Having ratified the CIS Free Trade Zone Agreement, the government has politically supported the Kremlin strategy of Eurasian integration
The Verkhovna Rada’s ratification of the Agreement, conducted hastily and clearly under pressure from Russia (it appears that these are the results of the July meeting between Vladimir Putin and Viktor Yanukovych in Yalta), could have insignificant positive consequences for Ukraine, but at the same time, creates additional risks on the course of economic integration with the EU and complicates the implementation of its European geo-economic interests. More specifically, the document provides for sanctions against a CIS FTZ member-state that enters into new trade deals, which can cause losses to other member-states.
NOTHING, OTHER THAN POLITICS?
One of the biggest problems for Russia in its trade relations with Ukraine is the re-export of goods from third countries, including Europe, if the Ukraine-EU FTA comes into effect. It appears that this could have been successfully resolved by Mr. Putin at the last meeting with Mr. Yanukovych in Livadiya. Viktor Medvedchuk, Mr. Putin’s confidant, enthusiastically reported this on his page in Facebook: “The meeting between Vladimir Putin and Viktor Yanukovych, during which customs duty games for trading with European goods was dismissed out of hand, drew the line under the wish to earn easy money, earned on the “Euro-integration” project”. The lack of alternatives to Ukraine entering the Customs Union became obvious not only for manufacturers, but also for representatives of commerce. It’s a shame that such decisions are made in such a difficult manner and over such a long period”. Based on these positions, Ukraine’s ratification of the CIS Free Trade Zone Agreement appears to be a victory for the RF on the course of Ukraine’s membership in the Customs Union.
In addition to the issue of re-export, which, as Ukrainian experts explained, can be regulated by special agreements, the potential increase of Ukrainian exports to Russia as a result of the modernization of production, due to European investment, is a far greater problem, since they could increase as a result of the harmonization of the Ukrainian economy with European standards. Moreover, China is also interested in increasing investment into Ukraine if the latter draws closer to European standards. However, this runs counter to Russia’s key geo-economic interest of being the regional leader on post-soviet territory, as well as leading and actually gaining the most benefit from the development of cooperation with the EU. The Kremlin actively supports the expansion of its exporters and strategic investors into FSU markets because it is interested in getting access to the significant natural and human resources of CIS countries and earning profits from financial deals. Russia is doing its best to win anything, competing with the EU and China on the region’s major markets, primarily that of Ukraine.
It is also important for Moscow to support the competitiveness of its enterprises on the markets of third countries. As can be seen on the diagrams, the geographic structure of domestic export in the last few years is characterized by a certain stabilization of sectors in the overall volume of both FSU countries, as well as in the EU. Instead, the sale of Ukrainian products on other markets is increasing. As far as this is concerned, Ukraine has some significant competitive advantages: the geographic proximity to the MENA (Middle East and North Africa) region and well-developed ports. Even so, for the Kremlin, according to its scenario, the main motive for economic integration with Ukraine is ultimately to slow down trade relations between Kyiv and the EU, since it is the European Union that is Russia’s principal trading partner.
Russia’s economic and geopolitical interests are closely intertwined. Instead, Ukraine’s accelerated economic integration with the EU, with NATO as its central element, is extremely inconvenient for the Kremlin, since it could lead to the expansion of cooperation with the EU in the security sphere. After all, the decisive interest of the Russian government, as well as the political and business elite, is to preserve the existing “state-capitalist” economic and political model. Any transformation of its neighbour-states based on European models could increase the domestic political imbalance in Russia.
In addition, the CIS Free Trade Zone Agreement is a certain foreign policy concession on the part of the Kremlin. If until now the priority of Russia’s foreign policy vector regarding its close neighbours, as Vitali Silitski accurately noted, has been, “forced integration” through the advancement of the Customs Union, then today it is rather a policy of bribery, since the coercion strategy is clearly not working. In actual fact, the conclusion of the above-mentioned agreement puts into effect the idea of multi-level integration, which was developed, among others, by the analysts of the Institute of Contemporary Development (INSOR), the patron of which is Dmitri Medvedev.
