EU EXTERNAL GOVERNANCE VS THE CAPTURED STATE: INTEREST AGGREGATION AND REPRESENTATION IN UKRAINE-EU...

COLLEGE OF EUROPE

NATOLIN (WARSAW) CAMPUS

STUDY PROGRAMME EUROPEAN INTERDISCIPLINARY STUDIES

EU EXTERNAL GOVERNANCE VS THE CAPTURED STATE:

INTEREST AGGREGATION AND REPRESENTATION IN UKRAINE-EU

TRADE NEGOTIATIONS

Supervisor: Professor Hannes Adomeit Thesis presented by

Kateryna Pryshchepa

for the

Degree of Master of Arts in European

Interdisciplinary Studies

Academic Year 2010-2011

2

Abstract

The Topic of EU External Governance vs the Captured State: Interest Aggregation and

Representation in Ukraine-EU Trade Negotiations draws attention as the negotiations on

Association Agreement and Deep and Comprehensive Free Trade Area between Ukraine

and EU seem to approach the final stages. Association Agreement and DCFTA are to

boost institution development in Ukraine, which could lead to business climate and

economic performance improvement.

The Hypotheses are:

(1) cooperation with the EU is still regarded in Ukraine as a foreign policy issue with tenuous connection between it and domestic reform frquirements.

(2) Principal economic agents regard the AA and DCFTA as an opportunity to gain better access to the European market and may demand tradeoffs to achieve this goal.

(3) Taking into account this fact and also the fact that reforms proposed by the EU can undermine economic power of Ukrainian oligarchs, it can be foreseen that commitments of Ukraine will be implemented selectively.

(4) The Russian authorities will attempt to delay closer integration of Ukraine

into the EU and will be prepared to spend substantial resources to achieve this

goal.

The theoretical basis of this thesis consist of the concepts defining EU policy towards its

neighbouring countries namely the concept of EU external governance is used. To define

the trends in Ukraine's institutional development the concept of captured state is used.

The Methods of research are the document tracing and the interviews.

3

The Literature: The primary sources consist of bilateral agreements between Ukraine and

the EU, joint reports of the parties, and official statements of EU and Ukrainian officials.

An important group of primary sources consists of interviews with the EU officials,

experts on international trade and lobbyists conducted for the purposes of this thesis.

The secondary sources consist of theoretical works of EU and Ukrainian scholars, media

articles on EU-Ukraine trade negotiations, Ukrainian politics and Ukraine-Russia relations,

and policy papers.

The Structure: The thesis focuses on EU-Ukraine trade relations over time. These relations

developed gradually as Ukraine was establishing its system of governance after the

country gained the independence. Therefore, the thesis traces principal developments in

Ukraine's institutions, presents an overview of EU policy towards its eastern neighbours

and examines the latest developments in DCFTA negotiations (up to April 2011).

The Results of the Research: Despite their prospective benefits, reforms in Ukraine can be

delayed due to the lack of financial resources and attempts by Russian authorities to

prevent the development of cooperation between Ukraine and the EU. In order not to lose

the reform momentum, which Ukraine can gain by signing the DCFTA with the EU,

financial resources conducive to the purposes of reform have to be found.

Key words: Ukraine, Free Trade Agreement, External Governance, Russia

4

INDEX

INTRODUCTION 4

CHAPTER I:External governance to substitute pre-accession policies: trade and

development in Eastern Europe 7

CHAPTER II: Genesis of the Captured State 17

CHAPTER III: WTO and institutional preparations for Ukraine 28

CHAPTER IV: Case study: Reform of the technical regulation system and the

system of safety control in Ukraine 35

CHAPTER V: DCFTA negotiations 41

CHAPTER VI: Russian Response 49

CONCLUSIONS 56

BIBLIOGRAPHY 58

ANNEX 1 UKRAINE'S RANKING IN DOING BUSINESS 2011 66

ANNEX 2 UKRAINE'S TRADE WITH MAIN PARTNERS (2009) 67

ANNEX 3 UKRAINE'S GLOBAL COMPETITIVENESS RANK 2010-2011 67

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Introduction: Trade negotiations between Ukraine and EU are about reforms

Ukraine is an open market economy centrally located in

Europe, and it is quite integrated. The European Union is

its model and institutional standard, and even if Ukraine

has so far imitated the European Union relatively slowly it

endeavors to do so. After 2000, it gained better market

access to the European single market, which is now its

largest export market. Ukraine's proximity to the European

Union is no guarantee of convergence, but its politicians

would have to make many mistakes to fail to achieve

European convergence.1

Trade negotiations with the EU for Ukraine is about development prospects. As

negotiation agenda includes [legal] approximation issues, Ukraine may use EU model to

improve its system of economic governance and thus improve the business climate. As the

European Commissioner for Trade, Karl d e Gucht, phrased it: “The most innovative

characteristic of this particular future trade agreement is the approximation with trade-

relevant EU rules and regulations. This is unique and unprecedented ... [T]rade

negotiations must go hand in hand with Ukraine's internal reforms in order to improve

overall business governance. We want to see a modern, transparent and predictable

environment for consumers, investors and businessmen on both sides”.2

At present, Ukraine's international position as a place for doing business is extremely low.

In the World Bank’s Doing Business 2010-2011 ranking, Ukraine's rank is placed 89 out

of 139 countries.

1 Anders

Åslund, How Ukraine Became a Market Economy and Democracy, Pterson Institute for International

Economics, 2009, p.260

2 Karel D

e Gucht, European Commissioner for Trade, A trade deal for growth, Speech in Diplomatic Academy,

Kyiv, 28 October 2010, Avaliable at

http://trade.ec.europa.eu/doclib/docs/2010/october/tradoc_146837.pdf (consulted on December 17 2010.

http://trade.ec.europa.eu/doclib/docs/2010/october/tradoc_146837.pdf

6

Scholars specially underline the fact that Ukrainian position in “Doing Business” ranking

is much lower than positions of Ukraine in human development and income rankings

which proves significant under-performance. The most attractive features of Ukraine as a

business spot so far is the population of estimated 45 millions and a skilled labour force.

According to the World Bank’s publications, the business environment in Ukraine is

distorted by complicated and contradictory laws, inefficient state bureaucracy and the

weakness of the judicial system in the country. This poor state of business in Ukraine is

caused by inefficient and often corrupted state institutions.

In the World Economic Forum’s Global Competitiveness Index for 2009–10, Ukraine is

placed 82nd among the 133 countries that were ranked. This was mainly caused by the law

ranking of Ukraine's institutions. Ukraine is ranked 127 of 139 in terms of irregular

payments and bribes, 134 of judicial independence, 127 in “favoritism in decisions of

government officials ”, 125 in “burden of government regulation ”, 138 in “efficiency of

legal framework in challenging regulations”.3

Experts claim that Ukraine has to regard these ranking reports as “to-do lists”4 which

Ukraine will receive in the trade negotiations with the EU. Adopting and implementing a

significant proportion of the EU acquis communautaire is expected to simplify the

regulatory framework in Ukraine and therefore improve the country's business

environment.

While, as scholars state, “in the early 1990s, institutional reforms were a by-product of

other high priority policies on macroeconomic stabilization, trade liberalization and

enterprise restructuring”,5 now they seem to be on agenda themselves. The principal policy

agents seem to have accepted the idea that institutional reforms can improve the economic

situation in Ukraine and consequently the position of their business.

Among all other policies, the trade related ones will have the biggest impact on Ukraine's

development due to Ukraine's dependency on external trade. According to the State

3 The Global Competitiveness Report 2010-2011, Centre for Global Competitiveness and

Performance , 2010, p.335

4 Anders Aslund, Oleksandr Paskhaver (editors), Міжнародна комісія незалежних експертів.

Пропозиції для України: 2010 – час для реформ, Kyiv, 2010

5 Inna Melnykovska, Rainer Schweickert Who you gonna call? – Oligarchic Clans as a Bottom-up

Force of Neighborhood Europeanization in Ukraine/Arbeitspapier Des Osteuropa-Institut der Freien

Universität 67/2008 Berlin, 2008, p.13

7

Statistics Committee of Ukraine data, in 2010 overall external trade amount of Ukraine

was about $112 billion and Ukrainian GDP approximately $136 billion78

. [This way

correct?]

The aim of this thesis thus is to present an overview of the current negotiations on Deep

and Comprehensive Free Trade Agreement between Ukraine and EU and outline possible

obstacles for the implementation of DCFTA arrangements.

The principal part of this thesis will be presented in six chapters. In the first chapter I

[Consistently avoid ‘I’ and ‘we’ __ particularly ‘we’ because the declaration was that the

author wrote the thesis by herself, independently, not together with anyone else] will

present the theoretical concepts which define EU policies towards Ukraine. The second

chapter will present an overview of the Ukrainian system of governance and theoretical

concepts which define its present state and possible future development. In the third

chapter, an overview of Ukraine's WTO accession will be presented. This chapter will be

followed by a case study, presenting the course of implementation of some of Ukraine's

commitments to the WTO namely the reform of technical regulation system. The fifth and

the six chapters will present the latest DCFTA negotiations between Ukraine and EU and

the Russia’s reaction.

7 http://ukrstat.gov.ua/,(consulted 5 May 2001).

8 http://bank.gov.ua/kurs/engl/last_kurs1.htm (consulted 5 May 2011

http://ukrstat.gov.ua/

http://bank.gov.ua/kurs/engl/last_kurs1.htm

8

CHAPTER I: External governance to substitute pre-accession policies: trade and

development in Eastern Europe

Among the Eastern Partnership countries Ukraine is a pioneer as the country was the first

to start the negotiations on Association Agreement and the DCFTA. The experience,

which the EU received in the negotiations with Ukraine, is now being used in AA

negotiations with other Eastern Partnership participants.9

EU policies towards Ukraine are conceptualized via the “external governance” approach. I

[Consistently avoid ‘I’ and ‘we’] use the definition of term governance used by Sandra

Lavenex and Mark Schimmelfeling - an “institutionalized forms of co-ordinated action

that aim at the production of collectively binding agreements”10

.

External governance is claimed to be an instrument of a “structural foreign policy”. And

“in contrast to conventional foreign policy, the goal of “structural foreign policy” is to

create a favorable or stable external environment by socializing third countries to one's

way of doing things. ... The EU, in other words, shapes its immediate external environment

in its own image.11

”

The need for external government was created by the combination of different factors. EU

accession policies towards the Central European countries proved to be successful. “The

prospect of EU membership, and the need to meet the political and economic Copenhagen

criteria and the demands of the ‘acquis’ combine[d --- ?] to make a powerful driver of

political and economic reform”.12

The “big enlargement” moved EU borders east but

9 Štefan

Füle , European Commissioner for Enlargement and Neighbourhood Policy , question-answer session at

the opening ceremony of the 61st academic year of the College of Europe (Natolin Campus), Warsaw, 6

December 2010

10 Sandra

Lavenex, Frank Schimmelfennig ,EU rules beyond EU borders : theorizing external governance in

European politics /EU External Governance:Projecting EU Rules beyond Membership, Sandra Lavenex,

Frank Schimmelfennig (editors), London, Ney York 2010, Avaliable at

http://www.informaworld.com/smpp/title~content=g913925143~db=all (consulted on 12 April 2011).

11 Tom Cai

ser, The European Neighborhood Policy: Assessing the EU's Policy Towards the Region/The Foreign

Policy of the European Union : Assessing Europe's Role in the World edited by Federiga Bindi, Brookings

Institution Press, Washington, D.C., 2010 p. 102

12 Willem

H. Buiter, Challenges for Europe, Remarks made at the launch of the volume Challenges for Europe

edited by Hugh Stephenson on Monday 6th December 2004 at the LSE.

http://www.nber.org/~wbuiter/10.pdf Consulted on 22 April 2011). p.3-4

http://www.informaworld.com/smpp/title~content=g913925143~db=all

http://www.nber.org/~wbuiter/10.pdf

9

because of it the EU is not ready to offer a membership perspective to its new Eastern

neighbors and had to find a substitute to it as an incentive to transformation as “for

countries that fall outside the dotted lines that Brussels has drawn on the European map

that powerful external driver of economic and political reform does not exist”13

.

Although the EU will not be offering membership perspective to its eastern neighbors,

intensity of interdependence links requires action. “Whereas the relevance of enlargement

may be decreasing, this does not necessarily hold true for the depth of interdependence and

the intensity of EU relations with its neighborhood”14

.

The need for new policies is also proved by the failure of previous EU policies towards

Eastern Europe. Constant claims of the EU officials dealing with Ukraine is its

unwillingness to fulfil all the obligations. The same was experienced by the EU when

dealing with the other participants of the ENP and particularly Eastern Partnership

countries. “The old concepts of cooperation have not generated substantial transformation

effects ... The PCA-approach (i.e. a set of relations which have been based on so called

Partnership an Cooperation Agreements) has neither produced additional dynamics for

reforms nor solved any of the “frozen conflicts in the region”.15

Approximation of Ukrainian legislation to the EU is among the main priorities and

determinant features of the PCA regime. Article 51 contains a list of areas which are to be

included in the approximation process. As formulated, the article provides for a voluntary

endeavour on the part of Ukraine to make its legislation compatible with the EU

The PCA between Ukraine and the EU was signed in June 1994 and entered into force in

March 1998. As scholars claim, so far Ukraine was mostly active in implementing trade

13 Tom Cai



Institution Press, Washington, D.C., 2010 p. 102

14 Sandra





15 Kai Ola

f Lang, European Neighbourhood Policy: where do we stand - where are we heading?/European

Neighbourhood Policy : Challenges for the EU-Policy Towards the New Neighbours edited by Johannes

Varwick, Kai Olaf Lang, Barbara Budrich Publishers, 2007, p.15


10

related arrangements. “Other provisions, for example in the area of labor co-operation,

amount to no more than ‘best endeavor’ clauses and compliance with these depends on the

overall disciplinary framework of the PCA.”16

External governance thus is an another attempt to secure EU transformational influence in

its neighborhood in a situation when the EU leaders feel unable to provide its new

neighbors strong incentives as a membership prospective but taking into account a level of

interdependency with its neighbors are going to continue the attempts to transform them

according to the EU needs and visions.

