Yaroslav ZHALILO

Yaroslav Zhalilo, Ph.D. (Econ.), President, Anti-Crisis Research Center (Kiev, Ukraine)

Eurochoice without Eurostrategy

The strategic goal of creating prerequisites for Ukraines integration into the European Union, clearly formulated in the presidential address to the Verkhovna Rada as the countrys European Choice (2002), quickly captured the attention of politicians and political analysts in the republic. Unfortunately, as often happens, extensive use of European phraseology does not necessarily mean a deep understanding of the mechanisms that can serve to accomplish this ambitious task. The discrepancies between Ukraines European ambitions and its European potentialities have also been clearly demonstrated by the situation around its projected entry into a Common Economic Space (CES) with the Russian Federation, Belarus and Kazakhstan.

In many cases, including speeches by high-ranking politicians, one will find an obvious shift in concept. In speaking of a Eurointegration strategy, high government officials have been trying to prove, first and foremost, Ukraines desire to integrate with Europe. Such an approach is totally incorrect. A country wishing to become part of the common European space must first demonstrate its ability to comply with the rules and standards operating within that space so as not to upset the balance in its economic development but, on the contrary, to become a factor helping to maintain its socioeconomic stability. Such a country has to convince its potential partners that it intends to join the EU not as an applicant for assistance, but as a country with a stable economy which will open before a united Europe new prospects of socioeconomic, political and humanitarian development and will provide it with an additional competitive advantage.

In this connection, Ukraine must demonstrate its ability to ensure, through its own efforts, sociopolitical and economic stability in the country, high rates of economic growth and effective restructuring of the national economy. Incidentally, this is clearly stated in the text of the above-mentioned European Choice address. It is quite obvious that the listed tasks are very important for Ukraine irrespective of its proclaimed geostrategic priorities, since they are dictated by the need to survive in the conditions of economic globalization.

In the time elapsed since the delivery of the presidential address, very little has been done in Ukraine to translate the Eurochoice into a consistent strategy charting the way to be followed by the country in order to draw closer to European rules and standards.

In place of a strategy for achieving these ambitious goals we have a bureaucratic timetable under which state agencies are required to perform prescribed technical operations in order to bring the countrys legal and regulatory framework into line with European parameters. By taking unilateral steps to create prerequisites for European integration the republic does not achieve any positive effect and can hardly expect such an effect in the foreseeable future. It can only be achieved in case of the establishment of an integration grouping with the EU. Hence the dilemma of whether Ukraines top priority is to try to copy the outward signs of the European economy so as to meet the Copenhagen criteria by way of political prepayment or whether its priority task is to overcome the so far catastrophic gap in living standards, labor productivity and national economic efficiency.

Artificial Dilemmas

The lack of a comprehensive strategy of European integration was the reason why the idea of a common economic space initiated and lobbied by Russia left the Ukrainian political community in a state of near shock. That resulted in an artificial dilemma between Ukraines European and Eurasian integration vectors. In actual fact, there is no such dilemma, because these vectors do not coincide in time: Eurointegration is a strategic goal of the distant future, whereas the creation of a common economic space is a question which has to be addressed today. Ukraine is indeed faced with a choice, but this is not a choice between integration alternatives.

The real option is a search for resources required to support the gigantic leap forward that is so necessary in the economic and social spheres, and also for opportunities to enhance the competitiveness of the national economy and bring it closer to the standards of European community life. Regrettably, the debates around the CES are mostly speculative and, as a rule, have little in common with a concrete forecast of the economic effect of such integration. The avoidance of a balanced analysis of the pluses and minuses of a common economic space for the sake of ephemeral political goals inevitably leads both to a loss of the positive potential of this new structure and to an underestimation of the dangers inherent in it. The stand taken by CES opponents is based on nonacceptance of Eurasian integration trends, but does not propose any effective alternative, while the political struggle over the CES is not conducive to a solution of the resources problem. As a result, even if the opponents of integration gain an upper hand Ukraine will still be faced with the same need to look for resources for a push forward, but with fewer alternatives.

The process of Europeanization of the economy and the legal framework does not in itself contain any internal incentives or sources of economic growth. On the contrary, since it involves significant structural changes, it is a very high-cost and painful process. Consequently, at least in the short and medium run Ukraine has to look for external factors of economic growth along other lines. In my view, the republics main task in the medium term is to overcome, by means of a policy that may sometimes differ from the one pursued in the European Union (while there is still a chance to follow a sovereign policy), the disproportions generated both in Soviet times and during independence, and to lay the economic groundwork for practical development of the Eurointegration process. As I see it, the issue of a common economic space should be considered in such a context.

Integration Benefits

In accordance with the CES Concept, the common economic space is understood to mean a space combining the customs territories of the participating states in which economic regulation mechanisms based on uniform principles ensure free movement of goods, services, capital and labor. The CES states have to pursue a common foreign trade policy and a concerted tax, monetary and financial policy to the extent that is required to ensure fair competition and maintain macroeconomic stability.

The concrete mechanisms for assessing the gains and losses from the countrys participation in the common economic space are just taking shape. The most straightforward method of such assessment would be to measure the total value of all the currently effective mutual restrictions that have to be lifted after the countrys entry into the CES and to subtract from it the budget receipts that are now ensured by the tariff component of these restrictions. In my view, however, the use of such a criterion is patently incorrect, primarily because it fully ignores the very purpose of the common economic space: to stimulate mutual economic ties.

