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On their recent trips to Kiev, Russia’s Prime Minister Vladimir Putin and President Dmitry Medvedev have failed to secure a commitment from Ukrainian President Viktor Yanukovich to bring his country into the Customs Union with Russia, Belarus and Kazakhstan.
Yanukovich brushed off Moscow's latest efforts to woo Ukraine into the Customs Union, insisting that Kiev wants special terms. Yanukovich proposes a “3+1” arrangement, that would still allow Ukraine to further develop relations with the European Union (EU). In particular, the Ukrainian government wants to sign a free-trade agreement with the EU by the end of this year.
In recent weeks, Moscow has stepped up pressure on Ukraine to join its Customs Union. Putin said on a visit to Kiev on April 12 that membership would bring benefits of up to $9 billion a year for Ukraine. Other officials suggested Ukraine could save $8 billion a year on its gas bill paid to Russia if it joined the Customs Union.
Ukraine’s faltering heavy industry will also enjoy tangible benefits from joining the Customs Union in the form of zero tariffs on exports of steel, steel pipes and fertilizer to the Russian market. Ukraine’s agricultural sector will also benefit from lower protectionist tariffs within the Customs Union.
Russia’s offer to join the Customs Union is serious, and in the short term could be very lucrative for Ukraine, while Russia is likely to bear significant costs and the loss of fiscal revenue as it drops export duties on Russian exports of oil and gas to Ukraine.
Russia also offered to help Ukraine renegotiate its unfavorable terms within the WTO, while remaining within the framework of the free-trade talks with the EU as part of a joint negotiating team within the Customs Union.
This appears to be the high price that Russia is prepared to pay in order to keep Ukraine in its economic orbit and ensure the success of the Customs Union.
On the flipside, the benefits to Ukraine of securing a free-trade deal with the EU appear to be less tangible. They largely consist of a promise to facilitate access for Ukrainian producers to the enormous EU market. Ukraine, however, lacks the competitive products and modern industries, (apart from steel), to take advantage of easier market entry rules.
Ukraine’s potentially most competitive sector – agriculture – is unlikely to benefit from the free-trade deal with the EU, as within the EU this sector enjoys heavy tariff and non-tariff protections.
Yanukovich's choice is seen as a bellwether for Kiev's geopolitical direction. He seems to be siding with those within the Ukrainian elite who argue that the EU agreement would be a major step toward deeper economic, political and cultural integration and offers Ukraine access to a larger, wealthier market, while a deal with the Customs Union would tie Ukraine more closely to Russia and its former Soviet neighbors, and thus endanger Ukraine’s sovereignty.
In Kiev this view is shared not only by the nationalist pro-Western opposition, but by members of Yanukovich’s own Party of Regions, as well as by some major Ukrainian tycoons, such as Dmitry Firtash and Rinat Akhmetov, who back the President.
Yanukovich agreed in April 2010 to a deal that extended the leasing of the Ukrainian port of Sevastopol to Russia's Black Sea Fleet until 2042, in return for a big discount on natural gas, and furthermore, ended his predecessor's pursuit of membership in NATO. He recently balked, however, at Russian proposals for even closer cooperation, such as merging Russian state energy giant Gazprom with its Ukrainian counterpart Naftogaz and selling the Ukrainian gas pipeline network to Russia. He has also reneged on his pre-election promises to make Russian the official language in the Russian speaking eastern and southern regions of Ukraine.
For Russia, the failure to secure Ukraine’s membership in the Customs Union signifies a serious setback to its efforts to forge a Russia-dominated economic zone within the former Soviet Union. The failure of heavy lobbing in Kiev by Putin and Medvedev could also mean that from now on Moscow will have to reconsider its policies toward the Yanukovich government in Ukraine and start treating it not as a strategic ally, but a serious competitor and even spoiler of Russia’s geopolitical and economic ambitions.