“What is termed “external governance” in this context is the ability of an actor to influence

the rules that govern social entities beyond its borders. The European version, which is to

say the spread of EU rules, political organization and modes of governance beyond its

territory.17

”

It can be performed using different mechanisms. The EU encourages its partners to join

supranational organizations, which would provide the initial shaping of state institutions

and approximation of the different law systems to EU standards. Promoting WTO

membership which requires of the candidate country careful work on its business related

institution arrangements is a clear example of the policies of this kind. “In the area of

trade, EU external governance has been growing and effective in transferring the EU’s

(and WTO) rules.”18

The second stage of EU external governance requires including external governance

subjected countries into networks, which would provide means of policy-making and join

16 Antoane

ta Dimitrova, Rilka Dragneva, Constraining external governance : interdependence with Russia and the

CIS as limits to the EU's rule transfer in the Ukraine/EU External Governance:Projecting EU Rules

beyond Membership, Sandra Lavenex, Frank Schimmelfennig (editors), London, Ney York 2010,

Avaliable at http://www.informaworld.com/smpp/title~content=g913925143~db=all (consulted on 12

April 2011).

17 Stephan

Hofer, Unwelcome Europeans: EU external governance and shallow Europeanisation in

Ukraine/Dynamics and obstacles of European governance / edited by Dirk De Bievre ; with the assistance

of Christopher Reynolds, Edward Elgar Publishing, 2007, p.119

18 Antoane

ta Dimitrova, Rilka Dragneva, Constraining external governance : interdependence with Russia and the

CIS as limits to the EU's rule transfer in the Ukraine/EU External Governance:Projecting EU Rules

beyond Membership, Sandra Lavenex, Frank Schimmelfennig (editors), London, Ney York 2010,

Avaliable at http://www.informaworld.com/smpp/title~content=g913925143~db=all (consulted on 12

April 2011).



11

both EU and non-EU states. As an example of such forms of actions can be named the

Energy Community which is aiming to expand EU energy market mechanisms to non-EU

European countries.

Advanced stages of external governance policies would require market inclusion. “In the

EU, the typical form of institutionalized market governance is the principle of mutual

recognition, at least in its application in the Single Market”19

.

Stephan Hofer argues that there are three modes of “EU external governance and rule

export”: accession process, association process and European Neighborhood Policy20

.

The main concept of the ENP is an offer to the EU neighbors of a tangible benefit in return

of some actions aiming the approximation of internal policies with the ones modeled after

the EU practice. “The basic offer which ENP makes to the EU's neighbors is that in return

for undertaking legal approximation to the regulation of the EU and adopting the EU's

fundamental values, the neighboring states will be given a share in the internal market of

the Union and political dialogue and cooperation will be enhanced.”21

Taking into account negotiations on Association Agreements which the EU has with some

participants of ENP, the later [or: the latter?] can be perceived as a preparatory pre-

association policy, at least for the ENP countries of Eastern Europe and the Caucasus. The

existing AA between the EU and some Mediterranean states are claimed to be the “old

generation agreements” which envisage lesser openness for the partners of EU. “For the

EU side, the AA (association agreement) is considered to be a bilateral development

within the context of the European Neighborhood Policy. It has been emphasized on

numerous occasions that the AA is totally separate from the question of a future Ukrainian

19 Sandra

Lavenex, Frank Schimmelfennig, EU rules beyond EU borders: theorizing external governance in




20 Stepha

n Hofer, Unwelcome Europeans: EU external governance and shallow Europeanisation in

Ukraine/Dynamics and obstacles of European governance / edited by Dirk De Bievre ; with the assistance

of Christopher Reynolds, Edward Elgar Publishing, 2007, p.118

21 Alan Ma

yhew, Ukraine and the European Union : financing accelerating integration = Ukraina a Unia Europejska

: finansowanie przyspieszenia integracji, Warszawa : Urząd Komitetu Integracji Europejskiej, 2008, p.15


12

accession to the EU. For the Ukrainian side however the AA is considered to be an

important part of the road towards full accession to the Union”.22

Association Agreements are regarded by the EU as a legal instrument of its influence on

Ukraine and are expected to provide the instruments for the enforcement of agreements as

well as the transformational incentives of other kinds. Taking into account the

“enforcement” part, some scholars claim that “the new agreement with Ukraine may be

considered by some as the first of this new generation of external treaty”.23

When discussing non legal incentives for transformation, the trade part of the Association

Agreement can be regarded as one of these. As it was already mentioned before, trade

related approximation of law in Ukraine has proven to be the most advanced field of

international action. One can claim that the reason behind this is the vivid interest of

Ukrainian policy agents in external trade. (Conceptual scheme of policy making in

Ukraine and its main actors will be presented in the next chapter).

The general goal behind the DCFTA is to support and develop the changes in Ukrainian

policies triggered by the WTO accession. Ukraine accessed the WTO in 2008 and thus

performed a number of reforms. The subject for most significant changes were import

tariffs and the custom-related procedures. Thus, at present, the aim of a FTA between the

Ukraine and EU is defined as abolishing non-tariff barriers to trade and improving the

Ukrainian business climate in general. “Certainly one of the major positive effects of the

Enhanced Agreement would be to make Ukraine a more attractive destination for foreign

direct investment (FDI) ... the single fact that the EU acquis will create, over time, a

business environment not dissimilar from that in the EU will be an attraction to EU and

other foreign business.”25

Taking into account the importance of external trade to Ukraine, the trade-related chapter

of the AA seems to have attracted the most attention in Ukraine. As official reports state,

this chapter of the AA is the one, which took the most time to negotiate on. It is likely that

DCFTA part of the Association Agreement will be the latest to reach a full agreement on.

22 Ibid.., p

.25

23 Ibid.., p

.30-31

25 Ibid., p

.37

13

But basing on this fact one can claim that trade related commitments of Ukraine can cause

the most visible and profound transformations in the country.

An important aspect of the ENP and respectively all of its instruments is a clear disparity

between the EU and its counterparts. “The ENP is primarily based on bilateral negotiations

providing the EU with plenty of negotiation power over its smaller counterparts. ...

Bilateral negotiations allow shaping country specific policies but forgo the chance of

exploiting the gains of a unified economic region. Thus, the ENP approach differs from the

EU policy in the Balkans which made the unified Balkan market a central point of its

strategy”.26

As “certain types of external governance come close to a hierarchical system and

undermine important sections of third countries’ autonomy over their legislation”27

successful policies of that kind should be able to provide to the EU partners the incentives

strong enough to take the idea of losing of part of the sovereignty without a perspective of

active participation in the EU policy making. Participation in the EU-defined institutional

space exposes its partners to the fact that they will have to follow and adapt to the EU

institutional developments.

“European policy makers could affect aspects of the regulatory systems and institutions of

its partners by “remote control”. Simply through changing laws in Brussels that they (like

countries in the European Economic Area) would be required to adopt. The Commission

could try and promote or disrupt efforts at institutional engineering...The likely economic

pattern would be the locking in of the NIS into roles as low level manufacturing, energy

and primary product suppliers to the European market. Dependency on EU for trade and

investment would mean that (even without intentionality) changes in Europe affect the NIS

governments, businesses and citizens and changes their lives. Likewise the increased size

26 Volkhar

t Vincentz, The European Neighbourhood Policy: an economic perspective/European Neighbourhood Policy :

Challenges for the EU-Policy Towards the New Neighbours edited by Johannes Varwick, Kai Olaf Lang,

Barbara Budrich Publishers, 2007, p.118

27 Sandra






14

of the European economic space would give European standards and regulations even

more weight in terms of global economic regulation”.28

As Sandra Lavenex and Frank Schimmelfennig express it: “EU norms and rules may even

gain prescriptive qualities towards third countries and/or their citizens by default that is,

without purposeful policy transfer on the part of the Union”. In their article they pose the

example of non EU EEA members, which de-facto follow EU defined policies in number

of areas including competition policies, consumer protection, immigration policies etc.

And “unlike enlargement, the ENP does not envision a transition from EU external

governance”.29

“EU rules can produce both negative and positive externalities for external actors who

adopt and comply with EU rules because ignoring or violating them would create

(opportunity) costs”.30 Criticism of the ENP is derived from the simple observation that

for many governments the loss of the sovereignty in case of closer cooperation with the

EU will not be compensated sufficiently.

The problems of financing the reforms need closer attention. When preparing the WTO

accession, Ukraine was mainly dependent on the international grant technical assistance.

EU technical assistance to Ukraine will not be sufficient. For the 2007-2013 budgetary

period, the amount of money allocated for Ukraine is €494 million. Volkhart Vincentz

quotes the chief economist of the EBRD, Willem H. Buiter, who in 2007, called the ENP

policy “shabby and cheap”.31

28 Patrick

Holden, In Search of Structural Power : EU Aid Policy as a Global Political Instrument, Ashgate, 2009,

p.93

29 Tom Cai



Institution Press, Washington, D.C., 2010

30 Sandra


European politics /U External Governance:Projecting EU Rules beyond Membership, Sandra Lavenex,



31 Volkhar





15

Trade related reforms are going to be very costly for Ukraine in many ways – as an object

of financing and as the cause of financial losses. “EU regulations on labor and social

standards ...might also contradict the development strategy in these poor, often

agriculturally dominated societies”, and adjustment of policies will inevitably cause

disruptions and loses in current business models in Ukraine.32

As for direct financial losses, they will be caused by abolishing non-tariff barriers and

improving the access of foreign competitors to local market. At the same time benefits of

Ukrainian companies at EU markets will be delayed in time. “The freedoms of the internal

market will be granted in small pieces on a case by case basis”.33

Furthermore, the grant mechanism of financing does not seem to be very efficient. “Grant

finance has the advantage of not imposing an interest charge on the budget but it has the

disadvantage of generally being badly managed by both the donor and recipient”.34

Taking into account the current financial situation of Ukraine as one of the biggest IMF

assistance recipients, it is clear that Ukraine is not in the position to find a substantial loan

capital, and “without adequate finance the implementation of a new agreement may well

take longer and be less satisfactory than either side would like”.35

The scholars tend to recognize the fact that, despite EU intentions, ENP countries will

have their own list of priorities of reformatory actions. “We can thus hypothesize that the

mode of external governance will follow the mode of third-country domestic governance.

... First, EU rules are more likely to be selected, adopted and applied if they resonate well

with domestic rules, traditions, and practices”.36

Alan Mayhew poses the question whether the EU “can rely on Ukraine to implement the

term which are agreed in the AA. The EU has become extremely prudent since the

32 Ibid., p

.122

33 Ibid., p

.121

34 Alan Ma



35 Ibid.., p .40

36 Sandra

Lavenex, Frank Schimmelfennig, EU rules beyond EU borders : theorizing external governance in

European politics /U External Governance:Projecting EU Rules beyond Membership, Sandra Lavenex,




16

negotiations on accession with Bulgaria and Romania. Which are both criticized to be

failing in the concrete implementation of the accession treaty”.37

It is also highly predictable that the holders of principal economic powers in Ukraine

would prefer government to perform only those parts of the arrangements which would

directly benefit their businesses and respective industries. This point requires additional

comments.

Ukrainian scholars consider the possibility of strong economic interests within Ukraine to

boost institutional building process. “ [The] EU could, by providing economic incentives

rather than the membership incentive, exploit the strong business interests of the oligarchic

clans in the EU markets and EU investment to motivate them to jointly drive institutional

convergence from the bottom-up”.38 But there are also reasons to believe that oligarch

business clearly have their preferences and will opt for the selective implementation of

bilateral EU-Ukraine arrangements.

As Julia Langbein states, “selective harmonization rather than full adoption of the acquis

could also offer those Ukrainian businesses that are closely linked to domestic politics

opportunities for ‘cherry-picking,’ that is, electing to converge regulations only in those

areas of the acquis that serve their private business interests.”39Taking into account

limited resources at disposition of the government in Ukraine, this might be done at cost of

the industries or businesses which can not use their government connections. In this case

there is a risk of even bigger concentration of economic powers in Ukraine and lesser

chances for the development of a balanced economy.

EU practitioners confirm the existence of concerns of this kind. As Director General DG

Environment and ex Deputy Director General DG Trade Karl Falkenberg explains, in

negotiations with Ukraine (and respectively with the other Eastern Partnership

37 Alan Ma



38 Inna Me

lnykovska, Rainer Schweickert Who you gonna call? – Oligarchic Clans as a Bottom-up Force of

Neighborhood Europeanization in Ukraine/ARBEITSPAPIERE DES Osteuropa-Institut der Freien

Universität 67/2008 Berlin, 2008, p.5.

39 Julia L

angbein, The EU-Ukraine FTA: Plus or minus?

http://www.icps.com.ua/files/articles/54/76/EF_November_2009_ENG.pdf (consulted Consulted on

April 25 2011

http://www.icps.com.ua/files/articles/54/76/EF_November_2009_ENG.pdf

17

participants) the EU was using among other its experience of development and trade

cooperation with the ACP countries.40

Taking into account previous experience of Ukraine's international commitments’

implementation, it is clear that the Ukrainian government will be implementing the even

provisions of AA agreement selectively. This might be justified by the lack of funds or

lack of experience or inefficient foreign advice.

The stage of implementation can face the problems also due to poor institutional capacities

of EU partnering countries. “The ministerial level has always been a more difficult

problem in Ukraine with very few senior ministers understanding the significance of

European integration or of the details involved in negotiations with the European

Union”.41 In addition “the reform may also incur cost for the ruling domestic elite.

Reforms might threaten their prospects of power and/or their personal careers”.42

Moreover, scholars also admit that EU partners can also question EU commitments. The

disputes between the EU and Turkey over the implementation of Association Agreement

between these two parties prove that EU policies can change as well. “As a third country

one may never be certain about the long-term security of agreements...a binding

Association Agreement, just like the rules of the WTO, will provide a reference point for

governments to refuse pressure from sectors which are against the internationalization and

modernization of the economy”.43

Willem H. Buiter, a critic of current EU approach towards Ukraine, insists that unless

Ukraine gets a substantial incentive EU goals will not be achievable. His ideas on

substantial incentives for countries like Ukraine include: Unrestricted market access for all

40 Intervi

ew with Mr Karl Falkenberg, Director General of DG Environment (till January 2009 – Deputy Director

General of DG Trade), College of Europe (Natolin Campus), Warsaw, 27 April 2011

41 Alan Ma



42 Volkhar




43 Alan Ma


: finansowanie przyspieszenia integracji, Warszawa : Urząd Komitetu Integracji Europejskiej, 2008, p.28-29

18

sectors, including agriculture and ‘sensitive sectors’ like textiles, footwear, steel,

shipbuilding, light engineering etc; a generous policy of (multiple) entry visas and work

permits to compensate for the loss of employment opportunities in the enlarged EU as a

result of the imposition of the ‘Schengen curtain’, generous financial support for capacity

building in the legal, regulatory and general administrative fields44.

These proposals seem to be designed to satisfy different parts of Ukrainian society and to

be acceptable to policy makers and policy agents. They envisage financial benefits for

industries, tools to cope with social problems for government and possibilities for the

citizens. Important notice to be made is that these ideas were not only supported by the EU

policy makers, they were pronounced in 2007 that is to say before the financial crisis in the

EU came into its active phase. In present situation thus they are not likely to be used.

