The Association Agreement is the solution - not the problem (28/11/2013)

An article by Jan Tombinski, Ambassador of the European Union to Ukraine

Since my arrival to Ukraine as the Ambassador of the European Union – barely 15 months ago – I've been continuously speaking about my conviction that closer economic integration and the reform programme set out in the Association Agreement (AA) would offer Ukraine the best possible opportunity to become a truly European country in every sense. I've kept saying that the AA would be a win-win solution and would launch a new era of economic reform for Ukraine. It would help to improve its business climate, to increase investment and to address the serious macro-economic challenges facing the country. I've sincerely hoped that the EU and Ukraine would complete preparations for the AA to be signed at the Vilnius Summit.

And indeed, a lot of work has been done and we all acknowledge the determination of the Ukrainian Government and political forces to pave the way for the Association Agreement. 18 September unanimous decision by the Ukrainian Government was for the EU a significant proof of the readiness of Ukraine to sign the Agreement in Vilnius. And as the opinion polls show, a majority of the Ukrainian society is already convinced of the benefits of the Association Agreement for Ukraine.

Last Thursday – "black Thursday" as some are now calling it – the Ukrainian government announced an indefinite pause in the preparation for the signature of the Association Agreement, while stressing the irreversibility of the pro-European vector of the Ukrainian policy. The reason that has been stated by the government is that the economic problems that the country would face following signature would be too severe. In particular there has been reference to the loss of trade with Russia and other CIS states.

Of course I notice with sadness that Russia has been putting Ukraine under intense pressure over the past few months, through disruptions to trade, cancellation of contracts, illegal use of food safety measures and other means. And the EU has condemned such actions in the strongest possible language. We deplore Russian interference in Ukraine's sovereign right to decide for itself its own future economic and foreign policy.

Even in this context I would not consider this as a reason for a pause and I know that Brussels and European capitals share this view. And it is clear from the events of the last few days that many hundreds of thousands of Ukrainians contest the imposed time-out.

Let me be clear: none of the problems being caused by Russia have got anything to do with the impact of the Association Agreement and the Deep and Comprehensive Free Trade Agreement (DCFTA). There is nothing in the Association Agreement which changes any aspect of the trade and economic relationship between Ukraine and Russia, or between Ukraine and any other trading partner. It is Russia which has chosen to apply this economic pressure, not the EU.

Compensation?

This brings me to the question of compensation. The other reason given by the Ukrainian government for its change in policy – repeated many times in the last few days – is that Ukraine is disappointed that the EU has not offered a sufficiently high level of compensation for the loss of the Russian market.

I find this line of argument quite incredible. Ukraine is asking the European Union to pay compensation for damage caused to its economy by Russia. Why should the EU pay for damage caused by others? And in any case, what form should such compensation take? The EU is happy to contribute to economic reforms but we are not going to pay Ukraine's debts. And loans or grants to the government are not in themselves going to assist companies in the East of Ukraine that are threatened by Russia with a loss of those markets.

A far better form of compensation for those companies would be the opportunity for them to get access to new markets – both in the EU, and worldwide – which can be facilitated by the DCFTA and by the adoption of EU standards. A far better form of compensation would be for those companies to get help to modernise, to get investment and know-how from international partners who would be encouraged to invest by the better business climate that would result from the implementation of the DCFTA. The Agreement could have a strong impact in building predictability and trust also for non-EU investors and may even help selling Ukrainian products in markets outside Europe, like in China, the United States or Turkey. And even if the new EU norms and standards will stipulate the domestic and EU-directed production, it would be still possible for Ukrainian companies to manufacture goods for their exports to Russia according to Russian norms and standards.

Experience of the EU10

The AA/DCFTA is the solution - not the problem. The package of economic reforms it contains has been tried and tested before. Every country that has signed an FTA with the EU in the past has seen economic benefits: even those which much less ambitious and far-reaching agreements than the AA/DCFTA.

Let me give you a few examples, examining the performance of the so-called EU10 – the former Soviet-bloc – countries in the period 1990-1996. This period is important as it is analogous to the situation that Ukraine could be in if it signed the AA/DCFTA. All the EU10 signed Association Agreements with the EU in the early 1990s, but accession to the EU became a credible prospect only after 1997.

All in all, in only six years, GDP per capita in the EU10 increased overall by 37 per cent. Investments per capita by 40 per cent, while exports per capita by 44 per cent.

The point is that as a result of the countries of Central and Eastern Europe signing FTAs with the EU in the early 1990s, those countries began to transform their economies. There is no reason why Ukraine cannot follow their example and reap the same benefits.

Costs versus investments

I have also heard a lot of complaints in the past few weeks about the costs of the AA to Ukrainian business. There have been some big figures quoted – 165 billion USD; or even 500 billion USD. Quite honestly, I am puzzled. I have not seen the studies that have produced these figures so I do not know how they were compiled.

But what I find frustrating is that the money that is needed by Ukrainian businesses to modernise is seen as a cost rather than an investment. In order for the Ukrainian economy to grow, to create more jobs, more wealth, it desperately needs investment. The under-investment in the Ukrainian economy over the last 10 years is astonishing. All the successful economies in the world have invested a high proportion of their GDP back into their economies. Since 2002 the EU has invested 29700 bn USD; compared to only 250 bn USD invested by Ukraine. If you look at the investment figures per capita, it shows that Ukraine has invested 11 times less than the EU, 2.5 times less than China and even 3 times less than Russia.

It is no wonder that huge investments are needed today. But these are not costs; they represent future revenues. The DCFTA is a tool by which new investments can be attracted to Ukraine. The cost of inaction, the cost of allowing further stagnation of Ukrainian industry and agriculture is a far greater risk to the future economic health of this country than spending money now to invest for the future.

No plan B

So where does this leave us? As far as the EU is concerned, our position has not changed. We always said there was no "plan B." This remains true today.

While we respect Ukraine's sovereign right to decide for itself to choose what kind of engagement it wishes to have with the EU, we remain convinced that the AA/DCFTA offers Ukraine the best possible package of economic reforms and the best possible blueprint for modernisation of this country.

There is no place in this discussion for a third party. The offer on the table is a bilateral agreement that has been negotiated over several years by the EU and Ukraine with the best interests of both parties in mind. We are quite prepared to explain the impact of the Agreement with Russia, via our bilateral contacts, but we do not agree to give Russia a veto or any special rights. As I have already explained, the Agreement does not harm any of our neighbours: on the contrary we believe it will ultimately have a positive effect on the whole region.

The offer is still on the table. The Association Agreement is ready for signature as soon as Ukraine is ready. We very much hope this will be sooner rather than later, as the work needed to transform Ukraine's economy is urgently needed right now.

(Published in Kyiv Post: www.kyivpost.com)