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5 February, 2019  ▪  Oleksandr Kramar

Content, not form

What model of European integration Ukraine needs

Ukraine’s economic reorientation on the West and on the EU more specifically is largely complete. The latest data shows that 49.7% of Ukraine’s exported goods went to the EU, while 52.7% of its imports came from EU and NATO members in 11M 2018. Both overall trade and the West’s share of trade are growing rapidly, and the latter could well hit 60% of all foreign trade in the next few years. Having left behind the once-key issue of choosing a direction for economic integration, Ukraine now needs to focus more carefully on just what kind of European integration it needs, what fundamental principles the country should pursue, including socio-economic ones, and under no circumstances be prepared to sacrifice.

What this amounts to is a healthy dollop of “euroscepticism.” This does not at all imply rejecting the move towards the West, shifting eastward, or questioning Ukraine’s prospects with the EU, as euroscepticism has been interpreted until recently. Rather, this means understanding the list of conditions essential to Ukraine’s further integration with Western institutions, including economic integration. Unless these conditions can be met, the purpose of accession will remain questionable and potentially damaging to Ukraine.

Constructive euroscepticism, however strange this word may sound to a country with no acknowledged prospect of EU membership, is necessary, among other things, as a preventive vaccination against being infected with the populist anti-european and anti-west virus being actively promoted by Russia. Constructive euroscepticism needs to become a component both in public debate and in negotiations with the EU. Key priorities should focus on long-term development plans for the domestic economy, rather than on promoting narrow group or corporation interests, or the interests of business groups linked to the negotiating process.

If Ukraine continues to use the “whatever you say” approach in negotiations with the EU and fails to protect critical national priorities, it will offer fertile ground for different actors to seed anti-EU and even more broadly anti-Western sentiments and encourage criticism of the country’s geopolitical and civilizational choice. And this is about much more than just the economy: it guarantees the country’s survival in the face of Russia’s aggression and the constant threat of a full-scale attack, as well offering the most effective developmental model.

Ukraine’s main priorities have been and remain military, political, informational, and ideological integration with the Western world. Socioeconomic rapprochement should be done cautiously so that Ukraine does not lose more than it gains in the process. This is especially important for the overall domestic economy, to prevent a situation where individuals enjoy personal benefits such as easier access to work in the EU, while the country as a whole suffers. 

A partner, not an appendage

The task for Ukraine’s political elite and negotiators is to link EU interest in the Ukrainian market to the idea that as the growth of Ukrainians’ purchasing power is key to growing consumption of European goods. When Ukrainians complain about the duty-free EU tiny export quotas for certain Ukrainian goods, especially food, under the Association Agreement, they tend to forget that, for the EU the Ukrainian market is also a “tiny quota” for the huge economies in the EU and the West. EU countries imported slightly over €22 billion worth of goods to Ukraine in 2018 – about 1% of the nearly €2 trillion worth of goods the EU exported to third countries last year.

RELATED ARTICLE: A bedroom community for the EU?

And so, it’s important for Ukraine’s political leadership to propose a Marshall Plan-like model for the country’s further socioeconomic integration into the EU. At issue is not just the scale of financial assistance, as many see it in Ukraine lately, but the principles and the ultimate goals of such an investment program. Serious European or western funding to support Ukraine should come, not as a means of patching up holes but as a tool to help shape a strong domestic economy and grow into a major trade, economic and investment partner for the EU, as befits the country’s potential scale.

Ukraine also needs to insist that the purchasing power of its consumers cannot and should not develop like a bedroom community of Europe, where residents live on the earnings from working as migrant labor in the EU, or on cheap loans and grants from European foundations.

An economically developed Ukraine with a strong middle class and numerous, resilient mid-sized and big non-oligarchic businesses can become a major market for EU goods in exchange for the EU buying similarly large amounts of goods with high added value made in Ukraine. Goods with low added value simply cannot provide the necessary volume of manufacturing and exports for a country the size of Ukraine to guarantee significant demand for finished EU goods here.