Taking into account all the problems, it is necessary to examine the interests and possible

expectations of the principal policy agents in Ukraine. These are, according to the claims

of many scholars, Ukrainian oligarchs, who managed to convert their economic power into

political one. Thus the next chapter will present the concept of a “captured state” and its

implications in Ukraine.

44 Willem H. Buiter, Challenges for Europe, Remarks made at the launch of the volume Challenges

for Europe edited by Hugh Stephenson on Monday 6th December 2004 at the LSE.

http://www.nber.org/~wbuiter/10.pdf Consulted on 22 April 2011)., p.5


19

CHAPTER II: Genesis of the Captured State

As long as it concerns the possible success of the EU policy towards Ukraine, it is needed

to analyze possible readiness of the country to perform the reforms which EU seems to

expect of its neighbors. As it was shown in the introduction, Ukraine is in great need of

reforms, which will improve its economy situation through improvement of a business

climate. As Julia Langbein puts it: “Institutional change comes about when actors realize

that current institutional arrangements do not accommodate their interests any longer”45

.

But the studies of Ukrainian transformation since 1991 showed that Ukrainian elites

resisted significant changes. All important economic reforms were performed as a

response to the major crisis as were considered inevitable to preserve the power of elites

and economic performance of the core Ukrainian industries, as will be shown in the

present chapter.46

Therefore in this chapter I am going to present the principal actors who can be the agents

of reforms in Ukraine and answer the question as to whether their aspirations correspond

with the EU proposals and whether Ukrainian principal actors have come to the stage, as

Mancur Olson puts it, where they realize that if they wanted to reap “gains from trade,

then, there has to be a legal system and political order that enforces contracts, protects

property rights, carries out mortgage agreements, provides for limited liability corporations

and facilitates a lasting and widely used capital market that makes the investments and

loans more liquid than they would otherwise be.47

”.

45 Julia L

angbein, The Transnationalization of Change in Economic Institutions : The Case of Industrial Standards

Regulations in Ukraine/ László Bruszt, Ronald Holzhackern (editors), The Transnationalization of

Economies, States, and Civil Societies: New Challenges for Governance in Europe, New York 2009, p.

111

46 See: Ol

e Nørgaard, Economic institutions and democratic reform : a comparative analysis of post-communist

countries, Cheltenham, 2000; Anders Åslund and Georges de Ménil (editors) Economic reform in

Ukraine: the unfinished agenda, New York, 2000; Anders Åslund, How Capitalism Was Built: The

Transformation of Central and Eastern Europe, Russia, and Central Asia,Cambridge, 2007; Anders

Åslund, How Ukraine Became a Market Economy and Democracy, Washington, 2009; Scott Gehlbach,

Representation through Taxation : Revenue, Politics, and Development in Postcommunist States, New

York, 2008

47 Mancur

Olson, Power and prosperity: outgrowing communist and capitalist dictatorships, New York 2000, p. 185

20

The term “captured state” often is used to describe actual system of governance in

Ukraine48

. In situation of a captured state a small group of individuals shapes the state

politics to pursue the economic interests due to its close ties with the top governmental

officials and lack of mechanisms of public control.

Oligarchy is another term to define Ukrainian political system. “The oligarchic clans are a

special hybrid of the political and business elite, which is a major actor in both Ukraine’s

politics and its economy. They are not groups of relatives or systems of kinship, as are the

classic European and Asian clans, but rather business entities”.49

In his book “How Ukraine Became a Democracy and A market economy,” Anders Aslund

refers to the definition of Daron Acemoglu - oligarchy as a country where concentration of

economic power leads directly to the concentration of political power. “In oligarchy, only

existing entrepreneurs ... participate in the political process, and policies are determined by

majoritarian voting among this set of agents. The nature of the oligarchic equilibrium is

simplified by the fact that the only heterogeneity within the elite is between high-

productivity and low-productivity agents. This implies that majoritarian voting will lead to

the policies most preferred by whichever group is in the majority within the elite. ”50

Combining the two proposed terms, one could say that, when talking about Ukraine it is

usually stated that the state in Ukraine is captured by the economic interests. [good!] Paul

d'Anieri raises concerns about whether it is state which is captured by the economic power

in Ukraine or the economic power which is captured by state. But he clearly states that

they seem to be one, adding a comment that “It is easier for the state to capture economic

48 See Cla

udia Šabić, Kerstin Zimmer, Ukraine: the Genesis of a Captured State/ Melanie Tatur (editor) The

Making of Regions in Post-Socialist Europe – the Impact of Culture, Economic Structure and Institutions

Volume II; 2004; Taras Kuzio, Robert S. Kravchuk, and Paul D'Anieri, State and institution building in

Ukraine, New York, 1999; Oleh Havrylyshyn, Divergent paths in post-communist transformation:

capitalism for all or capitalism for the few?, Basingstoke/New York 2006; Anders Åslund, How Ukraine

Became a Market Economy and Democracy, Washington, 2009;

49 Inna Me



Universität 67/2008 Berlin, 2008, p.9.

50 Daron Acemoglu, The Form of Property Rights: Oligarchic vs Democratic Societies, Working

Paper 10037 National Bureau of Economic Research, http://www.nber.org/papers/w10037 Consulted on

March 10, 2011, p.21

http://www.nber.org/papers/w10037

21

assets or to disposess its enemies of them than it is for wealthy individuals or groups to

penetrate the state”51

.

When studying the political paces of Ukrainian businessmen who decided to join politics

and business one can find the examples which can prove the statement of Paul d'Anieri.

Bohdan Hubsky – Ukrainian businessmen and now an MP who was first elected as a

member of the Parliament in 1998 represents the modes of business-state relations in

Ukraine. Being a co-owner and member of the board of few companies and a member of

the United social-democrtaic party of Ukraine (СДПУ). His partners in those businesses

was, among others, Viktor Medvedchuk. Mr. Medvedchuk who has now resigned from

politics in Ukraine, previously held the post of the vice-speaker of the Parliament and the

Head of the Administration of the President of Ukraine. If Viktor Medvedchuk being the

Head of the presidential administration in Ukraine during the presidential campaign 2004

had to leave the active politics shortly after the orange revolution, his colleague and (ex?)

business-partner being just a member of the pro-presidential majority in the Parliament in

2004, decided to continue as a MP. Shortly after the Orange Revolution, Bohdan Hubsky

quit a parliamentary faction “For the United Ukraine” and joined the faction of the Bloc of

Yulia Tymoshenko (БЮТ). Bohdan Hybsky remained the member of the faction in the

Parliament till 2010 when Viktor Yanukovych won the presidential elections in Ukraine.

Shortly after elections he left the БЮТ and at present he is not a member of any factions in

the Parliament, but he votes quite often together with the parliamentary group faction of

the presidential Party of Regions.52

Politics is the main official activity of Bohdan Hubsky, but he is constantly reported to be

one of the richest people in Ukraine and his wife an “official” business woman – an owner

of a fitness club53

and president of the Ukrainian business womens’ club, Modus

Vivendi.54

51 Paul D'

Anieri, Understanding Ukrainian politics: power,politics, and institutional design, New York 2007, p.66

52 Досье:

Богдан Губский, Available at http://file.liga.net/person/132.html (consulted 2 May 2001).; Губський

Богдан Володимирович, Available at http://w1.c1.rada.gov.ua/pls/site/p_deputat?d_id=2220 (consulted

2 May 2001).

53 Досье:

Евгения Губская, Available at http://www.focus.ua/dossier/156615/ (consulted 2 May 2001).

54 Свой ср

http://file.liga.net/person/132.html

http://w1.c1.rada.gov.ua/pls/site/p_deputat?d_id=2220

http://www.focus.ua/dossier/156615/

22

Being a member of the Parliament, Bohdan Hubsky uses his position to promote the

legislation which would strengthen the position of his family business, but he clearly feels

the need for “state protection”.

On the other hand, it is clear that there are business people in Ukraine who define the

politics themselves and do not feel the need for additional “security policy” so far. Dmytro

Firtash, who is an owner of Group DF and a co-owner of the very famous RosUkrEnergo

company,55

is regarded in Ukraine as one of the few people who have succeeded in

capturing parts of the Ukrainian state. Using its position as a monopoly gas supplier to

Ukraine, his company at present is strengthening his business group by acquiring new

companies, mostly in gas dependent industries such as fertilizers' production.56

Taking into account the existence of important nuances in definition of state capturing in

Ukraine, the term seems to be most useful for the purposes of this thesis. And now I

[avoid] will present the main stages of the state capturing in Ukraine after the state had

obtained independence and the main mechanisms of this process.

The economy of favor and business-state equilibrium

Many scholars trace political and economic developments in Ukraine starting from the late

(or even) early 1980s and the state of governance in Ukraine in the last period of its Soviet

history. The 1980s were the period, when informal networks including emerging business

and “nomenklatura” people started to emerge57

.

Extremely inefficient government which characterized the late stages of USSR history

“promoted” appearance of informal networks. Over-centralized system of industry

management and centrally manged distribution network created the situation were it

еди своих, Available at www.modvivendi.kiev.ua/modules/images/1225264645.doc (consulted on 2

May 2001).

55 Досье:

Дмитрий Фирташ, Available at http://file.liga.net/person/22.html (consulted 2 May 2001).

56 Фирташ

купил черкасский "Азот", Available at http://ru.tsn.ua/groshi/firtash-kupil-cherkasskiy-azot.html

(consulted 2 May 2001).

57 See Han

s van Zon The political economy of independent Ukraine, New York 2000; Alena Ledeneva, Blat

lessons: networks, institutions, unwritten rules/The legacy of the Soviet Union, edited by Wendy Slater,

Andrew Wilson, Palgrave Macmillan (UK) 2004

http://www.modvivendi.kiev.ua/modules/images/1225264645.doc


http://ru.tsn.ua/groshi/firtash-kupil-cherkasskiy-azot.html

23

seemed to be impossible to obtain consumer goods or even run the big state controlled

enterprise following the official procedures.

New emerging and enforced indirectly by the state informal networks created the situation

when the mangers of state enterprises started to parasite on the industries and enterprises

they were in charge of. That only enforced the informal networks and deterioration of the

Soviet economy. As Mancur Olson puts it “The stationary bandit (a dictator – K.P.) who

takes everything except the minimum needed to elicit the effort of his captives has an

encompassing interest in the productivity of the society, so he does what is necessary to

make the society productive and better able to meet his needs. By contrast, each of the

conspiring coteries, enterprise lobbies, industry associations, and local societies obtains so

little of the society's output that each of them has only a narrow interest – that is little or no

incentive to maintain the productivity of the society”.58

The old Soviet “nomeklatura” managed to preserve its control over the biggest enterprises

after the Soviet Union collapsed and Ukraine obtained independence. The observation of

Mancur Olson of the early years of post-Soviet reforms explains the success of

nomenklatura by political influence of the red directors. “By the time Soviet Union

collapsed, directors of big enterprises were too influential politically and could not be

controlled by the central government. They also were opponentsof real privatization and

used their political influence to prevent it, unless it was themselves to get the newly

privatized enterprise”.59

This opposition to privatization and attempts to privatize the state enterprises only under

conditions that they would become private property of the “red directors” or the people

related to them caused serious damages to Ukrainian economy. In his research on

development of taxation systems in post-Soviet states, Scott Gehlbach writes that

economic efficiency of ex state enterprises grew only 1% after their privatization.60

58 Mancur

Olson, Power and prosperity : outgrowing communist and capitalist dictatorships, New York, 2000,

p.153

59 Ibid.

60 Scott G

ehlbach, Representation through Taxation : Revenue, Politics, and Development in Postcommunist

States, New York 2008

24

The old elites were both unable and unwilling to perform profound reforms. And even

facing the risk of economic stagnation, political elites in Ukraine proffered to maintain the

system as close to the Soviet as possible.61

In Ukraine and other post-Soviet countries the term “red directors” (красные директора)

is used to define this group. Red directors played an important role in Ukraine through all

the 90-s. The second president of Ukraine, Leonid Kuchma, being one of the red directors

himself was first promoted by this group to the position of the prime-minister and shortly

afterwards became a candidate for the president (and consequently won the elections). In

1994 he ran for president as head of the Ukrainian Union of Manufacturers and

Entrepreneurs.

In addition it has to be said that for a long time Ukrainian red directors used to work in the

system of “revolving doors” - they hold ministerial offices and come back to business and

vice-versa. The president of USPP Anatoliy Kinakh director of one of biggest Ukrainian

shipyards at the end of 1980s, presided USPP in 1990s and happened to be a prime-

minister, and minister of economy is back to business again. American scholar Paul

Kubicek claimed that USPP itself was in the late 1990-s the back bone of Ukrainian

corporatist system of governance.62

Due to this fact, the first serious reform steps were taken in Ukraine only in 1994.

Kuchma's first presidency was a period of first reforms in the country. These included

deregulation of the economy, reducing the VAT and personal income tax rates and the

fight with the inflation. They were attempts to reach macroeconomic stability and were

supported by the elites as they were necessary to conduct foreign trade as foreign trade

was the main source of income63

. But the government, which was performing these

reforms, did them half-way. Apart from steps to reach macroeconomic stability nothing

was done. Economy remained highly regulated. Persons, who could secure an access to

raw materials or other commodities at law price fixed by the state and sell it abroad at a

market price used to be the most profitable activity in the country.

61 Paul Ku

bicek, Unbroken ties : the state, interest associations, and corporatism in post-Soviet Ukraine, 1999

62 Ibid.

63 Anders

Åslund, How Ukraine Became a Market Economy and Democracy, Pterson Institute for International

Economics, 2009

25

That state of partial reforms in Ukraine was also a result of the false assumption of the

institutions and experts who provided the initial technical assistance to Ukrane that pure

technical knowledge or know how will be enough to enable Ukraine's market

development. The importance and possible negative impact of the Soviet legacy in the

modes of state institutions' work was overlooked. As Patrick Holden puts it:“...reformers

(local and international) did not pay enough attention to “institutions” in general and in

particular to the legacies of the Communist system and the role of endogenous power

blocks”.64

Apart from their lack of willingness to perform reforms, ex Soviet civil servants and

political leaders in Ukraine were simply not qualified for the task. Due to this fact and also

due to the lack of effective communication between Ukrainian post-Soviet elite and the

society, reforms also didn't have the support from the public. “Considering the overall high

level of education, the Ukrainian government has few specialists with the knowledge and

expertise necessary for government work in a democratic, open, and transparent society.”65

In situation, when the elites looked incompetent and often unwilling to communicate with

the society, the society was confused and was not able or willing to control the

transformation in the country. After the shot ban Communist party re-emerged in Ukraine

in 1993. After the parliamentary elections of 1994 Communist party faction was the

biggest party faction in the Verkhovna Rada of Ukraine. It had 86 members. Non-Party

parliamentary group was the biggest one – 168 members, but it was the communists, who

shaped the government which then had to perform first ever market reforms in Ukraine

together with the president Leonid Kuchma.

