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Ukraine signs historic deal with the EU

Ukraine

Ukraine's President Petro Poroshenko (C) poses with European Commission President Jose Manuel Barroso (L) and European Council President Herman Van Rompuy at the EU Council in Brussels June 27, 2014. Ukraine President Petro Poroshenko said the June 27, 2014 signing of an association accord with the EU marked a 'historic day' that offered his ex-Soviet country a fresh start after years of political instability.

A HIGHLY SYMBOLIC AGREEMENT...

It was last November that Ukraine’s then president Viktor Yanukovych sparked what would become an international crisis when he pulled out of a trade deal with Europe. Seven months, one toppled presidency, and a Russian invasion later, that trade agreement has been signed.  

Current Ukrainian President Petro Poroshenko and the EU signed the deal today.

For many Ukrainians, such as Yulia Drozd, this was a potent confirmation of their European identity and destiny. 

“This is just a sign that the USSR period came to an end in Ukraine and this is a point of no return, you know, this is a joy, just a complete joy,” says Drozd, speaking from a café near Kiev’s main square.

While Drozd believes the accord will lead to economic improvement, “not really many people understand association with the EU from the economic point of view.”

..WITH SIGNIFICANT ECONOMIC IMPLICATIONS

But there are far reaching changes now set in motion as European tariffs on 98 percent of Ukrainian goods go down.   

“The calculations are that this would increase Ukraine’s exports altogether by 50 percent over five years or so and increase gross domestic product in the same period by 12 percent,” according to Anders Åslund, senior fellow at the Peterson Institute for International Economics.

He says the most obvious industry to benefit will be agriculture , which constitutes a third of Ukrainian exports already. The agreement is gradual in its exposure of Ukraine’s agricultural sector to foreign competition. Manufacturing investment from Europe and the U.S. for the purposes of exporting to Europe are also possible.

There are sectors that appear likely to suffer moving forward. “The less modern sectors,” says Åslund, among them steel and heavy machinery. These industries are centered in the Russia-leaning east of the country, and were focused on export to Russia. They have been the target of Russian import restrictions since the crisis began.    

A FOCUS ON GOVERNMENT REFORM AND ANTI-CORRUPTION

The European association agreement also contains a list of reforms that Ukraine must undertake to fight endemic corruption and raise standards. “There are literally hundreds of laws that Ukraine has committed itself to adopt,” says Åslund. “And this means that the whole state apparatus in Ukraine which is in very bad shape, will be reformed using technical assistance from the European Union.”

“To give you an example, sixty state agencies of EU countries have made  contracts with corresponding state agencies in Ukraine that these EU agencies will reform these Ukrainian state agencies.”

Alexander Kliment, director of Russia research at Eurasia Group, says these things will lay a foundation for future growth. “The reforms involved in making the Ukrainian economy more efficient and less corrupt are by themselves big advantages.”

COSTS

“The gamble is that over the longer term meeting higher standards, European standards, will open larger markets and create more economic growth, but in the short term there are costs,” says Kliment.

As Ukraine brings regulatory codes ranging from phytosanitary requirements to standards for agricultural products and foodstuffs into harmony with European codes, Ukrainian businesses will have to adapt. “Ukrainian companies are used to meeting one set of standards in Ukraine will now have to invest to meet another set of higher standards,” and this will require investment.

Russia, fearful that its normally open borders with Ukraine would be flooded with European goods, has restricted many goods from crossing its borders since the current crisis began. 

MANAGING EXPECTATIONS

The time frame along which the economic effects of the agreement unfold presents one of the greatest challenges to it. Ukrainian politicians, says Kliment, will have a difficult task of managing people's high expectations. “The benefits of this agreement are over the medium to long term, and people’s frustrations with agreements of this kind can come in the immediate to short term.”

About the author

Sabri Ben-Achour is a reporter for Marketplace, based in the New York City bureau. He covers Wall Street, finance, and anything New York and money related.

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