Archive for June 12th, 2011

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Ex-President Kuchma speaks on trade (and influence)

June 12, 2011

Well, after a few rather heavy and hopefully thought provoking posts over the past few days, I expect you are wanting a return to lesser matters dear readers.

Fear not, the political holidays will soon be upon us in Ukraine, although of course, the politics and diplomacy will not stop.

In the meantime, Ex-President Kuchma, whilst at a reception hosted by the Russian Embassy in Ukraine, gave a short but interesting statement warranting a little analysis. It is worthy of note not only for what was said, but also what was not. The subject – the EU DCFTA and AA verses the Russian Customs Union.

“I think that the Ukrainian leadership is in a very difficult position. We must take a political decision, but there is no certainty that on the one hand and on the other hand, those assurances and those promises will be fulfilled. Of course, I would like the level (of Russian-Ukrainian relations) to be much better, and I think that Ukraine would also like it to be better. I still believe that Ukraine has no future without Russia.” – Interfax

Short and somewhat true. My personal opinion is that Ukraine should go no further than Switzerland or perhaps Norway when it comes to EU integration and membership. A move from the top right of the below diagram to the centre left where you will find the Swiss and Norwegian flags.

As the diagram shows, that puts a barrier between the current position of Ukraine and Russia and the probable position of Ukraine fairly soon should the Ukrainian flag join that of Switzerland or two barriers should it join the position of Norway.

Whilst the signing of the EU AA and DCFTA will be a geopolitical victory of sorts for the EU, Ukraine makes up only about 2% of EU trade. The EU, on the other hand makes up about 50% of Ukrainian trade. The other 50% laying to the East and Russia.

What the DCFTA and AA with the EU does do for Ukraine is open the door, with more guarantees of a level playing field, for FDI from the EU corporations. FDI is very much needed. It may also generate problematic issues due to the still existing and quite deliberate Soviet policy of one nation rarely having the capacity to construct things alone. An example being aircraft and helicopter engines are still made in Ukraine whilst the chassis are still made in Russia.

President Yanukovych when seemingly turning his back on the Customs Union in favour the the DCFTA with the EU offered a Customs Union + 1 route as a compromise along WTO lines. The WTO is of course a somewhat sore point for Russia who is yet to join. Ukraine has of course already stated it would support Russia’s entry numerous times. Where several member of the Customs Union and Ukraine may be able to work together is in some form of Black Sea area OPEC styled grain consortium. Much depends on the devil in the detail of Ukraine’s existing WTO membership and any DCFTA is signs with the EU.

Needless to say, an OPEC styled grained consortium of the Black Sea region, a region responsible for huge amounts of grain production and export globally may well be a way to pacify Russia. We will see what happens in this regard, but it is certainly a matter of discussion at the highest levels of government.

Ukraine also is reliant upon Russian oil and gas as most of Europe is, but to a far greater degree. There is considerable strain upon the existing agreement at present, to such a degree there can be no certainty it will withstand the political forces it is under. The promise of extremely cheap Russian oil and gas should Ukraine abandon the DCFTA and AA with the EU is not to be rejected lightly. Thus far, the current government is pressing onwards towards the EU agreements but that needs to be dealt with rather swiftly, particularly within the EU, as Russia is very likely to install Mr Putin as President again in March 2012.

Both the EU and Ukraine will be well aware an emboldened President Putin come March 2012 is very likely to test the resolve of all concerned given his ability at brinkmanship and hard-core decision making. Severe problems may lay ahead if EU/Ukraine agendas are not concluded in a swift manner. Much will depend of the Franco-Germanic influence on Russia and vis-a-vis Russian influence on them should things linger too long.

President Yanukovych has been rather forthright in Ukrainian/EU negotiations recently, by insisting that there is a written guarantee that Ukraine will eventually have the right to join the EU within the agreements. He is quoted as saying without such a written guarantee that all current negotiations would be “empty”.

That is not quite true, Ukraine would still benefit from EU FDI and inherently become more Europe orientated by default but he does have a political point. To unnecessarily anger a large and essential neighbour without having something concrete to show the Ukrainian public regarding their eventual future will not sit well with the voting populous when gas and oil prices rise from an angry Russia and import/export issues that did not exist before suddenly occur along the large Ukrainian/Russian border.

A major card in the EU deck regarding Ukrainian public opinion is Visa-free travel when it comes to tourism/short term visit (90 days or less). It is a consistent source of irritation to the Ukrainian populous that they must produce an absolute mountain of official documents which take longer to collate than the two weeks holiday they had planned to visit the EU for, and at no small cost to do as well, just to get a tourist visa. This one single act by the EU would go a tremendous way to mitigating anything Russia may throw at Ukraine as punishment for signing the DCFTA and AA, as far as public opinion is concerned.

It would also be a tremendous blow to Russian pride that Ukrainians can travel freely throughout the EU on holiday when the Russian populous still requires a Visa.

It seems that the EU is prepared to play Visa card having given Ukraine a road-map to Visa-free travel, but as Mr Kuchma implies, it is one thing to be given directions but yet another to arrive at your destination.

There is also the internal political issue that Yanukovych has publicly and repeatedly stated Ukraine is heading towards the EU. Whilst it is a direction agreed with by all major political parties, a U turn back towards Russia is not a position any politician would want to make lightly having made so many public statements to the contrary. The EU must step up to the plate and offer such a guarantee, no matter how convoluted the language used to do so in order to pacify all EU members states or vague regarding time-lines for Ukraine, to be waved under the noses of the Ukrainian public as producing something worthwhile.

A further consideration is that the Ukrainian oligarchy seem to have decided their interests will be better protected and possibly better served looking West. Whilst an EU level playing field would in itself be a disadvantage over what they currently enjoy, a turn East gives rise to genuine concern that by hook or by crook, their prized assets would come under the control of Moscow eventually. That said, Ukraine is an export economy and Russia is a major customer to many. The overall feeling though, at least from those I have spoken to, is that of heading towards the EU level playing fields as the best long-term option. We shall see.

It is very much a catch 22 situation for the current government that involves some very difficult and hard choices that, whichever had been taken, will cause hardship in the immediate term. The EU needs to make that hardship worth while and the unpopular reforms seem necessary, by offering guaranteed solid gold carrots for the Ukrainian public (not politicians) and inherent political goodwill it would bring in a rather expedited manner if this is not to flounder on the rocks of EU bureaucracy and untimeliness, to be subsequently submersed by the immediate promise of cheap oil and gas from a much more politically nimble Russia.

Big geopolitical stakes at risk here and the Ukrainian croupier is trying to deal the EU the better hand. How long that will continue depends on the nerve of the croupier, the skill of the EU players and whether there is a Russian ace tucked up a Russian sleeve somewhere.

Ukraine can expect a tense autumn as DCFTA and AA negotiations draw to a conclusion, possibly a cold winter if Russia sees fit, an anxious spring to insure the momentum of the 27 EU member states signing the agreements is moving faster that the re-installment of President Putin in Russia, leaving the summer of 2012 as yet unknown depending on how upset Russia may or may not be with any result……not withstanding a small football tournament as well.

Phew!

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