While the communist government was performing the half-hearted reforms and the old

elite of red directors was trying to gain some money on big state enterprises, some

newcomers, who already had or managed to gain contacts with the state officials, went to

the commodity speculations. One of the most profitable commodities in the 1990s was

64 Patrick

Holden, In Search of Structural Power : EU Aid Policy as a Global Political Instrument, Ashgate, 2009,

p.87

65 Vira Na

nivska , What Went Wrong with Foreign Advice in Ukraine? / The World Bank/The William Davidson

Institute Transtition, August 1999 , Available at www.worldbank.org/html/prddr/trans/julaug99/pgs3-

4.htm (consulted on 15 January 2011

http://www.worldbank.org/html/prddr/trans/julaug99/pgs3-4.htm


26

natural gas. It was bought in Russia and other CIS states and afterwards sold abroad at a

price few times higher than at initial purchase point.

In his interview with the French magazine Politique internationale, Dmytro Firtash tries to

create an idyllic picture of that kind of trade. “At the Hotel Rossia (in Moscow – K.P.),

where I always stayed, I met by chance, a senior Turkmen official working at the Ministry

of Trade – an agency responsible for managing both food purchases and the sale of

gas. My partner was responsible for food deliveries in his republic. Meat, wheat,

everything ... However, when the USSR collapsed, the food supplies from other republics

have stopped abruptly. And, similarly, no one would buy Turkmen gas.”66

In addition to the lack of political will to perform institutional and economic reforms,

institutional weakness of Ukrainian governments and state agencies also provided its

negative impact. The business of the 1990s was dependent oh the good relations with the

state authorities. In order to be able to by commodities at law price one had to use personal

contacts in official institutions. This situation enforced corruption and was the first stage of

state capturing in independent Ukraine.

“Not only do personal relationships become “colonized” and used for matters going far

beyond sociability, but formal contacts also tend to become “informalized”, which results

in “privatizing” the state, (as Vladimir Shlapentokh puts it). Thus formal institutions can

also be seen as “colonized” by personal networks and involved with economy of favors”.67

This passage of Alena Ledeneva explains the mechanisms of informal economy in post-

Soviet Russia but it is perfectly applicable to the situation in Ukraine.

And thus we can follow the process of business-state mutual capturing. “Lump-sum

corruption has given way to more sophisticated arrangements by which, in exchange for

“alienating access” to state property, state officials receive “inalienable access” to private

resources commissions. Percentages, securities and shares in business are now common

66 Un mill

iardaire ukrainien sort de l'ombre. Entretien avec Dmytro Firtash, Avaliable at

http://www.politiqueinternationale.com/revue/article.php?id_revue=130&id=994&content=synopsis&sea

rch=firtash&page=1&resultPerpage=10&titre=&intexte= (consulted 2 May 2001).

67 Alena L

edeneva, Blat lessons: networks, institutions, unwritten rules/The legacy of the Soviet Union, edited by

Wendy Slater, Andrew Wilson, Palgrave Macmillan (UK) 2004, p.125

http://www.politiqueinternationale.com/revue/article.php?id_revue=130&id=994&content=synopsis&search=firtash&page=1&resultPerpage=10&titre=&intexte


http://www.politiqueinternationale.com/revue/article.php?id_revue=130&id=994&content=synopsis&search=firtash&page=1&resultPerpage=10&titre=∫exte=

27

forms of favor repayment. Thus, parasitism towards the state merges with parasitism on

the private sector”, - Alena Ledeneva continues.68

But global economic developments as well as the developments in CIS states soon

narrowed the chances for Ukrainian rent seekers. Following the financial crisis at the end

of the 1990s, the most important source of economic rents in Ukraine still stemmed from

imports of gas and oil from Russia and other energy-rich CIS countries. However, the

limits of such economic rents became more and more evident.69

Furthermore: “Generally, even before the Orange Revolution, the possibilities for

oligarchic clans to profit from cheap Russian energy imports had almost disappeared. In

addition, the requirements of good corporate governance and transparency became

essential for Ukraine’s oligarchic groups to do business in international markets”.70

And till the moment of the Orange revolution most important positions within Ukrainian

business elites took the new wave oligarchs. Anders Aslund describes them as a people

without close family or friendship relations within the old elite, usually people with good

mathematical skills, who obtained university degrees in best Soviet institutions and often

did a PhD in engineering or other math-related domains.71

In 1990s these people started to

acquire different enterprises in Ukraine becoming through limited privatization full or co-

owners of state enterprises. In situation of institutional underdevelopment and corruption

they tried to secure their business activity by acquiring the business which represented all

the stages of a production chain for certain goods (mostly – metallurgy and chemical

industry – the industries, which constituted up to 50% of Ukrainian export in mid 2000s

and about 35% in 2010)72

.

68 Ibid., p

.131

69 Inna Me



Universität 67/2008 Berlin, 2008, p.14

70 Ibid., p

.15

71 Anders

Åslund, How Capitalism Was Built : The Transformation of Central and Eastern Europe, Russia, and

Central Asia,Cambridge : Cambridge University Press, 2007

72 Товарна

структура зовнішньої торгівлі за 2010 рік, Available at http://ukrstat.gov.ua/ (consulted 2 May 2001).


28

This new economic power started to manifest itself in the politics. It is said that about 300

of 450 members of the Ukrainian Parliament elected in 2002 were millionaires. A

significant part of these people were “new-wave” oligarchs.

Anders Aslund states, reforms performed in Ukraine in 2000 were a response to their

needs and requests.73

Ukrainian oligarchs started to seek for the capitals on the foreign

markets and were looking for schemes to justify their assets. The person to manage the

reforms was Viktor Yushchenko who was appointed a prime-minister in late 1999.

His reforms dealt with few important problems. The government of Viktor Yushchenko

defeated barter which allowed to combat tax evasion. His government also started a big

privatization and also contributed to deregulation of small business in Ukraine. Another

big achievement was an agreement with the IMF on restructuring Ukrainian debt.

The reforms of 2000 pursued economic growth in Ukraine. For the first time after

independence, Ukraine was not in the recession in 2000. That year annual growth of the

GDP was only 5,9%, while in 1999 Ukrainian economy shrank by 0,2% (in 1998 it shrank

by 1,9%). Ukrainian GDP in 2000 was only 43,2% of 1990, but since than Ukraine have

been enjoying a significant GDP growth right till the year 2009, when economy shrank by

14,8% due to the global economic crisis aggravated by domestic inefficiency.74

Although reforms of 2000 contributed to the development of Ukrainian institutions, they

were not really profound. Profound reforms would have ruined the dominance of the

oligarchs in the economy and thus they could not be performed as the oligarchs would not

allow this. Moreover, Viktor Yushchenko's stay in office was short – from 22 December

1999 till 26 May 2001. His “departure” was organized by the oligarchs in the Parliament

led by Viktor Medvedchuk a well connected businessman who was at the moment a vice-

speaker of the Parliament and later on became a Head of the Administration of the

President.

The economic growth which was endeavored by the reforms of the year 2000, enforced the

power of oligarchs as they made their assets more valuable and profitable. And they made

“new-wave” oligarchs the main economic and supposingly political power in the country.

73 Anders

Åslund, How Ukraine Became a Market Economy and Democracy,Washington, 2009

74 Валовий

Внутрішній продукт (1990-2009рр.), Available at ukrstat.gov.ua (consulted 2 May 2001).

29

“The Orange Revolution coincided with the change in the Ukrainian oligarchs from

‘roving’ to ‘stationary’ bandits ... they became increasingly interested in formal and

reliable institutions through which they can protect their wealth and become eligible for

the capitalization of their assets on international markets”.75

There are still enterprises in

Ukraine which are controlled by the red directors. Among them for example is Ukrainian

producer of aircraft engines – Motor Sich. But it can be clearly said that the oligarchs have

the control over Ukrainian economy now.

One can expect thus that noticeable economic developments in Ukraine created a demand

for the formal institutions, because “in situation where many regulations regarding the

behavior of firms are still absent, and a lot of existing rules are contradictory, bureaucrats

are the ones who really decide'.76

As it was shown in this chapter, economic interests of the persons, who managed to

capture the state in Ukraine can be the incentives for the institution development in the

country as it has happened before. The very same economic interests gradually opened

Ukraine economically and forced the government to start adjustments of domestic system

of economic governance.

Due to the economic interests of oligarchs, Ukraine managed to enter WTO in 2008. Al

tough at the last stages the negotiation process was highly influenced by political situation

in Ukraine and not all Ukrainian business interest were protected by the Ukrainian WTO

package, Ukrainian parliament supported Ukraine's accession to the WTO with 411 votes

out of 450 – an extremely rare level of support.77

Ukrainian oligarchs being members of

75 Julia L



Economies, States, and Civil Societies: New Challenges for Governance in Europe, New York 2009, p.

117

76 Volody

myr Sidenko, Oksana Kuziakiv, Ukraine: the Newly Built State and Economic Institutions/Corporate

governance in a changing economic and political environment : trajectories of institutional change, edited

by Michal Federowicz and Ruth Aguilera, New York : Palgrave Macmillan, 2003, p.79

77 Засідан

ня шістнадцятею Сесійний зал Верховної Ради України. 10 квітня 2008 року, 10:00 година.

Available at http://www.rada.gov.ua/zakon/skl6/2session/STENOGR/10040802_16.htm (consulted 2

May 2001).

http://www.rada.gov.ua/zakon/skl6/2session/STENOGR/10040802_16.htm

30

the Parliament, and their colleagues expected better conditions for trade in basic Ukrainian

export products – black metals, fertilizers and agricultural products.

Thus all the economical reforms in Ukraine were performed mostly to insure the work of

some biggest industries, controlled by oligarchs. Economic reforms which did not seem to

be crucial for surviving of that kind of businesses did not took place.

As WTO accession was regarded as an important preparatory step for Ukraine before it

could start FTA negotiations in with the EU and in addition this was a first important

experience of trade negotiations between Ukraine and the EU which was a member of

Ukraine's working party, I will present the overview of these negotiations in the next

chapter. The chapter on WTO will be complemented by a case study of technical

regulation reform in Ukraine. Ukraine committed to this reform in course of its WTO

negotiations but it seems that Ukraine will not be able to perform this task in due time. The

study of technical regulation reform illustrates problems with the mechanisms of decision

implementations in Ukraine and indicates the main points of tension when it comes to the

implementation of international agreements.

31

CHAPTER III: WTO and institutional preparations for Ukraine

The agreement on Ukraine's accession to the WTO became effective on 16 May 2008 after

fifteen years of negotiation and preparation.

Accession to the WTO was a long story. Respective negotiations started in 1994. Being a

relatively big economy, Ukraine had more issues to negotiate than its smaller colleagues

from the CIS like Moldova or Kyrgyzstan. In addition to that, the small number of the

WTO staff and a little experience of Ukrainian negotiators made preparations for very

round of negotiations longer, than they would have been otherwise.

“More than 300 legislative acts, including draft laws, bylaws, resolutions, orders, degrees,

and the methodical recommendations of national authorities in the sphere of economic

policies, agriculture, taxation, customs and import/ export regulations, trade remedies,

standards, certification and technical regulations, SPS measures, governmental

procurement, intellectual property protection, and services were provided to the Working

group by Ukraine. For the period 2005-2007, 49 legislative acts were adopted. 70 acts of

Ukrainian law were considered to be no longer in effect”.78

In addition to these commitments, Ukraine had signed protocols on a market access with

52 WTO members.

As for Ukraine's commitments they were to be performed in to main directions. The

easiest thing to do was a reducing of the impost duties. Most of the import duties were

reduced during 2005-2006. This rapid reduction was a prove of the Ukraine's commitment

to finalize WTO negotiations.

The second group of commitments were in the sphere of institutional reform and market

liberalization. Ukraine fulfilled all the obligations when it came to the market access for

the service's providers. But when it came to the reforms of institutions, Ukraine still had

problems with the implementing this plans. (This issue is to be developed in the case study

on the technical regulation reform in Ukraine).

WTO accession was celebrated in Ukraine as an important step towards the active

participation in international trade itself and in the current talks on the future developments

78 Lilia K

arpinska, The EU's Free Trade Agreements: the case of Ukraine, College of Europe [Natolin Campus],

2009, p.26

32

of the international trade. WTO accession thus was a promise of an important role of

Ukraine as an international actor. As it was stated in Ukraine's accession protocol: “The

representative of Ukraine said that accession to the WTO was an integral part of overall

domestic economic reform and a major component of Ukraine's economic policy.

Implementation of the WTO Agreements would make Ukraine a reliable, predictable

partner for the entire international community.79”

For some of Ukrainian industries (agriculture, metallurgy, fertilizers etc), WTO accession

was a chance to develop their presence at the foreign markets. That fact actually was the

decisive one when it was the time for Ukrainian Parliament – the Verkhovna Rada to ratify

Ukraine's WTO accession package. “Despite the political crises, the “while-and-blue” and

“orange” forces in the parliament passed the laws necessary to complete the negotiations

on WTO accession”80

But from the point of view of the Ukraine-EU relations, WTO membership was a

preparatory step for the start of negotiations on the Deep and Comprehensive Free Trade

Area. The official page of DG Trade dedicated to the bilateral relations with Ukraine now

clearly states that “The EU has always believed that WTO membership can play a key role

in supporting Ukraine's economic reform, especially in the context of a transition

economy. In joining the WTO, Ukraine benefits from secure access to the markets of all

WTO members and commits to providing the kind of stable trade and investment

environment that will attract further trade and investment” and than further under the title

“From WTO to new FTA” - “In March 2007 the EU and Ukraine launched bilateral

negotiations of a new Association Agreement that will replace the present Partnership and

Cooperation Agreement that dates from 1998”.81

79 Report

of the Working Party on the Accession of Ukraine to the World Trade Organization,

WT/ACC/UKR/152, 25 January 2008,

http://docsonline.wto.org/imrd/gen_searchResult.asp?RN=0&searchtype=browse&q1=%28+%40meta%

5FSymbol+WT%FCACC%FCUKR%FC%2A%29+&language=1 Consulted on 23 April 2011).