A LITTLE ECONOMICS
Overall, the notion of the CIS Free Trade Zone Agreement is only nominal, since it determines the exclusion and restriction of more than 60 product groups. More specifically, the agreement provides for the exclusion of natural gas and electrical power trade from the custom-free regime, and at the same time, conserves the export duty for the member-states of the Customs Union (Russia, Belarus and Kazakhstan) for crude oil.
Is Ukraine likely to gain any economic benefits from the CIS Free Trade Zone Agreement? Even today, it is possible to definitively express doubts regarding some of those determined in the document – substantiating the ratification of the Agreement, which was submitted to the Verkhovna Rada.
In particular, it addresses the registering of obligations not to increase customs rates for goods, which are excluded from the free trade regime and not to apply new restrictions, which would have a negative impact on the free trade regime. But this is no protection from new exclusions: the Agreement contains provisions, which provide for the possibility to protect markets from an increase of imports, which are detrimental to national industry. The standards and rules of the Customs Union and bilateral agreements between countries – its members with member-states of the Joint Economic Space, have priority over the provisions of the CIS Free Trade Zone Agreement.
The second doubtful benefit: the provision regarding the initiation of the process for cancelling export duties, registered in the international agreement. However, the document also fixes the valid export duties for crude oil of member-states of the Customs Union, which has a negative impact on the Ukrainian oil refining industry and the oil transportation sector.
The Agreement states that trade disputes will be resolved in accordance with the mechanisms and procedures approved by the World Trade Organization. However, at the same time, the “last resort” is the Economic Court of the CIS. It is expected that disputes will be resolved with the involvement of a commission of experts, who are supposed to be guided by the standards of the WTO, however, their impartiality and objectivity is very doubtful.
People lobbying the agreement, predict an increase in the export of products from the agricultural and foodstuff industry, particularly in view of the liquidation of phytosanitary barriers. However, as evidenced by the “cheese conflict”, Ukrainian producers are forced to spend considerable resources in order to adapt to the strict standards and procedures that are required by Russia.
In general, most independent experts are convinced that the CIS FTZ will not bring an end to Ukrainian-Russian trade wars.
Unstated, but likely benefits for the current government and its big business include a “gentleman’s” agreement, whereby the RF will continue negotiations on the price and volume of Ukraine’s import of natural gas and will refrain from the prescribed “take or pay” requirement (in other words, Gazprom can allow Ukraine not to purchase the entire volume of gas indicated in the contract). In addition, the CIS Free Trade Zone Agreement could institutionally complicate Ukrainian-Russian economic relations in the future. This will require Mr. Yanukovych’s Administration to mobilize additional, clearly inadequate resources for conducting his foreign economic policy with Russia.
Nevertheless, the biggest problem is the fact that the format of relations with the RF, which calls for further economic and political integration with it, will be an enormous challenge for the successors of the existing government.
Ratification is essentially a propaganda measure which, together with the approval of the law on granting regional status to the Russian language, is called upon to demonstrate to the pro-Russian electorate, that the Party of Regions and its allies have fulfilled their pre-election promises. This document, just like the Kharkiv Agreements from 2010 whereby the stationing in Crimea of the Russian Black Sea Fleet is exchanged for cheaper gas, will not work. We will shortly see how the participants of the FTZ will impose huge penalties on undisciplined Ukrainian businessmen.
In October 2011 the CIS FTZ Agreement was signed by the presidents of Ukraine, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia and Tajikistan. It was also subsequently signed by Uzbekistan. Other than Ukraine, the only countries to ratify the document are Russia (28 March) and Belarus (8 May)
With European Union destinations still off-limits for Ukrainian tourists, the country’s own Black Sea and Azov Sea resorts are experiencing an early summer boom as Ukrainians seek out holiday options closer to home