However, much has transpired in Ukraine’s domestic politics in the last seven years. The outcomes of various legislative and regional elections and the impact and evolution of the Orange Revolution have changed the country’s relations with the European Union and reshaped its political direction on both domestic and regional levels.
Enough time has passed to take stocks of the evolution of the Yanukovich presidency, particularly the developments in European Union-Ukraine relations. Has the change of emphasis in the EU-Ukraine relations, from political to economic and commercial engagement, brought about a fundamental reorientation of Ukraine’s policies? Have the new relations contributed to improving stability - a process in which Ukraine can undoubtedly play a vital role - in the EU’s neighborhood?
Economic issues in EU-Ukraine relations
The Partnership and Cooperation Agreement (PCA) has served as the political and legal bedrock of relations between Brussels and Kiev since 1994. The EU launched its European Neighborhood Policy (ENP) on the basis of the PCA, following its 2004 wave of enlargement that took in the Czech Republic, the Baltic States, Hungary, Poland, Slovenia, and Slovakia as new member states.
The objective of the ENP was to reduce negative consequences associated with enlargement for already existing member countries, especially those bordering Eastern Europe, and “to avoid drawing new dividing lines in Europe, and to promote stability and prosperity within and beyond the new borders of the Union.” It was also partially designed to facilitate the entry into force of the Association Agreement currently being negotiated between the EU and Ukraine as a replacement for the PCA.
On January 10, 2011, during one of many visits to Ukraine, Stefan Füle, European Commissioner for Enlargement and the European Neighborhood Policy, stated the EU’s willingness to negotiate a partnership agreement with Kiev that would be implemented before the end of the year. However, recognizing the difficulty of achieving such an objective, Füle went on and stressed the need for Kiev to increase its own efforts to decisively promote a broad and tolerant agreement which would establish a free trade zone between the EU and Ukraine, as well as an expanded political and economic cooperation. The recent decision to imprison the former prime minister, Yulia Tymoshenko, at a time when the Association Agreement is being negotiated, reduces, however, the chances of a successful deal between Ukraine and the EU and makes their future relations more uncertain.
The Action Plan on visa-free travel regime, which supports the long-term goal of ensuring that Ukrainian citizens are able to make short term visits to EU countries without the need for visas, is a central issue in relations between the EU and Ukraine. It has now been confirmed by Füle during his January 10 visit that Ukraine has “the obligation [...] to implement necessary reforms in achieving the various objectives” of the Action Plan, although he added that the EU will continue to assist Kiev in this task.
The EU is Ukraine’s largest trading partner. EU trade turnover amounts to approximately a third of Ukraine’s international trade. In 2009 imports to Ukraine from the EU were valued at 7.9 billion Euros. The European Commission and Brussels have long insisted that strong economic integration must be part of any broader political compact. It was for this reason that European countries actively supported Kiev’s bid to achieve World Trade Organization (WTO) membership.
Ukraine’s entry into the WTO on May 16, 2008 enabled Kiev to negotiate with the EU over a Deep and Comprehensive Free Trade Agreement (DCFTA), which is especially designed to expand the access of Ukrainian goods to European markets and encourage European investment in Ukraine. The DCFTA, once agreed upon, will be the first of a new generation of trade agreements covering all spheres of mutual trade and economic cooperation, ranging from the service, transport, and energy sectors to the banking sector and even market competitiveness. The agreement, among other things, aims to remove various obstacles in Ukraine-EU trade relations by bringing Ukrainian commercial legislation in the fields of technical regulation, competition policy, trade services, customs, and financial regulations in line with EU standards.
Although Yanukovich has openly declared on many occasions that economic integration with Europe remains a priority of Ukrainian foreign policy, one must recognized that the results achieved during the negotiations on the free trade area have been thus far rather disappointing. Several commentators have also noted with concern that “less respect for democracy and pluralism” has been observed under Yanukovich presidency. This has especially been the case with regards to the protection of fundamental civil and political rights.