80 Inna Me


Neighborhood Europeanization in Ukraine/Arbeitspapiere des Osteuropa-Institut der Freien Universität

67/2008 Berlin, 2008, p.11

81 Ukraine

, http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/ukraine/ (consulted on on

April 26 2011

http://docsonline.wto.org/imrd/gen_searchResult.asp?RN=0&searchtype=browse&q1=(+@meta_Symbol+WT%FCACC%FCUKR%FC*)+&language=1


http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/ukraine/

33

EU used WTO law as a reference point in its trade agreements with Ukraine far ahead of

Ukraine's WTO membership. In the trade chapter of the Partnership and Cooperation

Agreement between Ukraine and the EU (1998) parties agreed to refer to GATT norms in

regulating bilateral trade. The preamble of the document states that it was signed

“Considering the commitment of the Parties to liberalize trade, based on the principles

contained in the General Agreement on Tariffs and Trade (GATT), as amended by the

Uruguay Round.”82

Moreover, articles 10 and 11 of the PCA state that “The Parties shall accord to one another

most-favoured-nation treatment according to Article I, paragraph 1 of the GATT. ” and

“The rules described in Article V, paragraphs 2, 3, 4 and 5 of the GATT are applicable

between the two Parties. ”83

Therefore WTO law was partly implemented in Ukraine well

before the country entered the WTO.

WTO membership plays an important role as a preparatory step for Ukraine before the

country could start FTA+ negotiations with the EU. WTO commitments of Ukraine

provided that Ukraine would reform its system of and phytosanitary measures, systems of

control of quality and safety, reform its custom procedures, implement the law on

intellectual property rights.

Furthermore accession to the WTO was one of the priorities of the Ukraine's Action Plan,

signed in 2005. The need for the preparatory step existed due to the highly regulated mode

of existence of Ukrainian economy. The state of foreign trade in Ukraine was described in

2008 as follows: “Generally, Ukraine when trying to penetrate foreign markets and to

attract foreign investment faces by far more problems at home than abroad...the general

complexity of regulations and their unfair enforcement, including a multitude o f pre-

customs permits, registrations, licenses, technical regulations, and, related to this,

corruption, delays, and high compliance costs, the slow and costly process of VAT

reimbursements to exporters, which continues to receive highly negative grades in

82 Partner

ship and Co-Operation Agreement establishing a partnership between the European Communities and

their Member States, of the one part, and Ukraine, of the other part, Avalibale at http://eur-

lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31998D0149:EN:HTML (consulted on 10

December 2010.

83 Ibid..

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31998D0149:EN:HTML


34

business surveys, and the unpredictability of and corruption in customs”84

. And during

WTO accession negotiations Ukraine took the obligations to improve the state of external

trade by conducting a number of reforms.

Ukraine's WTO commitments are summarized In a report for the DG Trade made by

ECORYS and CASE think tanks85. I will name here some of the most important. In

course of its WTO negotiations Ukraine agreed to lower import duties on more than 2000

goods. (Average import tariff for the agricultural products is now about 10%, non-

agricultural – about 5%).86 Maximum bound rates for most industrial goods were set at a

level of 10% and for most agricultural products at a level of 20%. The exceptions were

sugar with 50% import duty rate and sunflower-seed-oil with 30%.

Ukraine also agreed to drop minimum prices on imports of alcohol, tax equally petroleum

and tobacco products without reference to their origin. It also agreed to liberalize to a large

extent some very sensitive goods – i.e. sugar and beef.

The bad surprise for Ukraine was a need to agree on “gradual reduction of export duties

connected with ferrous and non-ferrous metals”87 (See comments further in this chapter).

The fees for the rail transport which were differentiated for the domestic and foreign

customers were set up equally. (Ukraine's economy is heavily dependent on rail

transportation as main money-bringing industries use it for supply of row materials and for

export of their products. The access to the rail stock and the possibility to transport the

goods is a subject of serious competition in Ukraine88. And this commitment thus was not

supported by many oligarchs).

84 Inna Me


Neighborhood Europeanization in Ukraine/ Arbeitspapiere des Osteuropa-Institut der Freien Universität

67/2008 Berlin, 2008, p.21

85 Global

Analysis Report for the EU-Ukraine TSIA , Ref: TRADE06/D01, Rotterdam, 2007, Avaliable at

trade.ec.europa.eu/doclib/html/135010.htm, p.64

86 Оприлюд

нено секретні умови приєднання України до СОТ, Availabla at

http://www.newsru.ua/finance/06feb2008/vtoo.html (consulted on 1 May 2001).

87 Global

Analysis Report for the EU-Ukraine TSIA , Ref: TRADE06/D01 , Rotterdam, 2007, Avaliable at


88 See Ukr

http://www.newsru.ua/finance/06feb2008/vtoo.html

35

Ukraine also significantly liberalized service supply among others by allowing non-

citizens to perform auditing and attorney services duties. Even capital flows were

liberalized to some extent by allowing establishment of branches of foreign banks and

insurance companies

In addition to this Ukraine committed itself to the technical regulation and market

surveillance reform (see the Case study) and signed an optional TRIPS agreement

committing itself to the intellectual property rights agreement of the WTO members.

Public perception of Ukraine's WTO accession is that WTO costs Ukraine too much and

all the commitments made in course of negotiations are almost an outcome of blackmail.

One can find media titles like: “Ukraine reduced import duties to please WTO”89

, or the

comments like “It is not a question whether Ukraine fulfilled its WTO obligation. We have

to talk about what WTO membership had brought to Ukraine”90

.

This point of view was developed by the media, which reported on WTO negotiations due

to the number of reasons. A lot of business organizations in Ukraine claimedthat WNO

negotiations were conducted without proper consultations with business. In addition to

this, Ukrainian officials, responsible for the negotiations were mostly not accessible for the

media.

Although, according to David Luff - a lawyer and specialist in international trade and the

WTO law, who was a consultant to Ukrainian government during the WTO negotiations

Ukrainian team showed its interest in the WTO. Ukrainian negotiators were learning very

quickly and gained significant experience in course of the negotiations, Ukraine relied

heavily on foreign assistance during the WTO negotiation period.

Due to the lack of experience, human resources and money, during the negotiations on

Ukraine's accession to the WTO, Ukraine had to use foreign technical assistance to large

extent, because Ukraine did not have capacities to perform all the necessary researches, or

aine: Trade and Transit Facilitation Study, Kyiv 2010, Available at

siteresources.worldbank.org/UKRAINEEXTN/.../TTF_April2010.pdf (consulted on on 17 January 2011

89 В угоду

ВТО Украина отменила импортные пошлины на алкогольную продукцию и спирт, Available at

http://fakty.ua/125606-ukraina-otmenila-importnye-poshliny-na-alkogolnuyu-produkciyu-i-spirt

(consulted on 2 May 2001).

90 Год Укр

аины в ВТО: поведение – "неуд", Available at http://news.ligazakon.ua/news/2009/6/15/12930.htm

(consulted April 30 2011


http://news.ligazakon.ua/news/2009/6/15/12930.htm

36

even to work on official documents. All the surveys and prognosis on outcomes of

Ukraine's WTO accession, which were accessible to public were financially supported by

foreign donors or done by the foreign think tanks. Among those donors were World Bank,

UNDP, USAID, state agencies for international development of EU Member States.

Interestingly enough, one of the most famous studies on Ukraine's international trade

prospectives, published by the World Bank was done under the supervision of Valeriy

Piatnytskyi91. Mr Piatnytskyi, who was and still is the principle trade negotiator for

Ukraine had already gained a lot of experience by the year 2005 and clearly opted for trade

openness for Ukraine.

Another reason was that some oligarchs flt that their business would be harmed

significantly due to Ukraine's WTO accession (Ukrainian automobile industry was one of

the first to suffer from the market liberalization after the accession to the WTO. And

automobile industry lobbyists were the ones, who managed to make Ukrainian Parliament

in autumn 2008 to adopt the law, which raised import duties in Ukraine breaching the

WTO accession protocol).

Last but not least: as the accession to the WTO and respectively the last stages of the

negotiations took place at the time when Ukrainian political crisis gained momentum, all

the WTO discussions became the subject of political quarrels in Ukraine not only between

the “orange” and “blue-white” camps, but inside a quarreling orange camp itself.

Everybody was eager to use the WTO prospective membership to take a credit for it.

According to David Luff the EU managed to make Ukraine to give even more than

Ukrainian negotiator were ready to give.

Although EU signed the protocol of understanding with Ukraine in 2003, in November

2007 – only three months before Ukraine's Accession was approved by the working party

(25 January 2008), EU of Ukraine to change its export regime of two kinds of raw

materials – meta scrap and sunflower seeds. Ukraine charged export duties for these goods

which was an instrument of protection for the local industries – metallurgy and oil

extraction respectively. Both of the industries are extremely important for Ukrainian

91 Ukraine

’s Trade Policy. A Strategy for Integration into Global Trade , Washington, 2005

37

economy. In addition, export duties imposed by Ukraine were not in conflict with the

GATT.

“The Commissioner for trade Peter Mandelson used black mailing technique in

negotiations with Ukraine. At one of his meetings with Valeriy Piatnytskyi he was very

rude and stated that he would talk to the president of Ukraine if the Ukrainian team would

not accept the demands of the EU”- says David Luff.92

Ast it was already mentioned, WTO accession was an issue of an enormous political

importance in Ukraine, as it would be the biggest success of the president Viktor

Yushchenko. Current prime minister Yulia Tymoshenko, who was trying to present the

accession as a success of her government was also trying to accelerate the negotiations. In

mid January 2008 it was announced to the mediathat Vice Prime Minister on European and

International Integration Mr Hryhoriy Nemyria reached a consensus on the matter with Mr

Peter Mandelson during their meeting in London.

This consensus was a clear political decision, as Mr Nemyria has background in political

sciences and did not have any experience in trade or economic related negotiations.

Moreover, among the political analysts of the Bloc of Yulia Tymoshenko, Mr Nemyria

was known as a person “responsible for the international PR activities of Ms

Tymoshenko”.93

According to the observations of the Director General DG Environment and ex Deputy

Director General DG Trade Karl Falkenberg, political rather then economical reasoning

was very clear in the actions of Ukrainian leaders at the stage of negotiations closer to

final. Mr. Falkenberg believes that, negotiations with WTO for most of the post-Soviet

countries were the rush away from Russia, and many of them didn't consider the outcomes

of their commitments to the WTO on their economic situation. Some of them should have

considered more gradual change of the economic model.94

92 Intervi

ew with Mr David Luff, Partner of the Law Firm Appelton Luff, adviser to the Ukrainian government

during the negotiations on WTO accession, Warsaw, 16 March 2011

93 Intervi

ew with ex staff political analyst of the Bloc of Yulia Tymoshenko, Kyiv, February 14, 2011

94 Intervi


General of DG Trade), College of Europe (Natolin Campus), Warsaw, 27 April 2011.

38

Too much of political engagement and a lack of an expert knowledge at a political level,

according to Mr. Falkenberg, had a negative impact on Ukraine's negotiations with the

WTO and was a reason why Ukraine's commitments in some areas were bigger then the

country could perform.

“At political level in Ukraine there was no understanding of what the WTO is. In Ukraine

people, who make political decisions often believe that WTO is just another western

political club, and concessions, which Ukraine made in course of the negotiations process,

were not that important. But WTO is extremely legalistic organizations and if Ukraine

does not implement all the agreed measures it will have to be ready to compensate that“.95

Mr. Falkenberg's observation will be supported in the next chapter by the Case study on

the technical regulation reform which was one of Ukraine's greatest WTO commitments.

95 Ibid..

39

CHAPTER IV

Case study: Reform of the technical regulation system and the system of safety

control in Ukraine

According to numerous reports: World Bank Doing Business reports as well as Global

Competitiveness Report and local edition – Ukraine Competitiveness Report and surveys

of the International Finance Corporation, technical regulation is one of the biggest

constraints of business development in Ukraine. It limits and slows down the process of

technical innovations in Ukrainian industry and also constitutes serious non tariff barrier to

external trade. Liberalization of technical regulation was a subject of concern in time of

Ukraine's negotiations on accession to the WTO and they also have been discussed at the

present negotiations on the Deep and Comprehensive free trade area.

In this area Ukraine operates inherited form the USSR GOST system. This system

established detailed technical requirements of products from the Soviet Union. “Using the

GOST system, the Soviet state not only established precise requirements as to the

components, specifications and procedures for the manufacture of products, but also

determined what selection of products would be allowed into production and further sale

through the USSR’s retail trade network...Quality standards meant identical, immutable

products, which automatically guaranteed their safety”96

.

After the collapse of the USSR the system continued to work in Ukraine. Officially the

state agencies in Ukraine perform pre-market control of all domestic and imported goods,

which has to guarantee their safety. In practice this system creates an enormous barriers to

external trade as well as to development of domestic industries, as it takes months to

obtain all the necessary permits for new products.

The reforms of the system were started during the presidency of Leonid Kuchma, but they

were to slow and did not intend to change the system profoundly. Instead deregulating the

system of standards the standards themselves were amended. This reforms thus did not

make Ukrainian system closer to the international (and European standards).

96 Maksym

Boroda et all, Market Surveillance in Ukraine: Reforms on the Way to the Europe an Market,

International Centre for Policy Studies, 2011 Avaliable at

http://www.icps.com.ua/files/articles/64/34/SIDA_2011_ENG%20_final.pdf (consulted on 20 April

2011).

http://www.icps.com.ua/files/articles/64/34/SIDA_2011_ENG%20_final.pdf

40

“The EU system of market surveillance...is directed at protecting the consumer, not at

controlling business and levying fines...Business is responsible for upholding essential

safety requirements and for providing the consumer with full and accurate information

about the characteristics and proper use of products...once a risky or actually hazardous

product is identified at a point of sale, it can be traced across the entire supply chain in the

country and even in the EU, so that restrictions and corrective measures can be applied to

the entire lot in which this product came. This protects the maximum number of

consumers. By contrast, the Ukrainian system dealing with products that are already on the

market, can work only with individual retailers”97

.

Taking this into account it is obvious that harmonization of Ukrainian surveillance system

with the international systems were the subjects of all trade negotiations of Ukraine, in

which the EU was a participant.

Reform of the technical regulation was one of the Ukraine's commitments to the WTO. In

short words reform should decrease the sphere of competence of the national state agency

in technical regulation – The State Committee of Ukraine for technical regulation and

consumer policy (DSSU) – by decreasing the number of products subjected to compulsory

certification and adopting international standards of quality and giving them priority over

the national ones. “All national and regional standards should be voluntary, except those

referred to in technical regulations intended to protect national security interests, prevent

deceptive practices, protect the life and health of people, animals or plants, as well as to

protect the environment”.98

Ukraine's WTO accession package set up two dates to mark two stages of the reform. By

30 December 2001 Ukraine have amend its technical regulation legal basis implementing

all the relevant international standards in the national law. By 31 January 2012 Ukraine

has to reduce the list of products which will remain to be the subjects to mandatory

certification and notify the WTO about respective changes.99

97 Ibid.

98 Ukraine

and the WTO /The Business & Law Readers Digest , Volkov, Koziakov and Partners Law firm,

Avaliable at http://www.vk-partners.com/site/pdf/Ukraine%20and%20the%20WTO.pdf (consulted on 27

April 2011).

