The asymmetrical association between Ukraine and the EU

Ukraine is waiting for the EU to take further steps liberalizing the access of Ukrainian goods to the European market. At the same time, however, Ukraine is not doing enough to ensure that companies from European countries are able to enjoy equal access to the Ukrainian market.
The asymmetrical association between Ukraine and the EU

(Thisisbossi, CC BY-SA)

According to data released by the State Statistics Service of Ukraine (Ukrstat), in the period from the beginning of the last year until November 2019, Ukraine’s negative foreign trade balance amounted to the USD9.37bn. Goods worth the USD45.96bn were exported from Ukraine, while the value of imports to Ukraine amounted to the USD55.33bn. The difference between the export revenue and the expenditure on imports was higher by the USD500m than in the same period of 2018, which means an increase of 5.6 per cent. In the period discussed, Ukraine sold goods worth the USD19.2bn to the member states of the European Union, while purchases from EU-based suppliers reached a total value of the USD22.8bn, resulting in a negative trade balance of the USD3.6bn. Ukraine’s exports of goods grew at a much slower rate than the imports — the former increased by 4.4 per cent compared with the same period of 2018, while the latter rose by as much as 7.5 per cent.

Customs or industrial visa-free regime?

Ukraine has been trying to find a way out of this situation and to change the structure of trade in its favour. Until recently the efforts of the Ukrainian authorities were focused on joining the European Union’s Convention on a Common Transit Procedure, commonly referred to as the “customs visa-free regime”, and the unification of customs procedures with the EU. “We will join the customs area of the EU on its principles, which will make life easier for businesses. Companies will be able to use the single customs declaration and the single administrative document for the movement of cargo from any location in Europe to Ukraine and the other way around,” stated the news agency UNIAN while describing the advantages of this solution.

Such a solution would be beneficial both for the Ukrainian companies sending their goods to the EU market, as well as for EU exporters. Recently, however, the pursued objectives have changed. “Ukraine no longer aims to establish a customs union with the EU. Instead we are putting the emphasis on the greatest possible simplification of all the customs procedures, promoting the intensive movement of goods across the customs border, as well as improving the access of Ukrainian producers to the EU market,” said Dmytro Kuleba, the Ukrainian Deputy Prime Minister for European Integration.

Instead of a “customs visa-free regime”, the Ukrainian government would now prefer the implementation of an “industrial visa-free regime”, that is, the conclusion of an Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA) with the EU, which would provide unilateral preferences to Ukrainian companies. After the conclusion of an ACAA agreement, Ukrainian producers would no longer have to obtain conformity certification from EU-based notified bodies because the EU would recognize the conformity certificates issued in Ukraine. The ACAA agreement would cover 27 sectors identified in the attachment to the Association Agreement. At present the only country that has signed an ACAA agreement with the European Union is Israel.

At the end of December, the Ukrainian President Volodymyr Zelensky signed the last of a series of laws necessary to introduce the “industrial visa-free regime” — the law on the reduction of market surveillance authorities’ pressure on businesses. The government hopes, that the conclusion of an ACAA agreement will result in a significant increase in the exports of Ukrainian goods to the EU market. According to estimates prepared by experts, the agreement may cover up to a fifth of all industrial goods and could enable the transformation of the structure of Ukrainian exports to the EU, from one that is primarily dominated by raw materials towards a greater share of products with higher added value. This would allow for a revival of mutual trade, whose growth has been slowing down with each passing year. While in 2017, the rate of growth in EU-Ukraine trade was 30 per cent, it is estimated that in 2019 mutual trade only increased by approximately 6 per cent compared with 2018.

Ukraine and the EU held the initial talks concerning the conclusion of an ACAA agreement in 2005. At that time the parties agreed on an action plan, but no progress was achieved for many years. “We have many sensitive issues in the trade with the EU. This is why our next goal is to simply start talking to the EU as constructive partners who are discussing the possibility of increasing trade volumes, rather than looking for excuses to postpone the signing of important agreements. Such agreements only exist between industrially developed countries. In this respect, there are great concerns with regard to Ukraine, which we have to overcome. We have to convince the EU that Ukraine is sufficiently developed in terms of technology in order to be able to conclude such an agreement,” commented Taras Kachka, Ukraine’s trade representative at the European Union.

The Ukrainians would like to conclude the ACAA agreement as soon as possible. The news website Evropeyskaya Pravda informed that the EU representatives were open about their limited trust in the proper performance of the obligations relating to the certification procedure. The main reason for that is the general lack of confidence in Ukraine’s rule of law.

