Good deal, bad result

KATARYNA PRYSHCHEPA: You have made critical remarks regarding the scope of the Association Agreement between the EU and Ukraine. Do you believe Ukraine would have been better off if it was not signed?

OLEKSANDR CHALYI: The Association Agreement between Ukraine and the EU is an important and complex agreement, which will continue to play an important role for Ukraine. However, in my view, the trade part of the Association Agreement in its present form will cause serious obstacles for the economic development of Ukraine. And the main reason is the discrepancies that the Association Agreement has. The AA explicitly states that Ukraine does not have thestatus of an EU candidate state. But at the same time the scope of the Deep and Comprehensive Free Trade Agreement that constitutes the integral part of the AA is as if it were signed by a candidate state. And unlike a candidate state we will not be receiving enough financial support from the EU in order to complete the economic transformation required by the DCFT. Given all this, if we do not seriously amend the DCFTA in the nearest time, Ukraine is going to have a very big negative balance of trade with the EU, which will hurt the economy.

The idea of the Association Agreement itself appeared after the negotiations on the free trade agreement between Ukraine and the EU started. How have the AA negotiations come into place and why was the trade deal included in the bigger document?

From the start the parties have discussed two alternative options –  the trade agreement could have been included into the big agreement or could have been concluded separately. The other issue which was discussed was whether the free trade agreement should have followed the Swiss model – i.e. the so-called sectoral free trade – or Norwegian model. In the case of the Swiss model, the parties to the agreement agree to open their economies for free trade sector by sector when and if they are ready for this. The Norwegian model effectively means full opening of the market for the EU with only some minor exceptions.

And also there have been discussion as to what extent Ukraine would open its market – whether we would just abolish the import tariffs and introduce the full deep and comprehensive free trade with gradual abolishment of all non-tariff barriers. And at a certain point the EU has convinced the Ukrainian side to start the negotiations on the Association Agreement including the full-fledged DCFT modelled on the Norwegian scheme of trade with the EU. And at that point Ukraine and Ukrainian state institutions were simply not prepared to conduct such difficult negotiations.

At present the UK and the EU will start negotiations on basically the same issues as Ukraine and the EU had back then. And you see how they estimate their state capacities and how long they have been preparing to start these talks.

In addition, I believe that when Ukraine started negotiations on the Association Agreement we chose a bad strategy. In Ukraine all the effort was concentrated on the political parts of the AA with the aim of getting the official perspective of the EU membership when it was clear already at that time that this was not possible. I believe that instead of trying hard for getting the membership promise, we should have concentrated more on the trade part of the agreement and get more from that deal.

And also the EU became a much tougher partner after the crisis of 2008. Before 2008 we were promised more asymmetric trade regimes with the EU, higher quotas for agricultural products and chemical industry products and as the result of the crisis the EU became less flexible in these spheres.

You say that Ukraine was not successful in negotiating the trade deal with the EU partly because Ukraine’s institutions were not ready to conduct such difficult negotiations. But where have the famous Ukrainian oligarchs been during these negotiations? Didn’t they have the necessary resources or interest in this process?

You see, this was the difference between the EU and Ukraine. In the EU the economic actors are able to state their demands and interests via different channels – there is a network of think tanks, business associations etc. which are able to represent the interests of business in the consultations which the EU institutions are obliged to conduct and thus influence the negotiation position of the EU.

In Ukraine at the time when the trade negotiations took place, there were not that many business associations of this kind. Some of the associations represented in reality the positions of only one or two oligarchs, and in fact they were competing with each other. And this was the situation in such advanced sectors of Ukraine’s economy as metallurgy or agriculture. But when we spoke about such sectors as medical industry or textile, the negotiators on behalf of Ukraine could only form the negotiation position based on some theoretical modelling and calculations. And at that time we did not have any experience of implementing of the trade agreement of such a scope.

I believe that given all of that, we should try to renegotiate the trade deal with the EU. The Association Agreement itself provides some mechanism for accommodating some needs of Ukraine, but using these mechanisms requires good will on the side of the EU. Unfortunately at present in view of the upcoming Brexit negotiations and other economic challenges the EU might not be open to Ukraine’s needs.

The Brexit negotiations, however, can provide some ideas for Ukraine. The Ukrainian side will be able to observe the EU-UK negotiations and pick up some negotiation know-how. I am sure both the EU and UK will be fighting over each comma and dot in the agreement.

But do you think that now Ukraine’s business associations will be more ready to provide input for the new negotiations with the EU? Have they understood their interests?

I believe that at this moment they will not have any other choice. We can see that trade with the CIS states is decreasing. For a very long time Ukraine had a healthy external trade balance. We have one third of our external trade with the CIS countries, one third with the EU and one third with the rest of the world. Currently our external trade model to a large extent resembles the external trade of an EU Member State or a Candidate State, as approx. 40  per cent of our trade turnover is with the EU. Given all this, Ukraine should really concentrate on lifting all the barriers which prevent export to the EU which means the reform of the safety and quality control system. And to achieve this we will require help from the EU.

Will Ukraine ask for more financial assistance or will it require some other sort of help?

Ukraine will need financial and technical assistance. Not only the money but equally important technical expertise and expert advice. Otherwise the negative trade balance with the EU will continue to grow. We used to have a surplus in our trade with the EU mostly till the big enlargement of 2004. Because of the EU enlargement of 2004 Ukraine has effectively closed the free trade zone with Poland and the Baltic states and as a result we have had a negative trade balance with the EU ever since. So in fact in terms of the bilateral trade the EU has been the least friendly partner of Ukraine. So in view of this fact we really need to ask for the EU’s help now in order to achieve a healthy balance.

