Ukraine: Ukraine signs Free Trade Agreement with the European Union
July 8, 2014
Ukraine signed the Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union (EU) on 27 June. The country had withdrawn from the negotiations on 19 November 2013 after ex-president Viktor Yanukovich rejected the agreement arguing that the country was not ready to face its conditions. Ukraine’s withdrawal sparked protests in Kiev, which ended with Yanukovich being ousted in February. The treaty was signed by newly-appointed President Petro Poroshenko, who won the snap presidential elections that were held on 25 May. The agreement, which is part of the broader Association Agreement (AA) between the EU and Ukraine, will open a new free market consisting of 28 states and 500 million consumers for Ukrainian exports. In 2013, 23.8% of Ukrainian goods exports went to Russia and 26.1% to EU countries. Among the EU, Poland, Italy and Germany are Ukraine’s main trade partners.
The DCFTA is mainly focused on the agricultural and the industrial sectors. The agricultural sector will benefit from a reduction in duties, but not from full liberalization. Duty-free tariff rate quotas have been granted for cereals, pork, beef, poultry and similar products whereas the EU will progressive eliminate customs duties on other agricultural products over the next 10 years. The EU and Ukraine will fully liberalize trade on industrial products. Some sectors, however, will be protected in the first stages. Whereas the textile sector will be fully liberalized from day one, a period of transition will be considered for the automotive industry. Given the current unstable situation in the country and the recent economic and financial imbalances that it has experienced, the potential impact of the DCFTA is still difficult to assess. According to Alina Slyusarchuk and Jacob Neil, economists at Morgan Stanley, the economy is not expected to feel the impact of the DCFTA strongly in the short-term, although they do add that:
“While we see trade benefits for Ukraine from signing the DCFTA with the EU as being limited in the short term […], the external rebalancing is under way, principally driven by the 30% UAH depreciation and domestic demand contraction, with some assistance from the lower gas price at the beginning of 2014.”
Meanwhile, in the eastern parts of the country, ongoing violent clashes lead to casualties in both the Ukrainian army and pro-Russian armed groups, as well as among journalists and civilians. According to the United Nations, 356 people, including 257 civilians, have been killed in the eastern regions of Donetsk and Luhansk since interim President Oleksandr Turchynov launched an “anti-terrorist” operation in April.
After the DCFTA was signed, Poroshenko extended the truce with the pro-Russian armed groups for 72 hours in order to find a solution. However, violence arose again on 30 June and abruptly ended the 10-day truce that had been in place. Poroshenko blamed Russia for breaking the peace, whereas Russia’s President Vladimir Putin denied any responsibility and announced that Russia would continue to defend the interests of the Russian population in Ukraine’s eastern regions. On 5 July, the Ukrainian army launched an operation in the Donetsk region in an effort to gain control of the main cities that were under the pro-Russian armed groups’ control. The army gained control of the important city of Sloviansk in the Donetsk region, as well as in some neighboring cities. The clashes between the two groups are still ongoing as the army approaches the city of Donetsk, where the bulk of pro-Russian supporters and armed groups is standing.
The conflict has already been felt in the country’s economic performance and it has driven increasingly sharp contractions in industrial production figures. Over the coming months, the focus will be on the Donetsk region, which is a traditionally industrial area and the country’s top exporter of commodities. In fact, Donetsk (which declared itself the People’s Republic of Donetsk in April) is where most of the violent clashes are taking place. Therefore, since attention will be focused on the impact of the free trade agreement on industrial exports, Donetsk’s politically unstable situation is likely to affect Ukraine’s ability to take advantage of the new markets opened by the DCFTA.