99 Ibid.

http://www.vk-partners.com/site/pdf/Ukraine%20and%20the%20WTO.pdf

41

Despite the fact of declarations of strong European commitments of the president Viktor

Yushchenko and prime-minister Yulia Tymoshenko, first significant development in this

domain happened in the end of 2010. In December 2010 Ukrainian parliament adopted two

key legislations: the Law of Ukraine “On state market surveillance over non-food

products” and the Law of Ukraine “On the general safety for non-food products.” They

both come into force in July 2011. “Together, these laws provide for the institution of

European principles of market surveillance and the basic mechanisms and procedures that

are in line with EU practice”.100

Ministry of Economy of Ukraine in its report on implementation of WTO commitments of

Ukraine notices that these law were adopted as a part of technical regulation reform agreed

with the WTO. And, according to the Ministry, Ukrainian legislation in this sphere still

requires amendments, and the Kabinet of ministers of Ukraine is preparing to submit to the

Parliament three new legislation drafts.101

ICPS report statesthat this development was a result of the negotiations on the DCFTA

between the EU and Ukraine. Study of the technical regulation reform conducted by Julia

Langbein in 2007-2008 proves that without incentives from the EU implementations of

WTO commitments might have been slower.

According to this study, the biggest part of technical regulation subjected Ukrainian export

goes to Russia and CIS countries, whose technical regulation systems are close to

Ukrainian due to common Soviet legacy. This creates weak incentives for Ukrainian

oligarchs to push technical regulation reforms. In addition to this “At this stage, changes in

Ukraine's industrial standards regulations (or technical regulations in general) as a means

to simplify export to Europe are not on the priority list of the Ukrainian business elite”.

100 Maksym

Boroda et all, Market Surveillance in Ukraine: Reforms on the Way to the Europe an Market,

International Centre for Policy Studies, 2011 Avaliable at

http://www.icps.com.ua/files/articles/64/34/SIDA_2011_ENG%20_final.pdf (consulted on 20 April

2011).

101 Інформа

ція щодо стану приведення законодавства України у відповідність із зобов’язаннями, узятими при

вступі до СОТ, Available at www.me.gov.ua/file/link/165357/file/Laws_WTO.doc (consulted Consulted

on 30 April 2011).


http://www.me.gov.ua/file/link/165357/file/Laws_WTO.doc

42

(Although Ukrainian oligarchs own companies, which produce machinery. Their main

assets are in energy and metallurgy and banking).102

So far the main lobbyists for the liberalization of technical control in Ukraine were the

European companies, operating in the country or importing to the Ukrainian market.

European companies in Ukraine are mostly members of the European Business

Association. Lobbying activities of the EBA are concentrated on direct contacts with the

Ukrainian government through the public councils of Ukrainian state agencies and

lobbying with the assistance of the EU officials. Head of the European Union Delegation

to Ukraine José Manuel Pinto Teixeira is a member of the board of the EBA.103

Before

him other officials of then Delegation of the European Commission to Ukraine were the

members of the board.

In the sphere of food products, some Ukrainian companies could be interested in the fast

reforms. During 2008-2010 few Ukrainian companies producing poultry have been trying

to enter the EU market. Their aspirations aspirations required to obtain the certificate of

compliance for their production. The companies managed to invite EU inspectors to visit

and examine their production lines. But so far they were not able to obtain required

documents, although their production lines and all the procedures in the factories fulfill the

EU standards. “I visited these companies and was impressed by the modern equipment and

the level of production. This company fulfills every possible requirement of the EU”, -

states the official of the EU Delegation to Ukraine.

As it is explained by the official of the EU Delegation, EU system of control does not

work with the individual companies from the partner countries. The goal of the EU is the

reform of Ukrainian system of sanitary control and market surveillance so that Ukrainian

producers could export to the EU after obtaining certificates from the Ukrainian authorities

which would be recognized as valid by the EU.

102 Julia L



Economies, States, and Civil Societies: New Challenges for Governance in Europe, New York 2009,p.

117

103 http://

www.eba.com.ua/about/board.html (consulted Consulted on 1 May 2001).

http://www.eba.com.ua/about/board.html


43

At present it is clear that Ukrainian companies will not be able to export to the EU this

way at least few years more. The EU Delegation to Ukraine makes it clear that after

adoption of all the necessary laws and introducing all the required mechanisms of control,

EU experts will take a time to evaluate all the changes.104

According to the Ministry of economy Ukraine still has to revise its official list of the

products subjected to the compulsory certification. Ukraine also has to introduce

internationally recognized system of sanitary and phytosanitary control.105

“As to harmonization with the international law of the national law on food secutiry and

food quality, there is the National Commission of Ukraine for the Codex Alimentarius. It

should coordinate efforts to harmonize and develop new projects and changes to existing

sanitary measures, to make plans for harmonization, after consultation with all

stakeholders. It seems that the work here is only the initial stage”, - stated United Nations

Development Program expert Iryna Kobouta in 2010.106

In addition to this reforms in the sphere of food quality and security control can be

constrained by the stated agency which is now responsible for the market surveillance and

the development of the legally binding standards for food products which is TDSSU as it

is a member of the National Commission for the Codex Alimentarius.

“I have an impression that this agency is not interested in rapid harmonization with the

international and European standards. Perhaps this is so due to the fact that the DSSU

performs too many functions – standardization, metrology, conformity assessment, market

surveillance and consumer protection,mandatory certification of individual food products”,

- comments on the situation Iryna Kobouta107

.

104 Intervi

ew with the official of the EU Delegation to Ukraine, Kyiv, 14 February 2011

105 Інформа

ція щодо стану приведення законодавства України у відповідність із зобов’язаннями, узятими при

вступі до СОТ, Available at www.me.gov.ua/file/link/165357/file/Laws_WTO.doc (consulted Consulted

on 30 April 2011).

106 Исследо

вание: «Что такое хорошо и что такое плохо – Украинский аграрный бизнес и ВТО» , interview

with Iryna Kobouta, Team Leader of International Integration Team UNDP Blue Ribbon Analytical and

Advisory Centre , Avaliable at www.adamsmithconferences.com/ruc005/assets/files/undp_survey.pdf

(consulted 1 May 2001).

107 Ibid.


http://www.adamsmithconferences.com/ruc005/assets/files/undp_survey.pdf

44

The set functions of the Committee for technical regulation and consumer policy makes it

a very powerful agency and it fonctionnaires and management clearly do not want to loose

their position. In case of the complete reform of the technical regulation and safety system

the power of the agency will be significantly reduced. “With regard to the regulatory

agreements, the most important differences concern the existence of a centralized

regulatory body in Ukraine that performs all tasks regarding industrial standards regulation

while the EU model requires the breakup of this monopoly... It is only in the postmarket

situation that public or private bodies monitor the procedures' compliance with the EU

standards. In Ukraine, the public regulatory body is instead in charge of both premarket

control and post-market inspection.”108

In present situation, being an agency responsible for the reforms which would reduce its

power the Committee for technical regulation and consumer policy is seem to sabotage

the reform.

But even if Ukrainian companies, which have resources to influence political decisions in

Ukraine will force the reforms necessary for their entrance to the EU market, their

prospectives at present seem to be unclear as it is difficult to say how soon the EU will be

ready to evaluate and recognize Ukrainian system of control for the quality and safety as

the one which fulfills the EU requirements.

108 Julia L

angbein, The Transnationalization of Change in Economic Institutions : The Case of Industrial Standards Regulations in

Ukraine/The Transnationalization of Economies, States, and Civil Societies : New Challenges for

Governance in Europe, László Bruszt, Ronald Holzhacker (editors), New York 2009, p.110

45

CHAPTER V: DCFTA negotiations

EU and Ukraine launched negotiations on a Deep and Comprehensive Free Trade Area

(DCFTA) on 18 February 2008. Following the logic of WTO membership as the

preparatory step for the free trade with the EU, these negotiations were to resolve issues,

which were left behind the Ukraine's WTO accession.

In the report for the DG Trade109 these unresolved issues were presented as follows:

Effective implementation of all the agreed WTO commitments; Level of state support to

agriculture; Following reducing of tariffs on sensitive goods; further liberalization of

services in particular the issues related to the presence of natural persons and limits in

some services which in Ukraine are reserved only for the citizens (i.e. notary); limitations

on FDI.

In addition to this Ukraine was expected to make some new commitments. Among most

important were free access to the public procurement in Ukraine, liquidation of all

technical barriers to trade, adopting of EU competition policy standards, customs

facilitations, energy security, protection of Intellectual property.

In general it is envisaged that Ukraine will perform the approximation of its law in the

areas of “agriculture and rural development; audio-visual policy;... company law;

consumer protection; cross-border and regional cooperation;...financial cooperation

including anti-fraud provisions; energy cooperation; ...financial services; fisheries and

maritime development; health policy; industrial and enterprise policy; information society;

macro-economic cooperation; management of public finances; mining and metals;

participation in Community agencies and programs; research and technological

development;...taxation; tourism; and transport.110

As the Joint Progress Report on negotiations expressed it: “both sides will be guided by

the fact that the establishment of a deep and comprehensive Free Trade Area between the

109 Global

Analysis Report for the EU-Ukraine TSIA , Ref: TRADE06/D01 , Rotterdam, 2007, Avaliable at


110 4th Joi

nt Progress Report Negotiations on the EU-Ukraine Association Agreement, Brussels/Kyiv 8 November

2010, Avaliable at www.eeas.europa.eu/ukraine/.../joint_progress_report4_association_en.pdf (consulted

on 22 April 2011).

http://www.eeas.europa.eu/ukraine/.../joint_progress_report4_association_en.pdf

46

EU and Ukraine will lead to ever deeper integration of Ukraine into the EU internal

market, in parallel with the implementation of relevant elements of the acquis. Ukraine

reiterated its continuing attachment to this ultimate goal through gradual extension of the

four freedoms to Ukraine”.111

Ukrainian party in DCFTA negotiations was presented by the officials, who were as well

responsible for the WTO accession negotiations. It appears from the reports of EU officials

that at Ukrainian side two persons are responsible for the negotiations and they are not the

very top officials. Deputy minister of Economic Development and Trade Valerii

Pyatnytsky has a higher rank. His colleague is Taras Kachka who is a First Deputy

Director at State Department for Approximation of Legislation. He represents the Ministry

of justice, which would be responsible for drafting all the necessary law amendments.112

The chief Ukrainian negotiator on DCFTA Valerii Pyatnytsky clearly does not support the

idea of economic integration with Russia which has been promoted in the beginning of

2011, but it is not him to take the final decisions.

Accordingly to European Commission officials Valerii Pyatnytsky is trying to influence

the negotiations using additional instruments namely publishing classified information.

Am official working in the EU Delegation in Kyiv states that one of Ukrainian web-sites

namely wto.in.ua have been publishing articles on DCFTA negotiations which “literally

repeated thing which should not have left the negotiation room”.113 wto.in.ua is an

independent web-site which was initially financed form the grant of US government as it

was founded with the purpose of informational support to the Ukraine's accession to the

WTO. The site thus was an officially appointed by the Ministry of Economy as web-site

for the Ukraine in the WTO, but was not appointed to cover DCFTA.

Still web-site publishes the articles with exclusive content (as well as the content of other

Ukrainian and European media) covering the DCFTA negotiations. Editorial board of the

web-site denies connections with the Ministry of Economic Development and Trade, but

111 Ibid.

112 Intervi

ew with the ex-official of DG TRADE, Warsaw, March 21 2011

113 Intervi

ew with the official of the European Commission Delegation to Ukraine, Kyiv, February 14 2011

47

they also refuse to name the source of the sites financial support and reasons to be

interested in the topic.114

When it comes to the shaping of Ukrainian position unlike the WTO negotiations in case

with the DCFTA Ukrainian government conducted a number of open consultations with

the Ukrainian business associations and according to the observations was more open to

discussion.

According to reports of the Ministry of Economic development and Trade not all

Ukrainian business associations were ready to present their position papers for the

negotiations with the EU due to the lack of experts or other reasons. Therefore initial

information gathering was difficult. Nevertheless, few associations of producers, members

of which claimed that their interests were sufficiently damaged due to the closed mode of

WTO negotiations maid a significant effort and were in constant contact with the Ministry.

These were the Association of automobile producers, Ukrainian association of light

industry, Ukrainian association of confectioners, Ukrainian corporation for viticulture and

wine-making, Association Ukrainian Agribusiness Club.115

As the General Director of Association Ukrainian Agribusiness Club, Volodymyr Lapa,

stated, FTA+ negotiations with the EU are different from the WTO negotiations. The

ministry of economy is more open for business and often is ready to accept its position.

The ministry holds seminars to discuss position of the business. It can also address

business organizations with the informational queries.116 But is should be taken into

account that agribusiness associations in Ukraine are among the most aware of the most

active lobbyists. Agribusiness have well established connections with the governmental

officials.

The other business associations mentioned by the Ministry of Economic Dvelopment and

Trade also join the companies which either belong to top rank politicians in Ukraine or

114 E-mail

reply to the informational request from the wto.in.ua web-site ([email protected]), 9 February 2011

115 Ministr

y of economy of Ukraine, e-mail answer to the informational query from the Бизнес magazine, Kyiv, 10

March 2011

116 Interview with Mr Volodymyr Lapa, General Director of Association Ukrainian Agribusiness

Club, Kyiv, 10 February 2011.

mailto:[email protected]

48

have some kinds of connection with them and might already have the experience of

supporting their interests using different means.

The EU approach in this negotiations was shaped by its experience gained in previous

FTA negotiations with third parties. Due to the consensus-based approach and existence of

well-established mechanisms of consultations business EU business associations played

active role in shaping EU position. BusinessEurope Association was the most active

participant of the process.

According to Managing Director of the BusinessEurope Association, Thérèse de

Liedekerke, BusinessEurope's position regarding FTA+ negotiations with Ukraine is

defined by the risks of the access to the single market a partner which would not be able to

implement the acquis properly and possibly cause distortions on the markets. “If one day

some Ukrainian company exports to the EU products, which do not fulfill safety or quality

standards, this would cause damages to the respective European industries”.117

According to the EU officials, different EU business associations were ready to provide

technical assistance to Ukrainian organizations to help business to adopt to EU modeled

law or to implement some of the Ukraine's commitments. European wine producers

associations are ready to assist Ukrainian companies with re-branding Ukrainian wines and

other alcohols. Ukrainian producers will have to stop using protected European trade

marks as Cognac, Port etc.

