EuroWire November 2013

Inspiring People. Shaping the Future.

WASHINGTON, DC 1101 New York Avenue, NW Suite 901 Washington, DC 20005 USA Contact: Tyson Contact: Tyson Barker E-mail: tyson.barker@bfna.org Tel: Tel: (+1) 202.384.1993 www.bfna.org

BRUSSELS Résidence Palace Rue de la Loi 155 1040 Brussels, Belgium Contact: Contact: Thomas Thomas Fischer E-mail: thomas.fischer@bertelsmannE-mail: thomas.fischer@bertelsmann stiftung.de stiftung.de Tel: Tel: (+32 2) 280.2830 www.bertelsmann-stiftung.de/brussels

Between East and West: Ukraine and the Association Agreement EuroWire is a joint publication of the Bertelsmann Foundation offices in Washington, DC and Brussels. It connects Capitol Hill to European Union policy and politics, and contributes to a common trans-Atlantic political culture. EuroWire is an occasional publication that highlights issues, legislation and policymakers relevant to the Congressional legislative cycle. This publication looks at the European Union from the point of view of Capitol Hill staffers and offers timely operational analysis.

KEY POINTS summit on November 28-29 in Vilnius, Lithuania could see Ukraine and the EU sign an Association Agreement and aDeep Deepand and • The Eastern Partnership Summit Comprehensive Free Trade Agreement.

The failureover to secure the release of jailed Ukrainian politician Yuliafar Tymoshenko thustofar hampered to finalize these agreements.

• Concerns democracy and human rights in Ukraine have thus hampered has efforts finalize theseefforts agreements.

• In the run-up to the summit, Russia has significantly increased economic pressure on Ukraine and other Eastern Partnership countries. MEP Elmar Brok has described this as an “unjust trade war”.

But it is the potential accord with Ukraine that is creating waves and bringing the EU firmly into a struggle for regional influence and access.

Russia has applied intense pressure on Ukraine to abandon plans for closer cooperation with the EU in favor of formal integration into the Eurasian Customs Union (ECU), a Russia-led economic bloc of former Soviet states. Moscow realizes that an EU agreement with Kyiv would have immense ramifications for Ukraine’s future and the future of EU policy in the region, both to the Kremlin’s detriment.

ABOUT THE BERTELSMANN FOUNDATION: The Bertelsmann Foundation is a private, nonpartisan operating foundation, working to promote and strengthen trans-Atlantic cooperation.

Serving as a platform for open dialogue among key stakeholders, the Foundation develops practical policy recommendations on issues central to successful development of both sides of the ocean. ©Copyright 2013, Bertelsmann Foundation. All rights reserved.

©Copyright 2013, Bertelsmann Foundation. All rights reserved.

NOVEMBER 2013

Ukrainian President Viktor Yanukovych speaks at the February 2013 EU-Ukraine summit.

On November 28-29, the European Union will host its annual Eastern Partnership (EaP) summit in Vilnius, Lithuania. The EaP, formed in 2009, is an initiative governing the EU’s relations with six former Soviet states: Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine. At this year’s gathering, the EU hopes to cement relations with its eastern neighbors several of its eastern by signing by ansigning association agreementagreement (AA) and neighbors an association deep and acomprehensive free-trade agreement (AA) and deep and comprehensive free-trade (DCFTA) Ukraine initialing similar agreementwith (DCFTA) withand Ukraine, and working agreements Georgia and Moldova. on similar with agreements with Georgia and Moldova.

Inspiring People. Shaping the Future.

EU and Ukraine: The Long and Winding Road Since its independence from the Soviet Union in 1991, Ukraine has worked with the EU’s various institutions to establish extensive ties with Brussels. Signed in 1994 and entering into force in 1998, a Partnership and Cooperation Agreement (PCA) provided an initial framework for relations, promoting closer political dialogue and fostering greater economic, cultural and scientific cooperation. The victory of proEU Viktor Yushchenko in the 2005 Ukrainian presidential election, the so-called “Orange Revolution”, further solidified relations as he sought greater political and economic integration with the West.

