EU Advantages for Ukraine

„EU advantages for Ukraine“ is an op-ed by Ilya Timtchenko from Kiev/Ukraine, first published in the English-language paper Kyiv Post on 15.12.2013. We recommend the Kyiv Post (www.kyivpost.com) which provides a 24 hr topical coverage about the events in Ukraine – not only in Kiev. And this is the op-ed article:

Dec. 15, 2013, 11:40 a.m. | Op-ed — by Ilya Timtchenko

For those who still doubt, the European Union is Ukraine’s best option.

For good reasons, much of the attention of the Ukrainian protests has been put on being pro-civil rights and not necessarily on pro-European integration; yet, it is also important not to forget the economic consequences of Ukraine’s only two options – the EU or Russia’s Customs Union.
At a quick glance, here is an overview of Ukraine’s economy. According to the World Bank, Ukraine is in the lower middle-income level with a $3,500 GNI per capita. The income share held by the lowest 20% slightly increased since 2004 to 2010 from 9.0% to 9.9% respectively. In contrast, the income share held by the highest 20% decreased from 37.3% to 35.7%. This means that almost no progress at all has been made in decreasing the gap since the Orange Revolution. In addition, Ukraine is expected to experience a 15% devaluation of the hryvnia peg to relieve pressure on Ukraine’s foreign-exchange reserves. Ukraine’s economy has been in sharp decline in the past two years and its near-term growth outlook and stability are worrisome. Lastly, nominal incomes of Ukrainian citizens are being strongly underestimated relative to their real purchasing power.
Ukraine’s proximity to Russia has always been a concern for the EU. The two countries’ relatively high social integration ties are a strong factor in evaluating Ukraine’s economic institutions with Russia.

The CIS has been a handy tool for Russia to achieve these integration attempts since the perestroika. Putin has been attempting to build unions similar to those of EU yet with some “minor” differences. Though it might seem attractive at first glance, bringing back an economic union between post-Soviet states is far from realistic.

Conveniently for Russia, most of the treaties are structured in a form of economic dependency on Russia. Therefore, institutional formality of the CIS is not helpful since Russia will do what is best for Russia. Most importantly, cooperation does not exist to any great extent, and Russia’s bullyism does not help. The 2006 trade wars on gas pipes between Russia and Ukraine are one example. The share of intraregional exports in the CIS region majorly declined from 57% in 1994 to 31% in 2004 while imports declined from 59% to 46% respectively. Sociological surveys confirm that post-Soviet citizens do not have confidence in the CIS integration projects. Economic reforms cannot work on the basis of CIS: the states are too weak and Russia is too bossy.
Without doubt, corruption has a significant negative effect on Ukraine’s economy. Unlike tax, corruption is not transparent, creating arbitrariness and uncertainty and therefore a decrease in FDI. With low democracy there is a strong correlation with lower demand for regional cooperation. If Russia would increase the quality of its institutions then the share and volume of Russian investments would increase. Yet, the likelihood of this happening in the near future is very unlikely.

Russia does not have much to offer, and Ukraine has an attractive alternative – join the EU – the economic benefits of which include aid and trade. As for the EU, Western policymakers affirm that Ukraine is crucial for stability in Europe, and that uncertainty in Ukraine is uncertainty in Europe. This means that support and assistance toward Ukraine means a more stable and prosperous Europe.

The EU is Ukraine’s largest trading partner. Ukraine receives EU protection and preferences for key products such as animal and vegetable oils, processed vegetables and fruits, clothing and certain steel products. EU trade policies are not a significant barrier for Ukrainian exports, and the primary constraints are internal. EU’s recent border expansion is a positive result for Ukraine, which contributed to additional FDI attraction and positively impacting Ukraine’s industrial products. These results will only accelerate if Ukraine joins the EU.

Ukraine’s export relationship with the EU has been growing while declining with Russia. 2002 was the first year when Ukraine’s exports to the EU were greater than those to Russia. Standard trade models highly predict that the EU market will be of much more importance for Ukraine. According to the World Bank, these estimates predict that a trading country of Ukraine’s economic size and proximity to major markets has a potential of exporting more than 40% of its total exports to the EU. Lets not forget that economically Russia is very small relative to the EU: its GDP mass is approximately 40-50 times larger than that of Russia!

Other countries in the region have much stronger trade with the EU. For example, more than 50% of Poland’s exports go to the EU. During the period of 1996-2002 the net FDI per capita in Poland were approximately 8 times larger than in Ukraine. The geographical reorientation of the trade of these countries toward the EU happened relatively fast and early because they signed FTA’s and association agreements.

In order to strengthen the Ukraine-EU trade policy relationship, Ukraine must improve the competitiveness of Ukrainian firms on international markets, its domestic business environment and strongly aim to attract FDI (something Yanukovych failed at doing). Ukraine must also seriously restructure its trade toward more diversification and specialization since it seriously underutilizes its geographic advantages. Though EU’s strictness is a key factor in delaying Ukraine’s access to the EU, it also plays a major role in improving Ukraine’s quality of standards and efficiency of its economy.

EU is Ukraine’s only best option. To a great extent, Ukraine’s upcoming inflation could be offset through applying a competitiveness boost – something the EU partnership can provide. Ukraine not being a part of the EU, places the country in a clear disadvantage compared to its Western neighboring countries. The associations agreement that Yanukovych failed to sign was meant to wax Ukraine’s exports and provide more economic stability. Corruption will plummet. In turn, this will attract trade not only with the EU but will open windows to the rest of the world’s largest and most successful economies.

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