According to the latest official statements (the latest round of negotiations took place at the

beginning of April 2011 and the next one is scheduled for the June 2011), most of the

issues have been successfully resolved.

As Ukrainian Deputy minister for Economic Development and Trade, Valerii Pyatnytsky,

stated in April 2011: “We already gradually approach the point when a full stop will be

needed to be put in our negotiations. And this is the stage when questions that, to a certain

extent, cause concerns of particular EU countries arise. This is why we had decided that

now it is better to communicate openly with them, hear to their opinions. We have been in

Berlin, Paris, Warsaw and Rome”.118

117 Intervi

ew with Ms Thérèse de Liedekerke, Managing Director of the BusinessEurope Association, Brussels, 2

March 2011

118 If we a

49

The question of export quotas for the agricultural products remained discussed for rather a

long time. As for Ukraine, agricultural exports are one of the main sources of income from

foreign trade. In addition to this, one of EU officials declares its willingness to make the

concessions but Ukraine's requests are often not supported by serious calculations.

Regarding the agriculture export, the wto.in.ua website quotes the statement of Valerii

Pyatnytsky: "We know that the EU has the experience of free trade agreements, but it

happened so that we differ from the others ... Ukraine is an agricultural country and one

should not beguile us with free export of industrial products. We can not sell cars to the

EU, but we can sell cereals and we want to do this. Is there any other country in Europe

which is ready to adapt its legislation to the EU under negotiations on FTA so deeply”119.

As for the EU, the Ukrainian demands on agriculture were regarded as unrealistic.120

“When it comes to the agriculture products, Ukrainan party should bear in mind that the

Common Agricultural Policy is one of the basic policies of the EU and it can only be

changed by the decision of the Member States and not in course of the negotiations with

third parties”.121

In addition to this some questions with regard to the loss of the GSP treatment might have

appeared. According to Director General DG Environment at present, till 2009 – Deputy

Director General DG Trade Karl Falkenberg, it has been few years since EU changed the

approach towards its prospective FTA partners. At present, if EU signed an FTA

agreement with the country, which could benefit from the GPS treatment, the later is not

applicable after the agreement is signed. “The logic behind that is very simple: if a country

still needs an GSP treatment having signed the FTA agreement with the EU, than it means

that the agreement is not valuable.”122

As Mr Falkenberg states, in order not have a partner

re to accede to the Customs Union, we have to stop the negotiations with the European Union, Available

at http://wto.in.ua/?lang=en&get=34&id=2060 (consulted 25 April 2011).

119 Перегов

ори з ЄС пр ЗВТ: кожний про своє Available at http://wto.in.ua/index.php?search=1&get=3&id=1996

(consulted on 4 May 2001).

120 Intervi


121 Intervi


122 Intervi


General of DG Trade), College of Europe (Natolin Campus), Warsaw, 27 April 2011.

http://wto.in.ua/?lang=en&get=34&id=2060

http://wto.in.ua/index.php?search=1&get=3&id=1996

50

country punished by the FTA, respective agreement should include the “GSP like”

treatment – the conditions for trade that would not be worse then those secured by the

GSP. But this should still be the matter of negotiations. As the GSP concerns a big variety

of sensitive agricultural products, there is a possibility that actual trade conditions for some

of them will be worth for Ukraine after the FTA+ comes into force.

The April round is reported to be fruitful with compromises. During the April round

parties reached the initial agreement on agricultural issue. This was a compromise on

export quotas for Ukrainian grains and meat. Valerii Pyatnytsky commented on the

compromise: “It is a bad thing if a quota is a fixed one; therefore we try to provide for a

mechanism to increase it for the future prospect, for the period of some 5 to 10 years. And

the final text of the agreement on the free trade area is guaranteed to contain the provision

about a revision of quotas. At any moment of time we will be able to sit at the table of

negotiations”.123

The two remaining contentious issues concern export customs duties (Ukraine will sustain

losses after they are lifted) and energy.124 As it appears in the reports, so far the parties

have to agree on energy issues and on some export duties which Ukraine intends to keep.

Among the issues which, according to the parties, are still to be negotiated are possibly the

most difficult ones – energy and transport. Basing on the statements of Valerii Pyatnytsky,

he believes that EU demands in these spheres are excessive. From the articles at wto.in.ua

web-site, it occurs that Ukrainian party believed the EU was trying to use the disparity in

the resources and political pressure to impose on Ukraine hard obligations which would

cause significant expenses but will not provide Ukrainian companies with additional

business opportunities in foreseeable future.

“We are strongly in favour to adapt the EU norms on the state aid in transport sector. But

if we get a proposal in which market access to transport services is closed, this

immediately raises the question: why should we do it? We do not reject this legislation if it

123 If we a

re to accede to the Customs Union, we have to stop the negotiations with the European Union, Available

at http://wto.in.ua/?lang=en&get=34&id=2060 (consulted 25 April 2011).

124 Sławomi

r Matuszak, Wojciech Konończuk, The negotiations on the EU-Ukraine Association Agreement and

Russia, Available at, http://www.osw.waw.pl/en/publikacje/eastweek/2011-04-13/negotiations-

euukraine-association-agreement-and-russia (consulted on 22 April 2011).


http://www.osw.waw.pl/en/publikacje/eastweek/2011-04-13/negotiations-euukraine-association-agreement-and-russia


51

would open new opportunities for market access. But what if access is closed? We can not

take advantage of adapted legislation! I'm not saying that the situation remains the

same. Perhaps it will shift as a result of the negotiations”.125

There are no official statements as for the present state of negotiations but from the former

comments one can conclude that EU requests were excessive, as EU requested of Ukraine

to fix the guarantees of the gas transit with financial liability for Ukraine. At the same

time, Ukrainian companies will not get free access to the EU market.126

Political pressure and oligarchs interests

In course of the negotiations, both parties claimed that their counterparts were driven by

political reasons or were using political arguments instead of talking economics. In

December 2010 when the parties were not content with the negotiations progress, the

comments of Ukrainian party were “The stagnation at the negotiations, as it seems to us,

has the two explanations: overuse of the political method for carrying out the trade

negotiations on the side of the top leadership of Ukraine ; and ongoing confusion in office

of the EU side itself: as it is generally known, the European Commission’s Directorate

General for External Trade (DG Trade) has not had an officially appointed Director since

October, and several vacancies have also not been filled since that time'.127

In summer 2010, the same comments were made by the EU party. In his paper Ukraine

turns away from democracy and the EU Tomas Valasek claims: “When the EU team went

to Kyiv in late May for scheduled talks, the chief Ukrainian negotiator failed to attend the

first day of the meeting. Even though he did appear a day later, the Ukrainian team was

badly prepared. At subsequent talks in July, negotiators made equally little headway. In an

internal communication to EU governments in late September, the European Commission

warned that it would suspend free trade talks with Ukraine unless Kyiv showed more

125 Валерій

Пятницький: «Загинуть ті, хто не хоче і не вміє працювати. Виживуть підприємливі»Available at

dt.ua/articles/61231 (consulted on 25 April 2011).

126 ЄС вима

гає від України гарантій постачань і закриває для наших компаній вихід на ринок енергоресурсів,

Available at http://economics.unian.net/ukr/detail/70182 (consulted on 6 May 2001).

127 The EU

in the FTA talks: We let you give everything to us, you let us be guiltless of that, Available at

http://wto.in.ua/?lang=en&get=3&id=1938 (consulted on 5 April 2011).

http://economics.unian.net/ukr/detail/70182


52

flexibility soon. EU officials see the hand of certain Ukrainian oligarchs in the slowdown

of the talks. “The previous government did not prepare the oligarchs for the costs that a

free trade agreement would entail,” one Commission official complained. “The new

Ukrainian government is now practically run by the oligarchs.”128

This claim was supported by an official of EU Delegation in Kyiv who wanted his name

not to be mentioned. From the beginning of the FTA negotiations Ukrainian party

presented its position clearly and showed its desire to conduct the negotiations in

constructive manner. But the course of negotiations was disrupted afterwards. Most of the

time, when FTA+ negotiations would get stuck, it was clear that the Ukrainian party was

trying to protect the position of specific companies rather than industries.129 [rather than

industrial sectors?]

The EU officials confirm that there are other goals behind the trade negotiations namely

DCFTA has to complement the whole Association Agreement between Ukraine and EU

and serve as a tool for an approximation of law and closer cooperation between Ukraine

and EU. As an official of EU Delegation in Kyiv stated: “The interests of the EU pressure

groups are obviously taken into account. But there is a clear understanding that the pure

commercial interests of one of the EU's pressure groups will not be able to undermine

FTA+ and Association Agreements with Ukraine, as its goals are much broader than pure

economy. At the same time, the Ukrainian parties should understand that some economic

issues cannot be neglected”.130

It appears that resolution of many tensions could take place because of Polish diplomacy.

The Polish government shows its interest in successful negotiations with the Ukraine on

the Association Agreement and FTA+ agreement which is a part of the AA. There are

hopes in Warsaw that the agreement will be signed till the end of the year 2011. Current

government needs the success story in negotiations with Ukraine, as it was one of the

initiators of the Eastern Partnership. The other reason is the need to set its agenda for the

Polish presidency in the Council. If the Eastern European agenda will be empty, Polish

128 Tomas V

alasek, Ukraine turns away from democracy and the EU, Availabale at

http://www.cer.org.uk/pdf/pb_ukraine_eu_valasek_oct10.pdf (consulted on 17 December 2010

129 Intervi


130 Ibid.

http://www.cer.org.uk/pdf/pb_ukraine_eu_valasek_oct10.pdf

53

presidency will be dominated by the same issues as the Hungarian – uprisings in Northern

Africa and new waves of public finance crisis in EU Member States. Taking this into

account, Polish diplomacy, as well as Polish politicians work hard trying to gain

cooperation of Ukrainian president Viktor Yanukovych. At the same time, Polish

governmental experts try to advise the Ukrainian side on how to present its position in

negotiations with the EU, referring to recent Polish experience of pre-acssesion

negotiations with the EU trying to make negotiations more productive.131

This interpretation has been confirmed by Valerii Pyatnytsky in his interview. When

answering the question who helped Ukraine during the negotiations on DCFTA he said:

“Traditionally, our friends are our neighbors, in particular Poland. Also, these are the

Baltic and Scandinavian countries, which in their approaches to trade are much more

liberal than some other countries, which, on the contrary, are very reluctant towards even

the minimum possibilities to open their markets, especially if this relates to agricultural

products or access to the markets of services”.132

DCFTA negotiation course thus proved to be influenced by a mixture of economic and

political factors. The progress however proves that in case when the parties are ready to

reach the compromise it is possible.

131 Interview with the ex-official of DG TRADE, Warsaw, March 21 2011

132 If we are to accede to the Customs Union, we have to stop the negotiations with the European

Union, Available at http://wto.in.ua/?lang=en&get=34&id=2060 (consulted 25 April 2011).


54

CHAPTER VI: Russian Responses

Ukraine's trade negotiations with EU always require examination of Ukraine's trade with

Russia, as Russia is the biggest single state trade partner of Ukraine. In 2009 when the

trade with the EU-27 constituted 29.3% of Ukraine's external trade, the share of Russia

was 25.3%.133

Trade relations with Russia play an important role not only because of the amount of

bilateral trade. At present, Ukraine is also the main transit country for the principal

Russian export goods, namely oil and gas. In addition to this trade, Russia also gives

Ukraine an opportunity to benefit from the bigger value added goods. “To some extent,

Ukraine’s trade pattern reflects the trade policies of the past and Ukraine’s difficulty in

deciding on priorities for international integration...Ukraine depends on Russian fuels and

EU machinery and equipment...the structure of Ukraine’s trade with the EU and Russia

still reveal the traditional pattern, with the westward movement of raw materials and

semiprocessed goods, and the eastward (opposite) movement of final products, primarily

investment goods.”134

Figure 1. EU-Russia balance in Ukraine's external trade135

2010

Export to Russia – 26.1% of total amount (share of Russia's import 5,6%)

(Railway or tramway locomotives, road equipment, mechanical machinery, ferrous

metals, energy, materials and oil refining products, )

Export to EU – 25.4% of total amount (share of EU imports 0,7%)

Base metals and articles of base metal, Mineral Products, Vegetable products, Machinery

and mechanical appliances, Products of the chemical or allied industries)

Import from Russia – 36.5% of total amount (share of Russia's export – 3,4%)

energy materials, oil and oil products distillation, mechanical machinery, ferrous metals

133 Ukraine

's Trade with Main Partners (2009), Available at

http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113459.pdf (consulted on 10 October 2010

134 Inna Me


Neighborhood Europeanization in Ukraine/ Arbeitspapiere des Osteuropa-Institut der Freien Universität

67/2008 Berlin, 2008, p.19

135 Source:

www.ukrstat.gov.ua, http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113459.pdf Cosulted

5 May 2001).

http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113459.pdf

http://www.ukrstat.gov.ua/


55

Import from the EU – 32.0% (share of EU's export – 1,3%)

Machinery and mechanical appliances; electrical equipment; products of the chemical or

allied industries; plastics and articles thereof; rubber and articles thereof; vehicles,

aircraft, vessels and associated transport equipment

It has to be said that trade regime between Ukraine and other CIS countries including

Russia is at present much more favourable than the trade with the the other trade partners.

Although the CIS Free trade agreement of 1994 is not effectively in power, de facto there

is a free trade area between the CIS states. It was created by a set of bilateral free-trade

agreements between the CIS members. “Ukraine operates a free trade regime with the CIS

based on a complex set of bilateral and selective multilateral engagements”.

It is often said that a trade regime between Russia and Ukraine can be called an FTA only

by exaggerating the facts, and there are grounds for such a statement. From the very

beginnings of the trade agreement between Ukraine and Russia, Russia insisted on a vast

number of exemptions. In addition, products from Ukraine are still the subject to non-tariff

barriers. But it is worth mentioning that the list of exemptions had been gradually

shortened and now includes only few (though very important for items). In 2009 Russia

excluded from this list cigarettes and sugar. By 2015 it is expected that trade in spirits will

be in a regime of free trade.136

When it comes to non-tariff barriers, it is usually easier for Ukrainian producers to meet

the criteria of Russia authorities, as Ukraine and Russia still operate the system of

technical regulation based on the one inherited from the USSR.

It has to be said, however, that free trade between Ukraine and Russia is exposed to

political risks. Trade embargoes or bans on certain products are often used by Russia as an

“argument” in political discussions. As an example of such risks, meat and dairy products

ban can be named. In January 2006, a few weeks after the major gas crisis dispute, Russian

authorities banned the import of meat and dairy products from Ukraine. Official reasons

for the ban were the bad quality of Ukrainian products and their danger for the customers.