The 2008 EU-Ukraine summit, which occurred several months after Kyiv joined the World Trade Organization, led to negotiations for a successor accord to the PCA, an EU-Ukraine AA. AAs, while not offering EU membership, allow non-member states to establish privileged political and economic relationships with Brussels, and harmonize their legal, regulatory and political standards with EU laws and norms.

Negotiations for an AA between Ukraine and the EU were officially concluded in 2011; both sides initialed an agreement in July 2012.

Those negotiations included talks on a DCFTA, which would grant Ukraine tariff-free access to the EU market and align standards in several additional areas, including intellectual-property rights, competition and public procurement.

The benefits of a DCFTA for Ukraine could be substantial. With nearly 23 percent of Ukrainian exports going to the EU, deal supporters argue that such an agreement could create jobs and increase foreign direct investment (FDI) as Kyiv adopts the stricter EU regulatory and institutional standards. Economic studies estimate that a DCFTA could increase welfare gains in Ukraine by nearly 12 percent.

Perhaps more important than the economic gains would be the normative transformation Ukraine could undergo through an AA. For years, Ukraine has struggled to establish democratic

Ukraine’s Top Export Partners (2012) European Union

23%

Rest of the World

WASHINGTON, DC 1101 New York Avenue, NW Suite 901 Washington, DC 20005 USA

42%

BRUSSELS Résidence Palace Rue de la Loi 155 1040 Brussels, Belgium

22% Russia

3% 4%

India

6% Turkey

China

Source: DG Trade

foundations while confronting endemic corruption, an unfavorable human-rights record and a judicial system widely seen as favoring financial and political elites. An AA, proponents claim, would not only affirm Ukraine’s European identity, but compel it to conform to EU standards on democracy and the rule of law.

Such concerns on corruption, civil and human rights, and the lack of an independent judiciary, have thus far delayed the signing of the AA and DCFTA, both of which were finalized in 2012. Highlighting Brussels’ concerns were the October 2012 parliamentary elections (considered by many to be fraudulent) and the systematic crackdown by the government of current President Viktor Yanukovych on political opponents, most notably the arrest and imprisonment of former Prime Minister Yulia Tymoshenko. In December 2012, the EU Foreign Affairs Council adopted its conclusions on Ukraine that expressed continuing unease about the state of Ukrainian democracy and stated that the signing of the AA and DCFTA would hinge on improvement in three areas: 1) elections; 2)

addressing the issue of selective justice; and 3) implementing reforms, including efforts to strengthen institutions guaranteeing democracy and the rule of law, as outlined in the AA agenda.

Since that time, Ukraine has taken small but significant steps towards meeting EU demands.

Volodymyr Rybank, chairman of the Verkhovna Rada (Ukrainian parliament) has promised that the legislature would adopt the reform laws necessary to sign the AA and DCFTA, and the body has moved to pass bills aimed at political and legal reform. As for Tymoshenko, former European Parliament President Pat Cox and former Polish President Aleksander Kwasniewski have worked towards reaching an agreement with Ukrainian authorities that would allow Tymoshenko to leave prison and travel to Germany for medical treatment. The Ukrainian parliament, however, has struggled to reach an agreement on her release even though it would pave the way towards signing the agreements when both sides meet at the end of November.

Enter Russia

A Ukraine firmly embedded in Europe also has enormous geopolitical consequences for Russia.

Kyiv lies firmly at the center of Kremlin plans for the ECU, which currently comprises only Russia, Kazakhstan and Belarus, but reflects Putin’s goal of creating a “Eurasian Union”, an EU-style political body for most ex-Soviet states. Russian officials have repeatedly touted the benefits for Kyiv of joining the ECU (e.g., full access to Russian market and lower gas prices) while pointing out that the organization would give Ukraine full membership and an equal say in all bloc decisions. An AA and DCFTA, in contrast, ©Copyright 2013, Bertelsmann Foundation. All rights reserved.

would require Ukraine to adopt EU rules without having a say in their making.

