important.

6) In order for the postponement not to have a negative impact on the economy of Ukraine, the EU will unilaterally waive the collection of duties on Ukrainian goods until 2016. In other words, it introduces a unilateral free trade system. This system is already in place and will simply continue. However, let us remember that the FTA is only a part of the trade section of the AA. For full implementation of the agreement, a number of Ukraine’s goods (agricultural products, mostly of animal origin) cannot be exported to the EU under the simplified procedures.

7) Formally, the temporary implementation of the agreement (without the trade section) will begin on November 1 anyway. But in fact only certain points of the political part will be implemented — the others will wait for ratification in the EU member countries (these are features of the EU procedures). Therefore, the frame will be operative but without the content.

8) In response to Europe’s agreement to delay the AA, Russia promised not to introduce trade sanctions against Ukraine up to 2016. But this promise will almost certainly be broken (we will provide details later)

Who is the author ?

The decision to postpone the trade agreement was made because of Russia’s demands. This is an undeniable fact, even if official Kyiv and Brussels attempt to prove otherwise.

Without the demands of the Kremlin, neither Ukraine nor the EU would have considered such a possibility. Meanwhile, numerous EP sources suggest that the author of the compromise packet this time was not the Russian but the European side.

“An ultimatum was issued by several EU countries indicating they would block ratification of the AA in their parliaments if a compromise with Russia were not found regarding the agreement’s entry into force. This is how this proposition came about, one of the Ukrainian officials who met with the exiting president of the Euro commission Jose Manuel Barroso and heard his explanation told this publication.

The Minister of Foreign Affairs Pavlo Klimkin in a conversation with EP on Sunday did not agree with the term “blocked ratification” but confirmed that there was actually some pressure from several member countries.

“There is no blocking. But there are a number of countries that would like for us to agree with Russia regarding the overall situation as well as the general schedule of the agreement. They believe that without such agreements, an uncontrollable situation may develop,” he said.

Ukrainian society has become accustomed to blame all ills on Germany, but, according to EP sources, this is not appropriate in this case. The Germans had their own proposals on what the compromise should be, but Berlin eventually agreed to accept the idea of postponing the trade part of the agreement. Sources report that Paris, as well as several “southern zone” countries, were the driving force behind this package.

By the way, EP knows with some certainty that the proposal came as a complete surprise to Kyiv. Kyiv was going to Brussels with its own packet of proposals, which were developed to address previous Russian requirements. EP had the opportunity to become familiar with Kyiv’s negotiating position to the Brussels round, which dealt only with the exclusion of certain points from the trade agreement. It was in Brussels that the Ukrainian negotiating team first learned about the new ideas from the EU and, after consulting with Kyiv, agreed.

Now certain European politicians and bureaucrats state that it was Kyiv that had asked Brussels not to move to the free trade regime but to continue the unilateral trade preferences. Such statements are designed to “reduce” the role played by Russia during the negotiations on the agreement. But they are an outright lie.

Why is Russia involved?

The agreement on postponing the AA was reached in a trilateral statement signed by the head of Russian Ministry of Economic Development Alexei Ulyukayev.

A logical question arises — what does the Russian government have to do with our bilateral agreement with the EU??? Let us emphasize that the appearance of Russia in this format is not unexpected. This is not the first round of the tripartite consultations. But earlier they were followed primarily by experts. Now the published agreements have attracted the attention of the general public.

And finally, until the last minute, even the experts expected that that the tripartite documents, which formalizes Russia’s influence on the AA, would not be necessary. This is the biggest political problem with the Brussels agreements and Putin’s greatest achievement in this context. In fact, the parties recognize the Kremlin’s right to influence trade agreements between other independent entities.

There is no doubt, that Putin will return again and again to this practice, insisting that an international legal precedent was established on September 12 that gives him that right. It should be noted that this problem is likely to cause the greatest harm not to Ukraine but to the European Union.

Kyiv is already quite familiar with the price of Kremlin’s promises, and Putin even without (this new precedent) already interfered and will continue to interfere in our internal affairs. Therefore, concessions to Moscow are already very unpleasant for us, but nothing more.

However, for the EU this precedent is quite dangerous in a practical sense. Here is a simple example. At present, historically significant negotiations are taking place between Europe and the US regarding the creation of a transatlantic free trade zone. What will happen if after signing this agreement China enters the scene and demands its postponement and the beginning of consultations with Beijing? After all, claims regarding the impact on the Chinese economy are analogous to Russian claims, which the EU “acknowledged” in the Ukrainian precedent.

This is why Brussels is attempting after the fact to convince the world that Russia had nothing to do with this and that all the changes were made at Kyiv’s request.

But this is EU’s problem. In this article, we will not examine it thoroughly.

What do we get?

Let us begin with the positive consequences of the Brussels agreements as compared with the version calling for the FTA of the AA to be implemented on November 1, 2014 ( as was planned as recently as Thursday, September 11).

Ukrainian authorities continue to state that the agreement is a “complete win” since the Ukrainian budget will continue to receive duties which would have ceased with the full implementation of the FTA.