What does the spat over the Customs Union mean for Russia-Ukraine relations in the short-to-medium term? Could it lead Moscow to take a more confrontational stance towards Kiev and Ukraine to follow a more pro-Western strategy to offset the pressure from Moscow? What is a more advantageous strategy for Ukraine in the long term? Trying to join the EU, a goal they probably won’t achieve for the next 20 to 30 years? Or joining the Customs Union with immediate economic benefits in the form of lower energy prices and a larger market share for key Ukrainian products? What does Kiev’s refusal mean for the future of the Customs Union? What does it mean for Moscow’s ambitions in the former Soviet Union and its cooperation with the EU? Is the Kremlin likely to seek to undermine the Yanukovich government in favor of a more pliable Ukrainian leader, or is it stuck with Yanukovich for years to come?
Amid all the excitement about the Orange revolution (democracy and potential NATO membership) analysts have tended to ignore one startling fact: Ukraine is one of the poorest countries in Europe. According to the IMF, its per capita GDP (at the market exchange rate) in 2010 stood at a mere $3,000, compared with $12,300 in neighboring Poland, $10,437 in Russia and $5,800 in Belarus; even Albania was richer according to this measure, with $3,677. Given its undoubted huge industrial, agricultural and human potential, Ukraine must surely rank among the most poorly managed of the formerly communist countries.
The reasons for this are well known. Instead of focusing on structural reforms and sound macroeconomic policies, Ukraine’s “Orange” leaders, consumed by personal hatreds, fought one another to their political deaths, while doing their utmost to alienate the country’s key economic partner – Russia. The West, placing its “strategic interests” above all else (and grandly ignoring those of the long-suffering Ukrainian populace), applauded this irresponsible external stance by pretending that membership in NATO would signify entry into developed Europe.
This dismal history calls for some common-sense observations. First, genuine independence and international respect come not from poking the “authoritarian” Kremlin in the eye (and seeking to portray the rule of oligarchs as “genuine democracy”) but from a country’s economic prowess. By the same token, the poorer and more mismanaged a country, the easier it can be targeted by a predator. Indeed, the “sale” of the lease for the Russian Black Sea Fleet for discounted gas (to sustain Ukraine’s unreformed industry) could be interpreted as a symptom of such weakness on the part of Ukraine. It is, in fact, a replay of the Soviet mode of integration.
Secondly, looking forwards Kiev should be keenly aware of its weaknesses and act accordingly. The West was never seriously interested in having Ukraine in its camp – or to be precise, it may have wanted it, but only on the cheap: it offered NATO (for which Ukraine would have had to pay dearly in financial and geo-political terms) instead of the real thing – membership in the EU (for which the EU would have had to pay). And the West certainly will not want Ukraine in its camp now. With the EU undergoing an existential crisis of its own, the idea that Brussels and the key Western capitals are ready to consider early EU membership for Ukraine (or even a credible “road map” to it) is unthinkable.
Yet despite its current weakness, Ukraine will remain a highly prized asset as a geo-political, infrastructural and cultural link between Russia and the rest of Europe. From a geo-political viewpoint, increased Western influence in Ukraine would weaken the position of Russia, and vice versa. At the same time, Ukraine’s geo-political value would rise in proportion to its economic regeneration.
After coming to power in early 2010, President Yanukovich acted swiftly to end the follies of the Orange regime by re-directing Ukraine’s (pro-Western) geo-political course and returning to the middle ground, which is surely the best option. (Re-establishing constructive relations with the IMF was another important step.) And now, by rebuffing Moscow, Yanukovich is clearly playing “hard to get”. Having already secured significant benefits from Russia, Kiev is attempting to extract further concessions from Moscow, while hoping to increase its leverage over Brussels. Evidently, Yanukovich and his oligarchs calculate that their gambit might win both a privileged (3+1) arrangement within the Russia-dominated customs union, while helping to concentrate minds in Brussels towards securing the signing of the Free Trade Agreement and eventually an Association Agreement with the EU.