The European Parliament has noted the pressures exercise on various journalists. Of special concern is how they have often been manipulated for political purposes by the Ukrainian Security Service (SBU). Another contradiction of the principle of ensuring democracy and civil rights (a condition deemed fundamental in the negotiations between the EU and Kiev), as cited by the European Parliament, is the “misuse of administrative resources and legal proceedings for political purposes.” Additional concerns have been triggered by Ukraine’s constitutional reforms, as in October 2010 the 1996 Constitution was reinstated. Undoubtedly, the lack of progress by Ukraine during the DCFTA negotiations stems, at least in part, from structural problems and the countries’ apparent inert leadership, which seems unable to fulfill the promises of reform as purported during the 2010 presidential election campaign.
Implementation of reforms
Economic reforms are considered a precondition, not only for the commencement of negotiations on EU integration, but also for the release of the various tranches, (10 installments in total) of an International Monetary Fund (IMF) loan to Ukraine as negotiated in early 2010. The IMF’s financial rescue was much needed, as Ukraine was one of the countries hardest hit by the global financial crisis of 2008. The first loan installment of $15.1 billion was paid on June 28, 2010. The terms of the loan stipulates that reforms has to be carried out in the medium term with the aim of bringing about improvements in productivity and in the investment climate, as necessary for consistent and sustainable economic growth. The IMF identified macroeconomic imbalances in the fiscal policy and widespread corruption, two factors which discourage foreign direct investment (FDI) as the main obstacles to long-term economic growth.
A new tax code was approved by the Ukrainian Parliament in November 2010 following considerable protests and public demonstrations, particularly by small and medium-sized entrepreneurs. The reformed code aims to reduce fiscal burdens and strengthen the Ukrainian government’s weak and ineffectual fiscal enforcement structures. While the IMF has positively welcomed this reform, it is concerned by the fact that sudden cuts in taxes and the proliferation of exemptions can be so exhaustive as to threaten the capacity of the state to sufficiently collect taxes. In short, although the IMF was instrumental in introducing the new code and supports necessary and positive changes in tax policy, its influence has not decisively improved the quality of legislation and administration in the fiscal sphere.
The Ukrainian pension system also faces serious difficulties and requires ever increasing transfers from the state budget (state pension liabilities swallow up 18% of total GDP). Therefore, the IMF expects the government to present a new law fixing the retirement age at 60, which should bring substantial relief to the national economy and state coffers and increase GDP by 2.5% per year. However, on March 18, 2011 the Ukrainian parliament ducked discussion on this reform – contrary to its promise to deal with the matter. It should be noted that the implementation of such a reform is conditional for the release of the second IMF’s loan installment ($1.5 billion).
The fact that Yanukovich’s own Party of Regions holds the majority in parliament may explain a great deal of why the Ukrainian President has not yet implemented the promised pension reform and why the country as a whole is still trapped in a certain lethargy, without political and administrative momentum.
Finally, the energy sector, especially natural gas, is essential for the development of the Ukrainian economy. Following Ukraine’s entry into the Energy Community on September 24, 2010, the European Commission and Kiev organized a conference to encourage international investment in modernizing the Ukrainian gas transport system.
The planned modernization will be undertaken as part of an EU funded technical assistance project under the EU’s Neighborhood Investment Fund. Already more than 2.5 million Euros have been earmarked to conduct a feasibility study as well as an environmental and social impact assessment. The main goal of the proposed energy reform is to improve government transparency and bring about the sustainability of the gas sector. However, many economic, political and regional vested interests revolve around the gas sector – adding to its complexity – and the odds that the adoption of a series of laws aimed at introducing European standards in the energy sector will make it transparent are slim to none.