It is hard to disagree with this argument. If you judge only the direct economic effect, then the implementation of unilateral preferences rather the bilateral ones is obviously advantageous to Ukraine. However, the amount of revenue to the budget is relatively small. The EU in proposing the “unilateral” option understood perfectly that if would bear minimal financial loss. More than three months ago, the government calculated how much in customs duties Ukraine would fail to receive during the first year of the agreement. It was estimated to be UAH 3.99bn. However, these calculations were based on previous, pre-crisis imports. Recently, it was reported that during the first six months imports fell by almost 20%. There is no doubt that the situation will only worsen for the remaining six months.

This is why the actual annual savings on customs duties will not exceed UAH 3bn — therefore less than 200 million Euros. For the EU this sum is peanuts. For the Ukrainian “purse” it will be a pleasant and important revenue (given the crisis) but not a critical one. After all, it represents less than 1% of budget revenues.

At the same time, we must understand that maintaining import duties instead of cancelling them represents a corresponding rise in the cost of consumer goods. Therefore, eventually these UAH 3 billion will be paid not by European suppliers but by residents of Ukraine. There is nothing negative in this. During wartime, citizens should try to help the state and the state budget in multiple ways. But we must be honest with ourselves when we assess who is really paying for what.

The second positive result of the Brussels agreement is the “trade truce” with Russia. The Government of the Russian Federation in the person of Alexei Ulyukayev officially committed itself not to initiate the expulsion of Ukraine from the free trade regime with the Customs Union.

We should note that, according to the agreement on FTA with the CIS, Russia has that right, for which we must thank Mykola Azarov, who agreed to include this provision in the FTA, thus violating a presidential directive. Under conditions of austerity, this promise by Moscow really is an important factor — even with reduced trade with the Russian Federation.

In Russia, unlike in Ukraine, the customs duties are very high. This is why raising them from nothing to the level of standard duties would make many (Ukrainian) suppliers uncompetitive on the Russian market. Therefore, some of our producers would lose not only a portion of income but the entire market.

“The current state of the Ukrainian economy is such that economic shocks that are expected in several areas, for example, in machine building, would be prohibitive for the country,” the future European Commission Vice President Valdis Dombrovskis told EP when commenting of the possible trade war. However, even with this “plus” not everything is clear. EP expects that this “truce” (with Russia) will not last too long. It is likely to hold until the end of 2015 ONLY if Ukraine refuses to meet its obligations under the Association Agreement. That is, if Poroshenko follows the path of Yanukovych.

It should be noted that Alexei Ulyukayev on Friday not only signed the tripartite document promising to keep free trade. He also made a separate statement that if  “the partners violate the agreement and begin to implement the trade section,” Russia will return to the issue of trade restrictions against Ukraine.

“We understand perfectly that in this statement the Kremlin is inserting not only the matter of duty-free goods but the entire issue of reforms. And as soon as we begin to implement the European technological regulations or to adapt the phytosanitary standards as part of our obligations to the association, we will immediately get an answer from the Kremlin,” says one government source.

“We understand that Russia can deceive and impose restrictions despite the fact that we have introduced the unilateral FTA regime,” says a source in the European Commission.

Last weekend the prime minister, president and the foreign minister publicly promised that they would carry out the reforms without exception, including those included in the postponed section on trade.

A government official in conversation with EP during the YES Forum acknowledged that Kyiv wants to outmaneuver Russia by “simulating” the absence of reform. “We will prepare all the reforms and will implement them by the end of next year in a large block, ” he said.

However, there are a few “buts.”

First, this scenario means that Ukraine will spend next year without key reforms. Is this an acceptable scenario for society when it comes to implementing the Association Agreement? Hardly.

Second, in the coming weeks the Cabinet plans to consider and adopt an action plan for the implementation of the AA. It includes all the reforms, including the ones regarding trade. If it wishes, Russia could use even this official document to return to sanctions.

So, to sum up. There is nothing catastrophic in the Brussels agreements. The analogy with the government decision of November 21, 2013, does not hold up at all. Yes, concessions to the Russian Federation on the AA are a dangerous precedent. But the AA will still be ratified. Financially, the new scheme is even profitable for the country. However, to say the new agreements are undoubtedly beneficial is simply not accurate. After all, they encourage the authorities to put a brake on reform.

Instead of an epilogue: frankness and openness

Finally, we would like to return to the actions of President Poroshenko and his team who, in the view of the EP, personally were greatly responsible for the fact that on Friday, Saturday and Sunday a number of charges were directed at them.

They bear the blame for the fact that even the experts are looking for the false bottom in the agreements with the Russian Federation. Ukrainian society now demands openness and honesty from its politicians — at least in such sensitive and strategically important issues as European integration.

Unfortunately, the new government has not yet understood this. After all, for two and a half months we heard from Poroshenko, Chalyi (Valeriy Chalyi, deputy head of the Presidential Administration — Ed.) and Klimkin dubious statements on the reasons why the AA has not been brought to Parliament. The government’s explanations on the “technical delay” generated first grins from the experts and then anger and suspicion.

If two days before the planned ratification of the AA, Poroshenko cannot find the time to introduce it to Parliament and does not justify his actions, then there are only two explanations. He either is already negotiating with Russia on the agreement or assumes that he will have to negotiate.

Therefore, we would like to end this text with the following words: “Let’s live in a new way Petro Porshenko.” And that also applies to information policy.




Translated by: Anna Mostovych
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