Matti Maasikas, the EU’s ambassador to Kiev, points out that Ukraine still has a lot to do in this area. The EU is willing to agree to initiatives related to the implementation of the Association Agreement, but also expects Kiev’s ambitions to be backed up with concrete activities. “You have to convince us that the ACAA agreement is really necessary, and that you are ready for it. What happens afterwards is also important. We have to control the government in order to ensure that it fulfills the terms that we agree on,” said Mr. Maasikas.

An EU mission tasked with verifying Ukraine’s preparation for the conclusion of the agreement is supposed to arrive in Kiev in the first quarter of 2020. Moreover, Ukraine also hopes that the EU will recognize the Ukrainian certificates of safety concerning its food products, which would open the way to the EU market for new producers. However, for the time being, Brussels has remained silent on this issue.

A clear lack of symmetry

Ukraine’s expectations of a positive decision on the part of the EU are not followed by appropriate actions resulting in a genuine opening of the Ukrainian market for investors from the West, including those from Poland. During the recent World Economic Forum in Davos, the Ukrainian Prime Minister Oleksiy Honcharuk encouraged foreign investors to invest in Ukrainian companies. “What do you need to know in order to effectively invest in Ukraine? Just two words will be enough. If you say ‘Slava Ukrayini!’ (Glory to Ukraine!), all the doors will be open to you, and no one will make any difficulties,” said Mr. Honcharuk to the potential investors.

Such assurances of Ukraine’s supposed openness to foreign investors have been plentiful. However, instead of putting in place a legal framework that would enable investors to move independently and safely on their own, the Ukrainians still prefer manual control: identifying specific investment projects worth tens and even hundreds of millions of USD in areas in which they have been unable to succeed themselves. Such actions, simply put, are just another way of seeking financial assistance from abroad. Meanwhile, regular investors who want to put their money into a market niche that they identified on their own, are left with virtually no chance of surviving in confrontation with Ukraine’s corrupt state bureaucracy.

The authorities in Kiev are openly admitting that they aren’t particularly eager to fulfill their obligations under the Association Agreement with the EU, which guarantees equal rights to European entrepreneurs. This was made clear by David Arakhamia, the chairman of the parliamentary faction of President Zelensky’s ruling political party “Servant of the People”. In January, Arakhamia stated that “Ukraine should temporarily abandon the policy of harmonization of its legislation with the standards of the European Union, and should instead create its own rules of the game and utilize its competitive advantages.” During the World Economic Forum in Davos Mr. Arakhamia said that “many neighboring countries are pressuring us to engage in so-called harmonization. However, I believe that this is not the right move for Ukraine. If a weaker economy integrates with a stronger one, then it will always remain weak if it plays by the same rules. These words may be unpopular in the European Parliament or elsewhere, but we have to assume our own unique position until we become stronger. Only then can we synchronize with others.”. He also argued, that Ukraine should “create its own rules, which would encourage foreign entities to invest in the country”.

Unfortunately, in the case of Ukraine, the supposed “own path of development” frequently involves solutions that are difficult to comprehend for Western investors accustomed to normal rules of the game. Therefore, in order to reassure potential investors, in December 2019 the administration of the President of Ukraine announced the launch of an office devoted to counteracting so-called “raiding”. In order to show its effectiveness, Mr. Zelensky had met with a well-known Ukrainian film director whose apartment in Kiev was seized after “raiders” forged entries in the real estate register. The president accompanied him to the office which took care of the case. As a result of these actions, the victim was able to recover his property.

The phenomenon of “raiding”, or the illegal seizure of property through the falsification of public records, has become such a scourge in Ukraine that even the Minister of Justice has had problems with the enforcement of the law. Despite his public assurances concerning the safety of enterprises, within just a few weeks there were two instances in which corporate raiders managed to illegally seize the legal ownership of the municipal company “Kyivmetrobud”, which is involved in the construction of the underground in Kiev. It was determined that the perpetrators received support from corrupt notaries who have access to public registers.

The authors of the idea of establishing an office devoted to combating corporate raiding overlooked certain crucial facts. One of them is that almost six years after the conclusion of the Association Agreement with the EU, in which Ukraine committed itself to reform its legal system in order to strengthen the protection of investors’ rights, notaries are still able to ignore court judgments and forge public registers. In order to recover one’s property in Ukraine, it is now necessary to complain to the country’s president. This proves beyond any doubt that Ukraine is not fulfilling its obligations concerning systemic reforms. The situation also serves as an indication for the West that it may be necessary to wait some more time before investing in Ukraine and before adopting any new decisions favoring that country.

(Thisisbossi, CC BY-SA)

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