**********
Despite the shortcomings in the Ukrainian government’s implementation of reforms, the EU has so far refrained from openly condemning Ukraine’s failure to respect the political obligations as enshrined in the economic agreements it has committed itself to. In the wake of a much talked-about backslide in democratic standards, on January 10, 2011 Štefan Füle briefly noted the importance of the common values which form the basis of a healthy democracy. Respect for fundamental human rights, democratic principles, and legal process are values, he emphasized, which Ukraine must adopt if it wishes to continue its negotiations with the EU. He also reaffirmed the need to ensure that criminal law is not misused for political purposes and that the principles of fairness, impartiality and the independence of the legal process are respected – a clear reference to the prosecution of Yulia Tymoshenko.
As for the IMF, its team of experts assessed that the Reform Program “is off to a generally good start, though with some delays Yet, in a February 2011 report, it menacingly stated that “while macroeconomic risks are falling, they remain considerable. The challenge is to stay the course on policies agreed under the program” All in all, this is a minor challenge for the Yanukovich administration, with a strong parliamentary majority and no scheduled elections.
Yanukovich’s reform program promised during the February 2010 presidential election is much more ambitious than the economic aspects focused upon in this analysis. However, it seems so far that economic issues have been overshadowed by political and constitutional ones. Bearing in mind the current political stability in the Ukrainian political system – Yanukovich’s government controls the parliament and other key state institutions – developments over the coming months will indicate whether Yanukovich is really serious about meaningfuly improving in EU-Ukraine relations.
In his article “20 Years of Ukraine: the Road Has Just Begun,” published in the weekly Zerkalo Nedeli on August 19, Yanukovich writes: “The European choice has become the foundation of Ukraine’s foreign policy. European values have become the foundation of our development. We are confident that the Association Agreement and the document on forming a comprehensive and profound free trade zone are what Ukraine and the European Union need.” This is a clear statement on Ukraine’s path to Europe, but concrete actions, not only rhetoric, are required from now on.
Richard Rousseau is Associate Professor and Chairman of the Department of Political Science and International Relations at Khazar University in Baku, Azerbaijan and a contributor to Global Brief, World Affairs in the 21st Century (www.globalbrief.ca) and The Jamestown Foundation.
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Ukraine: A Fledgling Democracy with Incomplete Reforms
October 3, 2011
However, much has transpired in Ukraine’s domestic politics in the last seven years. The outcomes of various legislative and regional elections and the impact and evolution of the Orange Revolution have changed the country’s relations with the European Union and reshaped its political direction on both domestic and regional levels.
Enough time has passed to take stocks of the evolution of the Yanukovich presidency, particularly the developments in European Union-Ukraine relations. Has the change of emphasis in the EU-Ukraine relations, from political to economic and commercial engagement, brought about a fundamental reorientation of Ukraine’s policies? Have the new relations contributed to improving stability - a process in which Ukraine can undoubtedly play a vital role - in the EU’s neighborhood?
Economic issues in EU-Ukraine relations
The Partnership and Cooperation Agreement (PCA) has served as the political and legal bedrock of relations between Brussels and Kiev since 1994. The EU launched its European Neighborhood Policy (ENP) on the basis of the PCA, following its 2004 wave of enlargement that took in the Czech Republic, the Baltic States, Hungary, Poland, Slovenia, and Slovakia as new member states.
The objective of the ENP was to reduce negative consequences associated with enlargement for already existing member countries, especially those bordering Eastern Europe, and “to avoid drawing new dividing lines in Europe, and to promote stability and prosperity within and beyond the new borders of the Union.” It was also partially designed to facilitate the entry into force of the Association Agreement currently being negotiated between the EU and Ukraine as a replacement for the PCA.
On January 10, 2011, during one of many visits to Ukraine, Stefan Füle, European Commissioner for Enlargement and the European Neighborhood Policy, stated the EU’s willingness to negotiate a partnership agreement with Kiev that would be implemented before the end of the year. However, recognizing the difficulty of achieving such an objective, Füle went on and stressed the need for Kiev to increase its own efforts to decisively promote a broad and tolerant agreement which would establish a free trade zone between the EU and Ukraine, as well as an expanded political and economic cooperation. The recent decision to imprison the former prime minister, Yulia Tymoshenko, at a time when the Association Agreement is being negotiated, reduces, however, the chances of a successful deal between Ukraine and the EU and makes their future relations more uncertain.