Why in your opinion was the EU not ready to promise Ukraine prospective membership?

In my view there were two principal reasons. Firstly, the EU did not want and was not ready to confront Russia about Ukraine. The EU side was afraid of the possible problems in its relations with Russia. The second reason, paradoxically, was that until recent times Ukraine, unlike the Balkan States, did not really cause significant problems to the EU (the EU provides much more assistance to Ukraine now, when we started to remind the Balkans in a way). Ukrainian leadership in fact have always tried to accommodate the needs of the EU. So as a result the EU has seen some potential problems in  case it attempts to integrate Ukraine, and no problems in case Ukraine remains strictly in the Neighborhood.

I am sure this was not an issue of the accession criteria, because Ukraine was ready to fulfill them after the Orange Revolution. And if Ukraine had received the real promise of EU membership back then I am sure that Viktor Yushchenko’s presidency could have been different. This kind of promise could have helped to maintain the unity of the political class. In fact, the European idea is the only idea which could help to unite the political elite.

You have mentioned that in view of the fact that the EU was not ready to promise Ukraine membership, the only way to ensure that closer ties between Ukraine and the EU do not raise hostility on Russia’s side was the trilateral consultations between the EU, Ukraine and Russia. How could it work when Russian leadership clearly did not want any closer ties between Ukraine and the EU?

First, we have to remember that in 2004 it became clear that Ukraine didn’t really have any chance of becoming a member of the EU. And after Ukraine agreed with Germany and France that the Association Agreement in fact excludes the membership prospective for the EU, the chances were not great. And it was clear for the Russian diplomats that Ukraine did not stand any chance of EU membership for the next 20 or 30 years.

But when the EU offered Ukraine the full-fledged DCFTA and the EU and Ukraine started these negotiations, it became clear that Ukraine would have to change all its systems of safety measures, all the quality standards etc. This meant that Ukraine would part with the post-Soviet system of quality control and Ukraine and Russia would have completely different measures in place. This meant that the market of Ukraine would effectively come under European “control”.

The Russian side had offered the EU to start negotiations on the Pan-European economic area and the EU side refused. In 2013 the Russian side had offered the EU to start the free trade negotiations with the EU. In such a way there was a chance to overcome the conflict. Both Ukraine and Russia would have free trade deals with the EU. But the EU also had refused because from 2012 the relations between the EU and Russia started to deteriorate due to a number of reasons, which were not directly related to Ukraine.

What were these reasons?

Firstly, the return of Vladimir Putin into the president’s office. And later his working  relations with Angela Merkel were not very good. So the EU, which at that point had a feeling of its own strength, decided not to conduct any consultations with Russia regarding its future economic integration with Ukraine. As a result it caused the big geo-economic war for control over Ukraine. And both the EU and Russia had conducted this war without really taking Ukraine’s interests into account.

In this situation I believe Viktor Yanukovych made a big mistake. He decided to exploit this situation and instead of proclaiming the equal distance or proximity to both the EU and Russia, he started to play both sides of the conflict against each other and raise the bets whenever it was possible. In the end the bets were so high, that the conflict destroyed Viktor Yanukovych as a president and led to a real conflict on Ukraine’s territory and the loss of part of the country.

When you speak of the equal distance to the EU and Russia, in what way it would have been different and more successful than the famous multi-vector foreign policy under President Leonid Kuchma?

In my view the multi-vector foreign policy was the only option that really ensured the territorial integrity of Ukraine for almost 25 years. And all the presidents of Ukraine, including Viktor Yushchenko have really implemented this kind of policy. There might have been slightly different preferences, but even Yushchenko had tried to synchronise the steps made in European direction with the steps in relations with Russia.

But at some point President Yanukovych had lost the sense of reality and thought he was equal to those big players (the EU and Russia) and that caused the disaster.

I would like to come back to this issue of the EU membership prospective for Ukraine…

The mobilising effect of the EU membership prospect can only last for ten to 15 years. If in this time the promise of the EU membership does not come to its logical conclusion, the country could turn in the opposite direction and the authoritarian tendencies in society could get stronger. We have the example of Turkey to see this.  

I really hope that Ukraine gets visa free travel with the EU, because at present Ukrainian society is really skeptical about Ukraine’s relations with the EU and possibilities of integration. Personally, I have always been a supporter of the European integration idea as a tool of transformation of society. But we should not fool ourselves. It is clear that EU membership is not possible in the foreseeable future so we should set achievable goals. We need a deep reform of Ukrainian society based on European values and standards with a clear understanding that we will not have a possibility to become an EU member in the foreseeable future. Examples of such countries as Switzerland, Norway and Iceland demonstrate that such a way is possible and can lead to positive practical outcomes.

Oleksandr Chalyi is the former First Deputy Minister for Foreign Affairs of Ukraine, State Secretary for European Integration and Foreign Policy Advisor to the President of Ukraine. Chalyi was involved in the negotiations on Ukraine’s WTO accession and free trade negotiations with the EU and CIS countries.

Kateryna Pryshchepa is a PhD student at Graduate School for Social Research (Institute of Philosophy and Sociology of the Polish Academy of Sciences). She previously graduated in European interdisciplinary studies from the College of Europe and philosophy from the University of Kyiv-Mohyla Academy (Ukraine). As a journalist in Ukraine she covered Ukraine-EU relations, among other issues.

DCFTA, the Association Agreement, the European Union, trade, Ukraine