This gambit may well succeed. With the economy returning, albeit slowly, to an even keel (after the collapse of 2009) and the democratic credentials of Yanukovich’s regime remaining broadly intact (despite some reservations in the West), Ukraine is in a different league from that of faltering Belarus. While the latter currently has no option but to fall into the Bear’s benevolent embrace, Ukraine has a fighting chance of striking a working balance between the West and Russia. I doubt that Moscow would want to push too hard and risk destabilizing the Yanukovich regime. An excessively pro-Russian turn might plunge the country into yet another bout of instability, which is the last thing anyone would want (especially in the present global climate).
However, it is questionable whether such an outcome is actually desirable for all parties concerned. Crudely stated, what we are witnessing is an unsavory business in which the conservation of unviable Ukrainian heavy industries (at Russia’s expense) is being traded for questionable geo-political favors in the long-standing tradition of great powers. This is the way of the past rather than the future. And it signals the creation of new separate blocs. Surely, Europe should learn from its recent history and have the vision and courage to pursue genuine (fully market-based) pan-continental integration.
Indeed, rather than engaging in such outdated and damaging competition, all sides should start to cooperate. Ideally, this should involve Russia giving transitional aid to Ukraine (conditional on a program of deep industrial restructuring) and the EU offering a credible long-term road map to full membership – a restructured and more prosperous Ukraine would be worthy of such a prospect. Incidentally, the same applies to the case of Belarus, certainly in the long term. At the same time, all parties should strive for an upgraded relationship between Russia and EU/NATO, underpinned by Russia’s membership in the WTO and addressing all aspects of the economy and security.
In having to choose between joining the Russia-Belarus-Kazakhstan Customs Union as a fully fledged member, and negotiating a free trade arrangement with the European Union (short of full membership, which is not on offer), Ukraine finds itself lodged firmly between a rock and a hard place.
By joining the Moscow-sponsored Customs Union, Ukraine would get some very real carrots (and not a few sticks if it does not play ball), whereas the European offer is entirely nebulous. No one knows how Ukrainian enterprises would fare if European firms, with their superior financial resources, entered the Ukrainian market. Nor can anyone be too sanguine about demand in Britain, France and Germany, for example, for Ukrainian manufactured goods. All things being equal, Ukrainian agricultural products might be able to make a go of it, but things are far from equal: European agriculture is lavishly subsidized, which raises real concerns about the prospects for Ukrainian food and grain exports.
Russia, by contrast, offers real benefits: “Join our Customs Union, and we will charge you domestic Russian rates for the gas you import from us.” That represents a huge potential boost to Ukrainian state finances and to ordinary Ukrainian energy consumers. It would get Ukraine out from under the onerous IMF demands that it reduce Naftogaz's vast operating deficit by raising the rates it charges to Ukrainian homes and businesses. Ukraine would gain unimpeded access to a market of some 200 million people that has been growing economically by an average of 7% per year since 2001 (compared to 1.5% in the EU in the same period.) In short, joining the Customs Union would give a major boost to Ukrainian economic expansion and employment at a time of hardship for many Ukrainians.
So much for the carrots, what about the sticks? When the Customs Union goes into effect in January 2012, Russia and its partners will impose a 10.5% customs duty on goods entering the zone compared to the 4.5% Ukraine charges. Thus, Ukraine would face a considerable impediment to exporting to Russia – by far its largest trading partner – and would be tempted to retaliate by raising tariffs on Russian imports.
The choice would seem to be clear, but then Ukrainian Foreign Minister Konstantin Gryshchenko recently declared that Ukraine had no intention of joining the Moscow-sponsored Customs Union as a full member. Instead, he said Ukraine would consider becoming an associate member of the grouping, whatever that might entail. What it will almost surely not entail is Ukraine being charged domestic Russian rates for gas imports, and favorable tariff treatment on exports to the CIS. Why should it?
Minister Gryshchenko is playing with fire as no free trade deal has yet been negotiated with the EU, and Kiev has no idea what the final agreement will look like – or, indeed, if an agreement will be reached. To add insult to injury, Brussels, which views Ukraine as too big, too poor and too corrupt to be easily absorbed into the EU, refuses to assure Kiev that the conclusion of a free trade arrangement would lead, in the end, to full membership in the EU.
