Ukraine Teeters Between the EU and Russia

Ukraine Teeters Between the EU and Russia

Even if Ukraine-EU trade association agreements are signed, will they be harmful to Ukraine’s economy?

Several weeks ago, signs suggested Ukraine was moving towards Europe when the government officially stated it would rather sign trade agreements with the EU than join the Russia-led Customs Union. Recent developments, however, suggest that this move isn’t too certain.

In past weeks, Ukraine has struggled to maintain a balance between the Customs Union and the EU. Prime Minister Mykola Azarov has since engaged in in-depth discussions with Customs Union members to prove that Ukraine can successfully navigate economic agreements with the EU without harming its trade relationship with Russia.

Azarov will also pay an official visit to Belarus in early October to create a working group that will analyze prospects for economic relations after the potential establishment in November of the EU-Ukraine free trade agreement. At the same time, Ukraine agreed to sign 70 Customs Union agreements during a Customs Union meeting in Kazakhstan.

In a meeting at the Kremlin last week, Azarov tried to convince Russian Prime Minister Dmitry Medvedev that since both Ukraine and Russia are members of the WTO, there is an established institution to regulate trade between the two countries no matter what sort of future trade agreements are implemented.

Russia, for its part, does not seem convinced by these recent actions by the Ukrainian government. It has clamored even more loudly, forecasting Ukraine’s financial ruin if integration with the EU goes ahead. One of Russian President Vladimir Putin’s advisers stated that the Ukraine-EU trade association agreements could force a debt default that would require a €35 billion bailout.

In spite of Russia’s inflamed rhetoric, Ukraine is continuing talks with the EU on the politically sensitive issue of its jailed former Prime Minister Yulia Tymoshenko. Reaching a consensus on human rights and democratic progression has been the major sticking point for closer ties between Ukraine and EU. Ukraine remains confident that it will be able to find a solution that appeases those in the EU concerned with Ukraine’s dubious track record on democracy and treatment of political opposition.

The EU typically ties its economic and trade integration measures with many Eastern European countries to commitments regarding rule of law and corruption reform. However, many Europeans have placed their objections with Ukraine’s human rights record on the back burner, precisely because of the increased Russian pressure. Perhaps Ukraine will not have to make very concrete efforts at reforming its political environment to suit EU needs after all.

On the energy front, the Ukrainian government officially signed a project sharing agreement (PSA) with an international consortium led by ExxonMobil and Royal Dutch Shell to develop the Skifska natural gas field in the Black Sea. Russia’s Lukoil lost the bidding to explore this section of the Black Sea Shelf, in part because of Ukraine’s governmental strategy to diversify its energy portfolio away from Russia.

If the Skifska field reaches its full potential, it could reduce Ukraine’s dependence on Russian natural gas by 10 percent. Furthermore, the consortium is required to pay $300 million (about €222 million) for the license as stipulated by the PSA. Though this would help Ukraine’s finances, it is only a small amount of the €35 billion bailout Ukraine would supposedly need should a default occur.

The Customs Union has only been in existence for two years, and it is still unclear whether it is a viable and economically sound trade bloc. So far it seems that it has simply manifested itself as a political tool of its current and potential members, including the EU.

Because of all the political riffraff resulting from Ukraine’s teetering, Moody’s has downgraded the government’s bond rating from B3 to Caa1, explicitly citing Ukraine’s crumbling relations with Russia surrounding Ukraine-EU trade negotiations.

Can Ukraine continue to use its status as an energy and transport hub to offset the other trade and economic challenges it is facing? Can it continue its attempts to balance between the EU and Russia? And even if it does manage to successfully negotiate a political balance, will it help the country economically? The November EU Partnership summit could very well be held hostage to this intensified pressure on Ukraine and other Eastern European countries.

Categories: Economics, Europe

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