The Action Plan on visa-free travel regime, which supports the long-term goal of ensuring that Ukrainian citizens are able to make short term visits to EU countries without the need for visas, is a central issue in relations between the EU and Ukraine. It has now been confirmed by Füle during his January 10 visit that Ukraine has “the obligation [...] to implement necessary reforms in achieving the various objectives” of the Action Plan, although he added that the EU will continue to assist Kiev in this task.
The EU is Ukraine’s largest trading partner. EU trade turnover amounts to approximately a third of Ukraine’s international trade. In 2009 imports to Ukraine from the EU were valued at 7.9 billion Euros. The European Commission and Brussels have long insisted that strong economic integration must be part of any broader political compact. It was for this reason that European countries actively supported Kiev’s bid to achieve World Trade Organization (WTO) membership.
Ukraine’s entry into the WTO on May 16, 2008 enabled Kiev to negotiate with the EU over a Deep and Comprehensive Free Trade Agreement (DCFTA), which is especially designed to expand the access of Ukrainian goods to European markets and encourage European investment in Ukraine. The DCFTA, once agreed upon, will be the first of a new generation of trade agreements covering all spheres of mutual trade and economic cooperation, ranging from the service, transport, and energy sectors to the banking sector and even market competitiveness. The agreement, among other things, aims to remove various obstacles in Ukraine-EU trade relations by bringing Ukrainian commercial legislation in the fields of technical regulation, competition policy, trade services, customs, and financial regulations in line with EU standards.
Although Yanukovich has openly declared on many occasions that economic integration with Europe remains a priority of Ukrainian foreign policy, one must recognized that the results achieved during the negotiations on the free trade area have been thus far rather disappointing. Several commentators have also noted with concern that “less respect for democracy and pluralism” has been observed under Yanukovich presidency. This has especially been the case with regards to the protection of fundamental civil and political rights.
The European Parliament has noted the pressures exercise on various journalists. Of special concern is how they have often been manipulated for political purposes by the Ukrainian Security Service (SBU). Another contradiction of the principle of ensuring democracy and civil rights (a condition deemed fundamental in the negotiations between the EU and Kiev), as cited by the European Parliament, is the “misuse of administrative resources and legal proceedings for political purposes.” Additional concerns have been triggered by Ukraine’s constitutional reforms, as in October 2010 the 1996 Constitution was reinstated. Undoubtedly, the lack of progress by Ukraine during the DCFTA negotiations stems, at least in part, from structural problems and the countries’ apparent inert leadership, which seems unable to fulfill the promises of reform as purported during the 2010 presidential election campaign.
Implementation of reforms
Economic reforms are considered a precondition, not only for the commencement of negotiations on EU integration, but also for the release of the various tranches, (10 installments in total) of an International Monetary Fund (IMF) loan to Ukraine as negotiated in early 2010. The IMF’s financial rescue was much needed, as Ukraine was one of the countries hardest hit by the global financial crisis of 2008. The first loan installment of $15.1 billion was paid on June 28, 2010. The terms of the loan stipulates that reforms has to be carried out in the medium term with the aim of bringing about improvements in productivity and in the investment climate, as necessary for consistent and sustainable economic growth. The IMF identified macroeconomic imbalances in the fiscal policy and widespread corruption, two factors which discourage foreign direct investment (FDI) as the main obstacles to long-term economic growth.
A new tax code was approved by the Ukrainian Parliament in November 2010 following considerable protests and public demonstrations, particularly by small and medium-sized entrepreneurs. The reformed code aims to reduce fiscal burdens and strengthen the Ukrainian government’s weak and ineffectual fiscal enforcement structures. While the IMF has positively welcomed this reform, it is concerned by the fact that sudden cuts in taxes and the proliferation of exemptions can be so exhaustive as to threaten the capacity of the state to sufficiently collect taxes. In short, although the IMF was instrumental in introducing the new code and supports necessary and positive changes in tax policy, its influence has not decisively improved the quality of legislation and administration in the fiscal sphere.