EU and Russian officials have made it clear that Ukraine must choose: It can align itself with the Brussels or join the ECU, but it cannot do both. EU officials have repeatedly stated that ECU membership would be fundamentally incompatible with a DCFTA. At the 10th annual Yalta European Strategy meeting in September 2013, EU Enlargement Commissioner Štefan

NOVEMBER 2013

Moscow has vigorously opposed the AA and DCFTA agreements, arguing that a free-trade pact with the EU could flood an import-dutyfree Ukrainian market with competitive EU goods that could find their way into Russia.

Russian President Vladimir Putin has warned of protectionist trade policies in light of that possibility.

2

Inspiring People. Shaping the Future.

Füle noted that Ukraine could not operate effectively within the EU internal market if sovereignty over its external trade policy were ceded to the Eurasian Commission, the ECU regulatory body. Russian officials have perhaps been more blunt, with Kremlin senior economic advisor Sergey Glazyev likening a Ukrainian move towards Europe as “trade suicide”. As Kyiv has moved closer to an agreement with Brussels,

Moscow has ratcheted up the pressure by As November 28 approaches, the Vilnius summit blocking imports of certain Ukrainian products will become the focus of great attention: The or subjecting them to what many observers see meeting’s outcome will likely have immediate as unnecessary inspections (see table below). and long-lasting implications for countries in European Parliament Foreign Affairs Committee the region—and for the EaP itself.

Chairman Elmar Brok even released a statement denouncing Russian actions as an “unjust trade war” designed to “deter Ukraine from entering into the AA”.

BRUSSELS WASHINGTON, DC 1101 New York Avenue, NW Suite 901 Washington, DC 20005 USA

Résidence Palace Rue de la Loi 155 1040 Brussels, Belgium

Trade War? Russian trade restrictions and protectionist measures against some neighboring countries have increased in recent months as Georgia, Ukraine and Moldova weigh closer political and economic ties with Brussels. Critics have accused Moscow of attempting to re-establish a “sphere of influence” over many former Soviet states by pressuring them to forgo European aspirations in favor of membership in the Eurasian Customs Union. Below are some of the Kremlin’s recent actions.

Ukraine

In July 2013, Russia banned imports from Ukrainian confectionery company Roshen citing “toxic impurities”. The loss of exports could cost the company an estimated US$200 million.

The Ukrainian Employers Federation has also noted a near-complete halt of movement of Ukrainian goods through the Russian-Ukrainian border as exports “are being held up without explanation”.

Moldova

On September 10, 2013, Russia banned the importation of Moldovan wines and spirits citing “impurities”. Russian officials have also warned Moldova that signing an Association Agreement with the EU would “have serious consequences” and jeopardize the future of Transnistria, a breakaway Moldovan region.

Georgia

On October 8, 2013, Russia banned 28 alcoholic beverages from seven Georgian companies, citing “hygienic standards”. The ban comes only a few months after officials lifted an eightyear ban on Georgian wine.

Armenia

After discussions to sign an Association Agreement with the EU, Armenia has reversed course and announced it will join the Eurasian Customs Union instead. Russian officials reportedly threatened to increase arms shipments to rival Azerbaijan if Armenia did not sign a customs-union agreement.

Lithuania

On October 7, 2013, Russia suspended imports of dairy products from Lithuania, citing “numerous violations” of quality and sanitary standards. Eighty-five percent of Lithuania’s dairy exports went to Russia. The move comes weeks before the country, which holds the EU presidency, is set to hold an EU summit that could codify closer political and economic relations between the EU and states such as Ukraine, Moldova and Georgia.

NOVEMBER 2013

©Copyright 2013, Bertelsmann Foundation. All rights reserved.

3