The Guest Blog

Guest blogpost by Simonas Klimanskis, Eastern Europe Studies Centre in Vilnius.

The European Union (EU) signed Association Agreements with Georgia, Moldova and the Free trade Agreement, which is an essential part of the Association Agreement, with Ukraine on 27 June. If these countries were previously able to balance between the East and the West, they now clearly choose integration with the EU. This means that these Eastern partners even theoretically will not be able to join the Eurasian Customs Union, mainly dominated by Russia.

Ratification by signatory countries and all EU member states and, of course, implementation is needed for these historical agreements to actually open up the EU single market of 500 million consumers, reduce Russia’s influence in EU’s Eastern partners and create safe neighbourhood. In order to implement the provisions of the agreements, countries need to carry out necessary reforms, i.e. put free market principles, fight corruption, reinforce the rule of law, independent courts, liberalize procurement and service market and adopt European standards. Key challenges, namely, are related to the implementation: countries must have many political will and courage to carry out reforms, withstand external pressure and, as reveals situation in Ukraine, resist Russia’s posing threat to the security of the region. It is, therefore, important to evaluate the benefits of these signed agreements and possible geopolitical and economic challenges concerning their implementation in the current context of increased threat to the security of the region.

Geopolitical approach

Looking trough geopolitical prism it means the determination of three signatory countries to escape from Russian zone of influence and relate their future with the EU. Meanwhile Russia has always been considering these countries, especially Ukraine, to be important for the creation of the Eurasian Union and trying to halt their integration into Euro-Atlantic structures and keep them in its sphere of influence. Just after the Association Agreements have been signed, Russia warned of possible consequences. It could quite likely increase duty rates, tighten border checks. It may be noted that Russia by using such tolls usually seeks not only to protect its market but also to “punish” countries wishing to escape from its influence. Such a tactic was used last autumn before the Vilnius summit, when Russia launched so-called chocolate, cheese and wine warfare.

Another leverage of Russia’s influence is energy. For example, Russia could raise the question of the implementation of the provisions of the agreement during negotiations on gas price. Currently, this is relevant for Ukraine since “Gazprom” has cut off gas supply to this country after agreement on settlement of debts was not reached. Available gas reserves – about 14 bn. m3 – will be enough till the winter season. It should be noted Ukraine has already agreed with Slovakia on reverse-flow gas supply from the EU. But this supply will amount to about 40% of the amount of gas which was imported from “Gazprom”.

Meanwhile Moldova could avoid challenges related to security of gas supply and price because of available alternative supply – Romania will start to supply gas to this country this year. Georgia a major part – about 80% – imports from Azerbaijan.

One more channel of influence – as it is known, it is agreed on trilateral technical consultations in the Ukraine-Russia-EU format on the consequences of the implementation of the Association Agreement. There exists a real probability that Russia may influence the implementation of the provisions of the agreement during these consultations. As it is known, the implementation of the agreement was delayed until the end of 2015, following the latest trilateral talks.

It also needs to draw attention to the protocol on ceasefire that has been signed in Minsk on 5 September, although there are doubts about the sustainability of this ceasefire. Such a ceasefire could lead to the peace talks, but it poses a risk that Russia through pro-Russian separatists would undoubtedly seek the greatest possible decentralization of Ukraine during these talks. Decentralized political system would possibly allow Russia through political and business elite of eastern regions to influence Ukrainian central government’s decisions on carrying out reforms and thus hinder the implementation of the Association Agreement.

Concerning Moldova, Russia may play the Transnistrian card. Transnistrian – an unrecognized separatist region de facto controlled by Russia. The issue of this frozen conflict, the escalation of separatist tendencies may be used as a leverage to influence the implementation of the provisions of the Association Agreement.

To sum up possible measures of Russian reaction, it is obvious that Ukraine faces the biggest challenges – the broadest package of measures may be used against this country. Therefore, Ukraine, Moldova and Georgia must remain united to be able to withstand external pressure on their economies after they have decided to go forward on the European path. These countries need to understand all reforms are primarily useful in long-term for themselves. By evaluating statements of signatory countries’ heads, it is possible to see a strong determination to continue all necessary reforms in order to use all opportunities offered and seek full-fledged EU membership. However, it is important to note that Moldova will held parliamentary elections 30 November. Opinion pools reveal that Communist Party which is in favour for European integration but at the same time emphasizes the importance of pragmatic relations with Russia may get a number of seats. In the case of Communist victory, Moldova might choose a selective application of the provisions of the Association Agreement, consultations with Russia or the process of integration might slow down.

Economic approach

Concerning real economic benefits for business and people, the Deep and Comprehensive Free Trade Agreement, a fundamental part of the Association Agreement, will eliminate about 95% of customs duties and improve the protection of investments. Eliminated barriers will activate trade, increase competitiveness and promote economic growth and job creation.

But, first of all, signatory countries should adopt European standards and norms, as well as carry out reforms. Such an adjustment will mean additional costs for enterprises which might be increased by Russia’s response actions. The adjustment costs are one of the main factors influencing the motivation to carry out reforms.

Ukraine faces the highest risks related to Russia’s economic constraints as Ukrainian export to Russia amounted to 20%, import – to 29,1% in January–June 2014. Trade volumes were higher with the EU – 33,1 and 35,4% respectively. But the burden of adjustment on Ukraine will be facilitated by financial support of 11 bn euros available under the financial perspective 2014–2020. Meanwhile Moldova is in a slightly better position as country’s export to Russia amounted to 21%, but import – 13,9%. Moreover, Moldova has much closer economic relations with the EU as export to the Community amounted to 53%, import – 48,8%. Georgia might face a minimal risk. Country’s export to Russia amounted to only 9,7%, import – 5,6%, and export to the EU – 20,3%, import – 27,9%.

Nevertheless, it is important that countries would not have any doubts about long-term benefits of adjustment to European norms which will compensate short-term difficulties. Participation in the EU market operating in line with civilized business principles will ensure lover risk, more secure investments and fair competition. It is estimated that Ukraine’s GDP will increase by 6%, Ukrainian enterprises will save 500 million euros per year in import duties, if the aforementioned agreements are implemented. Georgia’s GDP will increase by 4,3%, export to the EU – by 12% and import by 7,5% during the same period. Moldova’s GDP will increase by 5,4%, export to the EU and import – by 16 and 8% respectively.

The EU will also win from the opening up of Ukrainian, Georgian and Moldovan markets. It will primarily improve the situation of enterprises from eastern EU member states which have suffered from the recent situation in Ukraine and relevant uncertainty, delays in payments and hryvnia fluctuations. Moreover, Russia’s military aggression and use of economy for political purposes might encourage some businessmen who care about the safety and the risk of their business to re-orientate towards opened Eastern partners’ markets. Of course, this re-orientation will depend on the settlement of the crisis in Ukraine.

In conclusion, there are no doubts about the benefits of the EU Association Agreements with Ukraine, but geopolitical and economic circumstances determine that the implementation period will not be easy. Many challenges await Ukraine due to its high economic dependency on Russia. The situation is undoubtedly aggravated by the conflict in eastern Ukraine. Therefore, it is important that Russia would stop arming pro-Russian separatists, withdraw its all regular troops from Ukraine and that Ukraine would have a possibility to choose freely its own future. The EU should use all tools to halt the further escalation of the conflict and to rebuild stability. Moldova will face fewer challenges. Meanwhile Georgia will likely be fastest with the implementation of the agreement. Finally, it needs to believe in countries’ determination to continue all necessary reforms, withstand pressure and successfully go the European way.

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