Darren Heyman: “For investors, joining the free trade zone with the European Union, means that it is safer to conduct business in Ukraine”

7 August 2012, 16:34

On 30 July, the Verkhovna Rada ratified the CIS Free Trade Zone Agreement, which many experts call a prelude to Ukraine’s entry into the Customs Union with Russia, Belarus and Kazakhstan, one of the Kremlin’s Eurasian projects. In the meantime, on 19 July, the economic part of the Ukraine-EU Association Agreement on the free trade zone was signed in Brussels. Actually, by settling on one of these economic unions, Ukraine will make a civilized choice, which will determine whether it will make an economic breakthrough in the future, which, a priori, is impossible, should pressure be brought to bear on the backward markets of CIS member-states.

In an interview with The Ukrainian Week, investment analyst Darren Heyman, who has extensive management experience in the area of financial and alternative trade, noted the key advantages and risks, which free trade with the EU envisages, and spoke about why it is so important for foreign investors that Ukraine joins the trade agreement with the EU.

U. W: In recent times, the complication of negotiations with the EU has activated those standing behind Ukraine’s membership in the Customs Union – an institution of undeveloped post-soviet countries. Their most valid argument is that other countries, which are in the same position, are waiting for Ukraine to become a member: with Ukraine’s immense corruption, fraudulent judicial system and non-competitive production. In addition, for joining the Customs Union, Russia, for example, is hinting that it will reduce the price of its gas. On the other hand, the EU is demanding democratization in all aspects of life, the improvement of laws, modernization of enterprises and improvement of product quality, in other words, it requires difficult and very detailed work, which will take years to complete. Do you think that the current Ukrainian government simply doesn’t see the economic benefits of the trade agreement with the EU?

The reality is that the EU is the richest market in the region. Being a part of it would be a huge plus for the Ukrainian economy. In addition, although little is said about this, the European Union is already Ukraine’s trading partner No. 1. Russia, for example, is in second place. At the same time, the EU is made up of 27 different countries and long-term markets, while the Customs Union is comprised of just three.

For Ukraine, the Free Trade Agreement with the EU will automatically mean the mandatory implementation of internationally recognized European economic, production and legal standards, which will improve the quality of Ukrainian production, and accordingly, its prospects of trading, not only with Europe, but also with the rest of the world. Becoming a member of the Customs Union with the Russian Federation, where even today, antiquated soviet standards continue to prevail, would only stand in the way of Ukraine’s modernization.

It’s clear that free trade with the EU would also require additional transparency and efficiency from business. In combination with the improvement of legislation, this would significantly improve Ukraine’s position in the eyes of international investors. Actually, for the latter, the very fact of signing the agreement with the EU will mean that it has become safer to be involved in entrepreneurship in Ukraine. This will open the flow of investments and technology into the country, not only from the EU, but also from the entire developed world. All of this will increase Ukrainian production and improve the overall economic situation in the country. At the same time, consumers will obtain cheaper and better quality goods.

There are also political benefits. After all, the free trade zone in the European Union will also bring Ukraine closer to a visa-free regime in the EU, and ultimately membership in it.

U. W: On the other hand, the risks for Ukraine after joining the EU free trade zone are also clear?

The very first risk that Ukraine will encounter, is political. Obviously, after Ukraine joins the free trade zone with the EU, it can expect a worsening of relations with Russia.

Another difficult moment – it is necessary to prepare for the fact that the introduction of European standards in Ukraine will not be cheap. After the very least, it will be necessary to create independent regulatory structures, which will have to be provided with relevant technology.

Macroeconomic risks will definitely emerge as well. More specifically, companies, which until then were competitive because of the higher price of imported goods, will come across new competition from imports. As a result, Ukrainian enterprises will have to reduce the price of their production, which for some, particularly in certain spheres, means being squeezed out of the market.

At the same time, it is expected that there will be a significant increase of pressure on small business, for which, at a certain stage, it will be difficult to compete with cheap imports.

Will simple citizens suffer under such conditions? Yes. After all, it is likely that it will result in a significant number of people losing their jobs. However, the following should be noted: a not insignificant advantage of agreements with the EU will be the fact that many small Ukrainian businesses will gain access to the vast European market. Obviously, the only enterprises that can benefit from this are those that will be able to improve their competitive ability. This will result in a balance being reached: some companies will benefit from the Agreement with the EU, while others will suffer.

Of course, everything will depend in what exactly will be written in the Agreement with the EU. After all, nothing is perfect. There can always be exceptions, certain “special conditions”.

Both Europe and the rest of the world are currently in a difficult situation. But the European Central Bank always finds funds for EU members. And for Ukraine, this issue is also open, particularly regarding financial aid and Ukraine’s implementation of a free trade regime with the EU. All of this can be thrashed out. With good lawyers, politicians and public support, these issues can be resolved.

U. W: The story comes to mind, whereby in spite of all agreements within the EU, French farmers stood on the border and simply did not allow agricultural products from Bulgaria. Will, for example, Ukrainian agrarians be insured against such problems?

The advantage for Ukraine is in the fact that it has seen the course taken by Bulgaria and the difficulties it had to overcome. And now, using someone else’s experience, Ukraine will be able to take a stand on certain conditions of the agreement, take the initiative into its own hands and cross all the “t’s”. It is possible to come to an agreement on all compensation for possible risks or make them altogether impossible. Of course, things happen that are difficult to predict, but at least it’s worth doing everything possible to avoid them.

The argument that joining the EU free trade zone will cause the destruction of the Ukrainian agricultural sector often resounds from Russian economists. I do not think that this is the case – there is always the possibility of protecting oneself.

U. W: Even during the soviet era, these agricultural products from these same Bulgaria and Hungary were of far better quality than those from Ukraine, not to mention Spanish, Italian or French produce. Today, western economists often hear that the main export perspective of the Ukrainian agricultural sector is rape. So, will Ukraine have to limit its agricultural ambitions to this crop?

The main problem lies in the fact that the vast majority of Ukrainian agricultural production is produced by farms. This production is completely ineffective, particularly in view of being competitive on the international market. Ukrainian farmers must use new technology and at the very least, attain the Bulgarian level of efficiency, which is completely realistic in view of the significantly better quality of Ukrainian soil and larger production volumes.

Another serious issue is connected to this, which actually hinders income in farming and investments, and accordingly, new technology, which will improve its efficiency –the absence of a civilized land market in Ukraine.

And, of course, when introducing agricultural production onto the European market, it will be necessary to take into consideration the fact that even today, Ukraine has the reputation of being the “Chernobyl country”. So buying anything grown in Ukraine is considered to be more risky than anything grown in any other country.

Can all these issues be resolved? Will Ukraine be able to become a significant player on the world agricultural market? Yes. But this will take time – at least several years, while, for example, Ukrainian production, which is not traditional for the latter, particularly vegetables, establishes a stable position on it.

Of course, competition will definitely not be easy at first, particularly for small farms. But the Ukrainian agricultural sector already has certain advantages. First and foremost – a qualified and cheap workforce. Also, for example, the existence of Black Sea ports and trading connections with Asia and the Middle East.

U. W: How important is it for investors, that Ukraine signs the Agreement with the EU?

There are several groups of investors. Among them – are those who want to enter the Ukrainian market prior to the signing of the Agreement with the EU. But for this, Ukraine must have political and economic stability. These are generally private investors.

But there is another group, which is not simply waiting for stability in Ukraine, but for one that is guaranteed by the EU. There are very many of them. They only want information on Ukraine from the European Union, prior to investing funds. And even though today, people are taking money from developing markets because of the crisis situation in developed countries, many investors are still interested in Ukraine.

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