Development & Aid, Economy & Trade, Europe, Headlines

UKRAINE: Trade Going West

Zoltán Dujisin

KIEV, Jun 2 2011 (IPS) - In spite of the nominally pro-Russian government in Ukraine, the country will most likely sign a free trade agreement with the EU by the end of the year, in what will be a blow to Russia’s interests.

This would be the country’s biggest step towards integration with Western Europe ever since Ukraine joined the World Trade Organisation in 2008.

Ukraine is a key market for the region. Its 45 million people constitute the second largest population and economy of all post-Soviet states, behind only its gigantic Eastern neighbour.

In the short-term the EFTA (European Free Trade Agreement) would impose both economic and political challenges for Ukraine, whose biggest trading partners are still the former Soviet republics.

The step is surprisingly being taken by President Viktor Yanukovich, who became known to the world as the Russian-backed ‘villain’ of the orange revolution in 2004.

During the presidential elections that same year, popular unrest forced a repeat vote which was eventually won by the liberal and pro-Western candidate Viktor Yushchenko.

However, little in the way of integration to the West happened over the chaotic Yuschenko presidency, which lasted from 2005 and 2010. At the same time Yanukovich, who succeeded Yushchenko in 2010, has vowed to bring Ukraine closer to the EU without angering Russia.

So far, Yanukovich’s actions have been more pleasing to the West than to Russia, considering the low initial expections. A recently released WikiLeaks cable shows that even the U.S. embassy considers Ukraine’s President a changed man compared to 2004.

Yanukovich has ensured the resumption of IMF (International Monetary Fund) credits, after a 15 billion dollar loan was suspended in 2009 due to former president Yushchenko’s inability to fulfill his commitments towards the international financial institution.

Ukraine was severly hit by the global financial crisis, verging on state bankrupcy in 2008 and registering a contraction of 15 percent in GDP (Gross Domestic Product) growth the following year.

Yanukovich took power under favourable economic conditions. Largely driven by strong metal prices, in 2010 GDP growth rose to 4.5 percent, while investments are expected to kick in by 2012 when Ukraine and Poland co-host the European Football Championship.

In what is also an attempt to please both the EU and the IMF, steps have been taken to deregulate and decrease the number of licences and permits, freeze pensions, increase gas household prices and reform the state administration, but there are enormous difficulties in implementation.

“This is especially due to corruption. What the government does is not always what it preaches,” Ildar Gazizullin, economic analyst at the International Centre for Policy Studies in Kiev, an independent think-tank, told IPS.

While foreign investors are expressing satisfaction with the country’s recent political and macroeconomic stability, “corruption is so institutionalised that investors who come to Ukraine must expect to get robbed,” one high-ranking EU diplomat told IPS under condition of anonimity.

Cases of non-competitive tenders, such as the recent case of the privatisation of state fixed-phone monopoly Ukrtelecom, are also still ripe.

Clearly less satisfied are average Ukrainians, suffering with IMF-prescribed reforms, and Russia, who wants to prevent Ukraine from signing the EFTA and instead lure it into a customs union with the countries of the Commonwealth of Independent States (CIS).

Polls indicate Ukrainians are becoming more pessimistic about their economic prospects and dissatisfaction is growing due to the government’s reforms, particularly price hikes in household utilities and the new tax code.

The new code is likely to benefit big business while hurting small and medium enterprises, which the government is trying to pull back from the shadow economy that accounts for 40 percent of the country’s GDP.

Russia, on the other hand, is disappointed with how little Yanukovich has delivered in terms of pro- Russian policies, and is trying to lure Ukraine into the customs union by offering an annual discount on natural gas prices worth 9 billion dollars.

Such a union would be welcomed by Ukrainian big business, particularly the energy-intensive steel industry that requires cheap gas and that can claim to be the “driving force of economic growth in the short-term,” according to Gazizullin.

If, as seems increasingly probable, Ukraine chooses the Free Trade Agreement over the customs union with Russia, it will face higher duties for Russian imports and limitations to its exports to former Soviet republics where its goods are still needed and competitive.

But EFTA also opens up the enormous European market for Ukraine and it may attract foreign investment in sectors where modernisation is long due. Joining EFTA may also help break many of the country’s government-protected and murky monopolies.

This will be the greatest challenge for Yanukovich, whose financial backing comes precisely from big businesses in the steel and chemical industry. These sectors operate with huge profit margins and fear competition from high-quality EU goods.

Their influence in the present, as well as all previous Ukrainian governments is enormous: six of the 16 current cabinet members are believed to be multi-millionaires who maintain their wealth by registering their businesses in their relatives’ names.

Foreign investors are generally pushed to business sectors of less interest to oligarchs and the state, such as agriculture, where Ukraine’s potential is substantial.

Even here though, the Ukrainian government has been recently criticised for giving preferencial treatment to a partly state-owned monopoly that now has the lion’s share of grain export quotas, limiting the interest of foreign capital to invest.

Officials justify the decision with the need to protect Ukrainian farmers from foreign competition, but critics claim the measure will just help keep land cheap for those with the ability to buy it and prevent farmers from selling their products at world prices.

Republish | | Print |

real estate finance and investments