136 Мастер

спирта// Украина смогла договориться с Таможенным союзом об обнулении ставок, Available at

http://www.kommersant.ua/doc.html?docId=1585443 (consulted on 3 May 2001).

http://www.kommersant.ua/doc.html?docId=1585443

56

Estimated losses for Ukrainian producers were $75 millions per month137. (All the trade

between Ukraine and Russia is estimated in US dollars.) Some of Ukrainian producers

could resume their exports to Russia in few months as Russia decided to authorize exports

on case by case basis. For many producers, however, the authorization took several years.

Some producers of dairy products (predominately cheese) forwarded their export to the

Asian CIS members. But Russia is still a main destination for this kind of products.138

Thus while Ukraine still has to reform its SPS system to be able to export to the EU, it can

relatively easy export to Russia and other CIS markets, despite the existing political risks.

As Scholars point out, however, “Russia’s power, inside or outside the CIS, has the

potential of interfering with the EU’s external governance and its ability to lead to policy

transfer in several ways: first, by using existing institutional commitments in the CIS

framework, its framework of bilateral agreements or other mechanisms of formal co-

ordination; second, by exercising power politics in areas where interdependence

(structural, geopolitical, economic) is high.”139

The Russian motives for the special attention paid to Ukraine obviously are not purely

economically motivated, but this issue requires an additional paper to focus on. Actions of

Russian authorities in the beginning of the year 2011 proved that Russia did not wish to let

Ukraine enhance its cooperation with the EU. All the actions of Russia to deeper Ukraine-

EU trade negotiations and statements of Russian officials did not limit to the Russia-

Ukraine relations. Russia took an ambassador's role for the Customs Union of Russia,

Belarus and Kazakhstan and thus formally represented three of the four biggest CIS

economies (Ukraine is the fourth).

137 Запрет на поставки в Россию украинского мяса не будет cнят, Available at

http://www.rosinvest.com/news/166742/ (consulted on 2 May 2001).

138 Экспорт украинских сыров в Россию может снизиться, Avaliable at

http://www.dairynews.ru/news/detail.php?IBLOCK_ID=1&SECTION_ID=2&ELEMENT_ID=28227&p

hrase_id=691061 (consulted on 2 May 2001)..

139 Antoane ta Dimitrova, Rilka Dragneva, Constraining external governance : interdependence with

Russia and the CIS as limits to the EU's rule transfer in the Ukraine/EU External Governance: Projecting

EU Rules beyond Membership, Sandra Lavenex, Frank Schimmelfennig (editors), London, New York

2010, Avaliable at http://www.informaworld.com/smpp/title~content=g913925143~db=all (consulted on

12 April 2011).

http://www.rosinvest.com/news/166742/

http://www.dairynews.ru/news/detail.php?IBLOCK_ID=1&SECTION_ID=2&ELEMENT_ID=28227&phrase_id=691061



57

From the statements of Russian officials it became clear that Russia not only wanted

Ukraine to participate in the Customs Union but also to integrate into the Single Economic

Space – an integration project initiated by Russia in 2003.140.

It is worth mentioning that the negotiations with the EU were complemented with the

plans of Ukraine to establish better trade relations with non-EU European countries. In

June 2010, while negotiating the DCFTA with the EU, Ukraine signed the free trade

agreement with EFTA. In addition to this EU is now “encouraging” Ukraine to negotiate

the free trade agreement with Turkey. This encouragement derives from the fact that recent

EU trade negotiations created some tension between the EU and its Association partner

Turkey. According to an ex official of DG Trade who requested his name not to be

mentioned, the tensions elevated during the EU negotiations with Korea, which may

compete with Turkey in few sectors. While Turkish party expected EU to represent

Turkish position along with the position of the EU, the EU decided to leave the issue to the

two parties to perform later. At present EU encourages all the countries, with whom it

negotiates on free trade to start similar negotiations with Turkey.141 Thus free trade

negotiations with the EU, complemented by free trade agreements with other European EU

trade partners can prospectively result in including Ukraine into completely different trade

area then the CIS. Although this will require not only the diplomatic effort but also

business community interest, which so far can not be guaranteed.

According to Polish experts from the Center for Eastern Studies (Ośrodek Studiów

Wschodnich -OSW), Russia did not interfere with Ukraine-EU association negotiations

because Russian officials did not believe that they would be successful but when the

progress in DCFTA became obvious the Russian authorities decided to take actions to

prevent further economic integration Ukraine with the EU. “The Kremlin was however

taken by surprise in the association negotiations between Ukraine and the EU and the

140 "Таможе

нный союз — это только первый этап интеграции", Available at

http://kommersant.ua/doc.html?path=\komua\2011\063\12896016.htm (consulted on 19 April 2011).

141 Intervi


http://kommersant.ua/doc.html?path


58

announcement that the Association Agreement would be signed by the end of this

year”.142

So far Russia's arguments to support Ukraine's integration with the Customs Union

included the promises of bigger revenues from the free trade with the members of the CU

as well as the threats of economical loses for Ukraine in case if it will chose the EU

integration vector.

The main threats addressed to Ukraine were the statement of possible price hikes for

natural gas. At present Ukraine buys gas from Russia without paying the Russian export

duty. This was one of the arrangements of the agreement of April 2010 between Russia

and Ukraine called “gas in return for fleet”.143 According to this agreement, Russia

reduced the price for its gas for Ukraine for $100 for 1000 cubic meters in return for the

prolongation of stay of Russian fleet in Ukrainian city of Sevastopol. In 2010, when the

agreement was signed and ratified, it was regarded both in Ukraine and Russia as a purely

political deal for Russia – a reward for Ukraine which elected the “right” president. It

appears now that Ukraine might soon be forced to pay the full price which will be $100

higher - $395 instead of $295 for 1000 cubic meters. [Unclear why this could be so. Any

Russian statements / warnings / hints to that effect? ]

Officially, the only country which gets Russian gas without the need to pay an export duty

is Belarus since the country is a member of the Customs Union.144 To be able to present

his position better, Russian prime-minister Vladimir Putin visited Kyiv on 12 of April

2011 just few days after the 14th round on DCFTA negotiations. His visit was a part of an

active media campaign in support for the Russian proposals.

As a part of the campaign, the Secretary of the Customs Union Sergei Glaziev also gave

interviews to the media, explaining Russian proposals in details. According to Glaziev,

Ukraine is likely to get additional revenues from the CU. Revenues as high as $5-6 billion

142 Sławomir Matuszak, Wojciech Konończuk, The negotiations on the EU-Ukraine Association

Agreement and Russia, Available at, http://www.osw.waw.pl/en/publikacje/eastweek/2011-04-

13/negotiations-euukraine-association-agreement-and-russia (consulted on 22 April 2011).

143 Россия снизила цену на газ для Украины на 100 долларов, Available at

http://focus.ua/politics/114089 (consulted on 5 May 2001).

144 Виталий

Портников, Призрак пошлины, Available at

http://rus.newsru.ua/columnists/05May2011/tax_ghost.html (consulted 5 May 2001).



http://focus.ua/politics/114089

http://rus.newsru.ua/columnists/05May2011/tax_ghost.html

59

per year will result from another reduction of the gas price and from the growth of trade

with the CU members.145

The proposals for the deeper integration with the Russia and the SES countries reflect the

most sensitive issues discussed by Ukraine with the EU. There are very important changes

at the market of transport services – we [who is “we”?] are shifting to common tariffs and

rules of acces to the rail and pipe transport. Apart from this we [who is “we”?] envisage to

create the single antitrust and arbitrage bodies. The countries of the CU will get an equal

access to public procurement. The rules of public procurement will be also unified and

tenders will be conducted in the forms of electronic auction. Two agreements of the

package define the freedom of capital movement. Finally, labor migrants will have equal

rights with the local population.146

The problems which Glaziev envisages for Ukraine [if it accedes to DCFTA?] will also be

the drop of the trade amounts due to the non-tariff barriers and additional duties imposed

on Ukraine by the CU members.

Russia is aware of the difficulties which Ukraine will face in case if it joins the CU. CU

will require of Ukraine to elevate import duties, as the actual ones in Ukraine are lower

than the duties of the CU members. This action will definitely cause disputes between

Ukraine and the WTO members. Russian argument states that in this case it will not be

Ukraine to be the party in the dispute but the whole of CU. But this argument is not valid

as none of the three present members of the CU are WTO members.

Ukrainian officials do not seem to be impressed with these statements. “The point is that

the Customs Union may conclude an agreement with a third party but a single member of

the Union may not include any independent agreements. So, if we are to accede to the

Customs Union, then we have to stop the negotiations with the European Union”, - stated

Valerii Pyatnytsky.147

Ukrainian party is fully aware of the legal limits to the possible actions of Russia and its

proposals. As Mr. Pyatnytsky stated “If Russia today declares its desire to join the WTO as

soon as possible, then this mean that the country is ready to implement all norms of this

145 "Таможенный союз — это только первый этап интеграции", Available at

http://kommersant.ua/doc.html?path=\komua\2011\063\12896016.htm (consulted on 19 April 2011).

146 Ibid..

147 If we are to accede to the Customs Union, we have to stop the negotiations with the European

Union, Available at http://wto.in.ua/?lang=en&get=34&id=2060 (consulted 25 April 2011).




60

Organization. This is why even in a case when Russia would be making attempts to

impose some kind of restrictions, it would have to do that solely within the framework of

WTO norms. And if the WTO provides for grounds for that, we would not be having

anything to find fault with. At the same time, the point is that the Free Trade Agreement is

in force between Ukraine and Russia. And if some additional restrictions are imposed

between the courtiers that signed such a document, this would be a kind of peculiar

nonsense”.148

But it appears that the general public might be persuaded by Russian party's argument.

Mykhailo Pohrebynskyi – a political expert with a long record of high profile jobs in

Ukraine. He used to work as an advisor to vice-speaker of the Verkhovna Rada of Ukraine

Viktor Medvedchuk and also was consulting him during his work the Administration of

the President of Ukraine. Mr Medvedchuk and Mr Pohrebynskyi are believed to continue

their cooperation. The position of Mr. Medvedchuk as a pro-Russian politician is

underlined by personal ties with the Russian prime-minister, Vladimir Putin. Mr Putin is

the godfather of the Mr. Medvedchuks younger daughter Daria.149

Mykhailo Pohrebynskyi represents the position of pro-Russian party in Ukraine in his

interview to Ukrainian web-site glavkom.net.

In his interview Mr Pohrebynskyi laments over the patriots who “believe that we can not

do anything right without a European policeman”.150 In addition to this he argues that

while Russian proposal to Ukraine is clear and easy to understand for the public, EU in its

statements does not propose to Ukraine anything substantial. “The CU, for example, has

voiced a number of very attractive offers to Ukraine. We can call them “candies”. Some

may not believe them to be realistic...but we did not hear about any “candies” from the

EU. I want to hear from them concrete offers as for the development of Ukrainian

148 IIbid.

149 http://

www.peoples.ru/state/politics/viktor_medvedchyk/ (consulted on 5 May 2001)., Виктор Медведчук –

тоже кум президента , Available at http://www.obozrevatel.com/news/2005/10/7/50356.htm (consulted

5 May 2001).

150 Михаил

Погребинский: Русские прекрасно понимают, что мы морочим им голову, Availabke at

http://glavcom.ua/articles/3574.html (consulted on 27 April 2011).

http://www.peoples.ru/state/politics/viktor_medvedchyk/

http://www.peoples.ru/state/politics/viktor_medvedchyk/

http://www.obozrevatel.com/news/2005/10/7/50356.htm

http://glavcom.ua/articles/3574.html

61

economy and only than make a choice...but they (the EU) instead says: we do not try to

induce you, it's you, who want to join us”.151

According to Mr. Pohrebynskyi, the only proposal from the EU which would be worth of

attention is the membership, because this will incorporate Ukraine in EU system of

governance and allow it to overcome the lack of institution capacity. ”maybe our judicial

administration will be situated somewhere in Holland, and this would stop lawlessness

here”.152

These kinds of arguments are clearly addressed to the general public and are not likely to

represent the opinion of policy makers. But together with the statement of the Russian

officials, they leave an impression that Russian authorities are ready to interfere with

Ukraine-EU relations and might consider actions which may cause significant economic

losses to Ukraine.

151 Ibid.

152 Ibid.

62

Conclusions:

Cooperation with the EU is still regarded in Ukraine as a foreign policy issue, and there

seems to be little connection between it and attempts to perform domestic reforms.

Principal economic agents regard the DCFTA as an opportunity to gain better access to the

European market and may demand tradeoffs to achieve this goal.

It is agreed by the scholars and the policy makers that reforms, which Ukraine has to

perform in order to implement the DCFTA will require significant expenses. But at present

the sources of financing for the reforms are unclear. In addition to this some of the

requests of EU discussed in course of DCFTA negotiations are regarded by Ukrainian

officials and experts as excessive.

Taking into account this fact and also the fact that reforms proposed by the EU can

undermine economic power of Ukrainian oligarchs, it can be foreseen that commitments of

Ukraine will be implemented selectively.

Scholars argue that EU did not succeed in providing an incentive strong enough to

stimulate internal reforms in Ukraine. At present stage most Ukrainian actors consider the

possibility of free trade with the EU as a chance to gain more due to access to the EU

market and do not seem expect significant improvement of domestic business climate.

From observations of the EU officials, who contact their Ukrainian counterparts, and from

the statements of Ukrainian political analysts, cooperation with the EU is an political issue

in Ukraine and therefore prospective economical gains of trade with the EU are not the

issue of public concern.

EU proposals to Ukraine are often reported to be “obscure” and lacking of real

commitments.

As EU officials state significant part of Ukrainian potential exporters to the EU are not

aware of their chances and legal framework of export. EU traditionally is not regarded as

the potential market for export of Ukrainian high value added goods (the principal market

for this export is considered to be Russia and other CIS countries), and therefore trade

integration with the EU may be regarded also as a threat to Ukrainian “knowledge

industries” and its developmental potential.

The Russian authorities will attempt to delay closer integration of Ukraine into the EU and

will be prepared to spend substantial resources to achieve this goal.

63

To summarize it has to be said that decision to implement the DCFTA arrangements will

require a political will from Ukrainian authorities and this process can be disrupted by

political developments in Ukraine ad Russia.

64

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71

2. uropean Commission’s Delegation to Ukraine

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ANNEX 1 UKRAINE'S RANKING IN DOING BUSINESS 2011

Source Doing Business 2011 report

73

ANNEX 2 UKRAINE'S TRADE WITH MAIN PARTNERS (2009)

Source: DG Trade country profile for Ukraine


ANNEX 3 UKRAINE'S GLOBAL COMPETITIVENESS RANK 2010-2011

Source:The Global Competitiveness Report 2010-2011, Country profile or Ukraine


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