Strangely, Brussels insists that membership in a Customs Union with Moscow is incompatible with participation in a free trade area with the EU, putting Kiev in the position of having to choose between the two. And yet Brussels granted Mexico a free trade arrangement even though Mexico was already a member of the NAFTA customs union with Canada and the United States. It is hard to avoid the conclusion that Brussels is motivated by a desire to isolate Moscow and sees Ukraine as a tool to that end.
Unless Kiev establishes a firm basis for cooperation with Moscow, the West will always be tempted to see Ukraine as a card to be played against Russia for its own benefit – as Brussels is now doing by insisting, unreasonably, that Ukraine cannot conclude trade deals with the EU and Russia simultaneously. There is nothing for Ukraine in such an approach.
Ukraine should accept Russia’s offer. Brussels will not cut Ukraine off, no matter what it says. On the contrary, it will have every incentive to begin taking Kiev seriously, which it is not doing now. Ukraine must drive a hard bargain with Brussels now for real benefits, not theoretical ones that may or may not materialize.
Ukraine can and should be the lynchpin in an integrated pan-Eurasian economic system stretching from Lisbon to Vladivostok. This means joining both the Moscow-sponsored Customs Union and concluding a free trade agreement with the European Union. Not only are the two things not incompatible, they are the pre-condition for the pan-Eurasian entente that has been the moral imperative of international politics since the end of the Cold War, and will remain so for years to come.
The application of ideology or political prejudices to economic and societal decisions usually leads to major damage. The history of Marxist societies worldwide is a present and permanent example of the folly of twisting realities to match an ideology.
International relations are processes. Whatever happened in Kiev this year, or at any other time, between Russia and Ukraine is part of an on-going dynamic. Geography and 1,000 years of shared history are not just accidental – they are the real fabric of the existence of both societies. The highly vocal Ukrainian separatists and their counterparts in Russia (which has her share of separatists also) are dogs barking in the wind. They cannot deny through ideology and sheer loudspeaker wattage a profound substratum of reality that will always shape Russian-Ukrainian relations.
As the Introduction correctly points out, Ukraine stands to gain much from prioritizing joining the Customs Union where she would be a very important participant in the near future – as opposed to going after problematic and future participation in the EU, where Ukraine would be a very junior partner – assuming that she even meets the Maastricht criteria.
The current economic crisis has objectively challenged the present composition of the EU and tacitly raised doubts about the past accelerated and careless admission of weak economies into a united Europe – economies which are now basket cases and a drag on the treasuries of the “core” EU countries. The lessons learned about selectivity, due diligence and salutary rigor in the application of Maastricht criteria will not encourage Strasbourg and Brussels to rush into admitting an economy with the problems of Ukraine into its ranks.
So Ukraine is stalling on the sure thing, where it would be a welcome and valued partner (the Customs Union), for the sake of possible future participation (if she qualifies) in a club of rich countries where she will be a very junior partner indeed. Moreover, one must remember the initiative on the EU table to define criteria and mechanisms by which member countries may actually see their inclusion suspended (or in fact voided, if the “suspension” is indefinite.) This would create for Ukraine a permanent burden of not only qualifying to join the EU but also to maintain “membership in good standing.”
One doubts that these considerations were widely examined until now by Kiev. The country is still recovering from years of mismanagement and political circus ushered in by the Orange revolutionaries, and may prefer not to face up to harsh realities at this time.
Regardless of the recent results or lack thereof of the Customs Union, the Russian-Ukrainian relationship will continue as a process and will evolve modes of interaction that are based on the deeper realities that are shared by both societies. History and geography define national destinies and the clue to the relationship lies in facts like these: Moscow was a provincial town in a country ruled from Kiev; the city of Yaroslavl’ on the Volga was founded by and named after a Kievan Grand Duke. Such are the realities, which will determine the long-term dynamics of this relationship.
On this scale, what happened or did not happen in Kiev in 2011 is just a bump in the road – another sad example of ideology temporarily interfering with reality.
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