What would the signing of an EU Association
Agreement mean for the Ukrainian economy?

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Volume 7, issue 07 September 2013

With Ukraine apparently on track to seal a long sought-after EU Association Agreement this November, there is much debate within the Ukrainian business community over the potential impact which this EU agreement – and its wide-ranging free trade provisions – could have on the Ukrainian economy. The Association Agreement signing is tentatively scheduled to take place during the late November EU Eastern Partnership Summit in Vilnius. As that date fast approaches, Ukraine’s possible EU future is beginning to loom larger and larger on the horizon.

With anticipation building in Ukraine, it is worth remembering that securing a landmark EU agreement would not be geopolitically decisive in and of itself. Instead, the signing of an EU Association Agreement would merely signify the start of a long and arduous process of Euro-standardization which must take place across Ukraine if the country – and its economy – is to establish itself as a fully-fledged member of the European community in the future. However, the Association Agreement itself does not provide any guarantees of the future participation of Ukraine in the European Union.

No guarantees: a long way to go

It is still too early to assume that Ukraine is sure to secure an Association Agreement in November. Despite cross-party domestic political support, Ukraine’s parliament has yet to complete its EU wish list of European integration legislation as requested by Brussels. Even if an Association Agreement is signed in Vilnius, the agreement must then be ratified by each European Union member state as well as the Ukrainian parliament, which could significantly delay implementation.

EU Association Agreement: what will it mean for Ukraine?

European government officials and their Ukrainian counterparts agree that the Association Agreement which is due to be signed in November is one of the most comprehensive and progressive of its kind. The document’s provisions for the creation of a Deep and Comprehensive Free Trade Area (FTA) have attracted the most attention and analysis. From a Ukrainian perspective, one of the most attractive aspects of the Association Agreement is the opening up of EU markets to Ukrainian exporters. This access to arguably the most lucrative markets on the planet (the EU boasts a population of 500 million with some of the highest disposable incomes in the world) creates an entirely new world of opportunities for a whole host of Ukrainian industries. However, we should not forget that the Ukrainian domestic market will also be exposed to imports from the European Union which local producers might initially struggle to compete with. This exposure of the domestic Ukrainian market to EU competition could have both negative and positive implications – in the long run, it could actually help boost the quality of local produce while also forcing down the price of EU imports.

Ukraine set to avoid tariff shock therapy

In principle, free trade agreements imply the removal of all barriers to the free movement of goods between signatory countries. In practice, this often means stage-by-stage reduction in barriers prior to the ultimate removal of export and import duties and any additional restrictions to trade among the treaty signatories. Ukraine’s EU FTA agreement provides for the abolishment or essential reduction of import duties for more than 95% of tariff positions. According to the text of the Association Agreement, the EU is required to abolish duties as soon as the FTA enters into force, while Ukraine is permitted to gradually reduce export duties down to zero. This gradual approach could prove invaluable, allowing Ukrainian businesses to take advantage of new EU markets while giving the domestic market time to prepare for EU competition.

Limited EU agricultural opportunities

Agricultural exports are one of the key focuses of the Association Agreement’s FTA provisions. One of the key results of the agreement is the introduction of tariff-rate quotas on all the main types of agricultural goods. Tariff-rate quotas mean that a certain amount of a particular agricultural product may be imported without any import duty, while excess amounts may be imported under a reduced import tariff. It is worth stressing that the modest tariff-rate quotas envisioned in the Association Agreement will likely struggle to reanimate agricultural exports from Ukraine to the EU. In line with a long Brussels tradition of protecting the EU’s own agricultural industries, the EU has shied away from including substantial volumes of duty-free Ukrainian agricultural exports within the FTA. For example, Ukraine will be allowed to supply the EU with 16,000 tonnes of poultry meat annually, increasing to 20,000 tonnes within five years. In turn, the EU will be permitted to annually export 8,000 tonnes of poultry meat to the Ukrainian market, with a gradual increase of annual supplies to 10,000 tonnes. Compared to current poultry production levels in Ukraine, these quotas are insignificant. Perhaps more significant are the tariffs which are applicable for excess quota exports, which are in some instances much higher for Ukrainian exports to the EU than vice versa.
The abolition by Ukraine of export duties on goods traded within the EU is another important aspect of the FTA. At present such duties are applied to more than 50 commodities including such key Ukrainian products as oilseeds, livestock, scrap metal and natural gas. Export duties are to be reduced gradually and eventually abolished within 10 years, while Ukraine will be able to apply some export duty surcharges for exports exceeding certain trigger levels.

Ukraine braces for the ultimate Euro remont

From a Ukrainian perspective, the main advantage of an EU Association Agreement may not lie in the document’s specific free trade provisions. Instead, an EU agreement could see Ukraine moving broadly towards European patterns of development as the country gradually adapts to EU standards and develops comparative institutional frameworks. As EU Directives are implemented across the country, the quality of goods produced in Ukraine will improve until Ukrainian-produced exports meet the highest consumer standards in today’s global economy. This process of EU adaptation will build consumer confidence in the Ukraine brand and will eventually allow Ukrainian goods to find additional new markets, not only inside the EU itself but also throughout other key consumer hot spots like Asia and North America.

The cost of meeting EU standards

The process of EU integration promises to be complex, with many Ukrainian businesses facing tremendous challenges as they attempt to modernize their production facilities to comply with new EU standards. The question of who will pay for this huge modernization undertaking remains ominously unanswered. Inevitably, the main burden of financing this modernization process will fall on the producers themselves.
As they struggle to meet new EU regulations, many Ukrainian producers will also find themselves faced with increased international competition within Ukraine itself. The abolition of duties is likely to tempt many EU producers to enter the Ukrainian market, with Ukraine expected to prove particularly attractive to textile companies and manufacturers of consumer goods.

EU Association Agreement: just the beginning

The signing of an EU Association Agreement is viewed by many Ukrainians as a step in the right direction for the country. Nevertheless, it is important to note that the signing of an EU deal is just the beginning of a long adaptation period. Ukraine must adapt its standards and regulations to bring them into line with EU norms, while broader integration at the legislative and political levels must also take place. In the long run, an EU Association Agreement could serve as a tool to help Ukraine overcome many of the country’s most debilitating post-Soviet vices – namely corruption, the weak rule of law and excessive bureaucratic procedures. However, the long-term impact of an EU deal on Ukraine’s development will largely depend on the manner in which it is implemented.

About the authors: Dr. Julian Ries ( Julian.Ries@bblaw.com) is the Head of Beiten Burkhardt in Kyiv. His areas of activity include cor¬porate, general commercial, M&A, as well as market entries and tax structuring projects.
Dmytro Kiselyov (( dmytro.kiselyov@dk-law.com.ua) is a Senior Associate with Beiten Burkhardt in Kyiv. His areas of activity include real estate and construction law as well as commercial, contract and corporate real estate law.