The Ukrainian pension system also faces serious difficulties and requires ever increasing transfers from the state budget (state pension liabilities swallow up 18% of total GDP). Therefore, the IMF expects the government to present a new law fixing the retirement age at 60, which should bring substantial relief to the national economy and state coffers and increase GDP by 2.5% per year. However, on March 18, 2011 the Ukrainian parliament ducked discussion on this reform – contrary to its promise to deal with the matter. It should be noted that the implementation of such a reform is conditional for the release of the second IMF’s loan installment ($1.5 billion).
The fact that Yanukovich’s own Party of Regions holds the majority in parliament may explain a great deal of why the Ukrainian President has not yet implemented the promised pension reform and why the country as a whole is still trapped in a certain lethargy, without political and administrative momentum.
Finally, the energy sector, especially natural gas, is essential for the development of the Ukrainian economy. Following Ukraine’s entry into the Energy Community on September 24, 2010, the European Commission and Kiev organized a conference to encourage international investment in modernizing the Ukrainian gas transport system.
The planned modernization will be undertaken as part of an EU funded technical assistance project under the EU’s Neighborhood Investment Fund. Already more than 2.5 million Euros have been earmarked to conduct a feasibility study as well as an environmental and social impact assessment. The main goal of the proposed energy reform is to improve government transparency and bring about the sustainability of the gas sector. However, many economic, political and regional vested interests revolve around the gas sector – adding to its complexity – and the odds that the adoption of a series of laws aimed at introducing European standards in the energy sector will make it transparent are slim to none.
**********
Despite the shortcomings in the Ukrainian government’s implementation of reforms, the EU has so far refrained from openly condemning Ukraine’s failure to respect the political obligations as enshrined in the economic agreements it has committed itself to. In the wake of a much talked-about backslide in democratic standards, on January 10, 2011 Štefan Füle briefly noted the importance of the common values which form the basis of a healthy democracy. Respect for fundamental human rights, democratic principles, and legal process are values, he emphasized, which Ukraine must adopt if it wishes to continue its negotiations with the EU. He also reaffirmed the need to ensure that criminal law is not misused for political purposes and that the principles of fairness, impartiality and the independence of the legal process are respected – a clear reference to the prosecution of Yulia Tymoshenko.
As for the IMF, its team of experts assessed that the Reform Program “is off to a generally good start, though with some delays Yet, in a February 2011 report, it menacingly stated that “while macroeconomic risks are falling, they remain considerable. The challenge is to stay the course on policies agreed under the program” All in all, this is a minor challenge for the Yanukovich administration, with a strong parliamentary majority and no scheduled elections.
Yanukovich’s reform program promised during the February 2010 presidential election is much more ambitious than the economic aspects focused upon in this analysis. However, it seems so far that economic issues have been overshadowed by political and constitutional ones. Bearing in mind the current political stability in the Ukrainian political system – Yanukovich’s government controls the parliament and other key state institutions – developments over the coming months will indicate whether Yanukovich is really serious about meaningfuly improving in EU-Ukraine relations.
In his article “20 Years of Ukraine: the Road Has Just Begun,” published in the weekly Zerkalo Nedeli on August 19, Yanukovich writes: “The European choice has become the foundation of Ukraine’s foreign policy. European values have become the foundation of our development. We are confident that the Association Agreement and the document on forming a comprehensive and profound free trade zone are what Ukraine and the European Union need.” This is a clear statement on Ukraine’s path to Europe, but concrete actions, not only rhetoric, are required from now on.
Richard Rousseau is Associate Professor and Chairman of the Department of Political Science and International Relations at Khazar University in Baku, Azerbaijan and a contributor to Global Brief, World Affairs in the 21st Century (www.globalbrief.ca) and The Jamestown Foundation.