The EU has long become Ukraine’s biggest trade partner, accounting for over half of its foreign trade. Ukraine’s exports to the economic core of Germany, France, the Benelux countries and the UK, which account for over half of the EU’s economic capacity and imports, and are home to over 45% of its population, are far smaller than its exports to the Visegrad Four with their far smaller economies. Most of what Ukraine exports goes to the EU periphery, partly because there is little demand for the goods Ukraine exports to the core economic markets. Most European economies still import very mono-specialized groups of goods from Ukraine. Spain and Ireland mostly buy Ukrainian grain, France and Belgium buy oilseed and products made of them, Italy, Greece and Bulgaria import unprocessed black metals, while Austria buys ore. It is important for Ukraine to bring more of its finished goods to the EU market.

With few exceptions, co-production between Ukraine and the EU is underdeveloped. Yet, this kind of cooperation mostly shapes mutual trade flows within the EU. For Ukraine, the share of co-production is substantial only in trade with Germany and the V4, where Ukraine exports the biggest share of electronic equipment and furniture.

The proportion of raw commodities and semi-processed goods with low added value is too high in Ukraine’s exports to the EU. This is not exclusively a question of Ukraine’s trade relations with the EU, but a flaw in the structure of Ukraine’s economy and exports. Ukraine sells far more raw materials beyond the EU, too. And yet, the share of machinery and equipment in Ukraine’s exports to the EU is already far higher than the share of this group in Ukraine’s total exports.

Keep your eye on the goal

Integration into the EU should not mean that Ukraine loses its own economic and entrepreneurial nature. Nor should the country turn into a joint stock company controlled by foreign owners, even if they were to make it modern and seemingly high-tech. What Ukraine needs is a policy for growing national champions from scratch or from the many embryonic, competitive non-oligarch businesses already operating in the country today. These are businesses that are ready focus on synergistic growth and the growth of their country, and at expanding the national pie to benefit the majority. Unless Ukraine does this, it cannot count on being an independent economic actor.

Given this, then, the challenge for Ukraine’s political leadership is to insist that the way to increase incomes, generate new jobs, preserve existing ones, and expand the market for European goods is not by having key segments of Ukraine’s economy swallowed up by European or Western transnational corporations or big business. Some Central European countries have already experienced this. Any conditions set for Ukraine should preserve the dominant position of domestic business in key sectors of the domestic economy. In the areas where domestic business is not present or is weak, Ukraine should be entitled to implement policies to encourage its emergence and rapid growth.

In the process of doing so, Ukraine should not have to worry about blocking integration with western institutions, such as the EU. If integration takes place without strengthening and dynamically growing of the country’s economy, or, worse, through undermining growth, it could do more harm than good.Formal accession to the EU has always involved many conditionalities and restrictions designed for already developed and wealthy countries that are in a position to seriously complicate growth. The EU’s economy is advanced but its growth is relatively slow. What Ukraine needs in the upcoming decades is something quite opposite: dynamic growth from the current low baselines. Settling for a subsidized life-style and allowing half the population leave for work in the EU is not an option.

Of course, Ukraine cannot afford trade wars with the EU or the West, as they are its geopolitical support, strategic partners and a market for half its goods. Still, trade and economic relations with the EU and the US need to be pragmatic regardless of geopolitical closeness.

As in the past, Ukraine remains interested in their technology and equipment to refit its industries. But projects like the purchase of General Electric locomotives, French helicopters or farm machinery should go through formal or informal competitions with a mandatory non-price-based component, such as locating production facilities in Ukraine or establishing joint ventures with local medium and large businesses and state-owned companies – especially if the procurement is tied to government-backed loans.

RELATED ARTICLE: Exports: A successful shift

For a long time, Ukraine needed the prospect of EU membership to nurture and strengthen in the minds of the many of its post-soviet citizens the sense of an alternative to Russia, a reason for breaking ties with it and overcoming post-imperial inertia. The last few years have given Ukrainians a new impetus for anti-Russian sentiment, which is now stronger here than in quite a few EU countries. Indeed, some notions drifting into Ukraine from the EU actually hinder a further break with Moscow. In Ukraine, understanding has grown that any compromise with Russia will inevitably lead to a complete takeover, but too many people in the EU believe that nothing but formal or informal agreements with Russia will resolve the Ukrainian question.

In short, what matters is not accession to the EU per se, but on what terms Ukraine will integrate. On the symbolic and directional level, Ukraine needs to maintain its EU course as one of the key geopolitical markers of the country’s western choice. Any rejection of this basic principle will lead to a dangerous vacuum just when a large part of Ukrainian society still needs this marker.

Translated by Lidia Wolanskyj

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