Over the past few years, the share of Ukrainian exports to the countries that have signed the CES Agreement has gradually declined (24.1% of total exports in 1999, 26.5% in 2000, 24.8% in 2001, and 20.3% in 2002). One should note here that the trends of the past two years are fundamentally different. Whereas in 2001 that share fell as the result of faster growth in trade with the EU (by $622m, whereas trade with the quartet increased by $177m), in 2002 trade with the EU increased by $553m, while that with the quartet fell by $591m. Consequently, the country has lost a part of its foreign markets, which is largely due, in the words of the market participants themselves, to the technical difficulties of cooperation (for example, to the sharp decline in Ukrainian exports to Russia caused by a change in VAT refund rules). This means there is potential for an increase in Ukrainian exports to Russia, whose buildup could give a significant impetus to economic growth in the country, help to raise corporate and household incomes, create new jobs, etc.

That is why the main effect is expected to include an increase in trade, a deepening of production cooperation, and a rise in the competitiveness of national production. As a result, direct losses in the budget sphere will be compensated by higher corporate and household incomes, which will have a positive effect on revenue from conventional taxation. A correct assessment of the economic effect of integration should take due account of this multiplier effect. Another segment, which has yet to be evaluated, relates to a reduction in the transaction costs of companies, which will no longer have to glean scarce information, to surmount official and unofficial barriers, etc.

Since all these economic effects are only potential, that is, they will depend both on the concrete forms and lines of integration and on the validity of the national policies of the CES member countries, their quantitative assessment today is hardly possible. Let us confine ourselves to qualitative forecasts.

The main and most tangible benefit to be derived by Ukraine from the creation of a common economic space is probably the transition to free trade without exception, including trade in energy resources. Russias abolition of export duties on oil and gas will reduce their prices in the territory of Ukraine, and this will result in a tangible reduction in the cost of Ukrainian-produced goods, making them more competitive in external (including Russian) markets. That is why the establishment of a free trade area without exception or limitation must be regarded as an indispensable condition of Ukraines entry into the CES.

Concerns are often voiced that if the country gets hooked on cheap energy resources this could play a negative role in stimulating real structural changes, in the drive to raise the competitive capacity and technical level of Ukrainian enterprises. In my view, such apprehensions are groundless. It is true that lower prices for energy resources primarily help to enhance the competitiveness of energy-intensive industries in the upstream segment of production. At the same time, generation of additional income in these industries helps to raise the creditworthiness of the economy in general and its investment potential in particular. As regards the use of that potential, this question lies beyond the realm of the energy prices problem. The main thing here is a consistent strategy for the development of investment and innovation activities, while the geographic and sectoral origins of the resources used for these purposes are of little significance. Moreover, the higher the technological level of production, the less pronounced is the corrupting influence on it of cheap energy resources. Nor should one forget that Russia, too, has declared its intention to gradually raise energy prices to world levels.

Generally speaking, Russias abolition of export duties on hydrocarbons, if this is to take place already in 2004, could be of significant political importance for Ukraine. Apart from an overall acceleration of economic growth, a rise in income levels and an increase in employment, a fall in production costs (which will certainly not be coupled with a decline in other domestic prices, especially for goods which sell readily as it is in the domestic and foreign markets) is bound to increase budget revenue from taxes on higher profits (which is of no small importance, given the uncertainly as regards budget revenue in the first year of the tax reform). One can also assume with a high degree of probability that price and cost manipulation will become a most effective instrument in raising money for all kinds of shadow funds, whose importance in 2004, the year of presidential elections, is hard to overestimate.

The drastic change in the stand taken by Moscow, which for a long time refused to include energy resources in the regime of free trade with Kiev, has met with a cautious response among many Ukrainian experts, since this is associated with a kind of free lunch for which Ukraine will allegedly have to pay a certain price by making political concessions. Of course, one cannot rule out that Russia will try to use the energy factor for putting political pressure on Ukraine, just as on its other CES partners. This is indicated, among other things, by the record of Russias current relations with Belarus. On the other hand, one should bear in mind that at the present stage the de facto involvement of Russian capital in the Ukrainian economy is such that high prices for Russian energy resources in Ukraine are becoming a serious obstacle in the way of the further development of Russian business. Such autonomous processes of economic integration tend to pragmatize political relations between the two countries, so that the link between economic and political concessions today is less straightforward than it used to be. In addition, one should not overestimate the possible losses of the Russian budget as the result of an abolition of export duties on oil and gas. Thus, the CIS (almost exclusively Ukraine) accounts for only 8% of Russias total exports of mineral products.

The plans of the CES states to synchronize a number of economic policy measures have great potential. Contrary to the expectations of some Ukrainian politicians who prophesy that the republics economic policy will take an Asian turn, such steps could spur market transformations in Ukraine, whose authorities sometimes lack the resolve to take the necessary decisions, and could also help to resist both the lobbying efforts of domestic corporate politico-economic groups and excessive pressure from international organizations.

Although this is obviously not the time to raise the question of a single currency, mutual convertibility and a transition to settlements in national currencies, as provided by the draft agreement, could play a positive role. These measures would make it possible to simplify settlement procedures between the companies of the member countries and to stimulate the development of joint projects. Another productive idea is to set up a single clearing center, possibly with the introduction of a single unit of account within the CES framework.

The debates around the common economic space often focus on the differences between the economies of Ukraine, Russia, Belarus and Kazakhstan, from which it follows that full unification of their economic policies is inadvisable. On the whole, this is a logical conclusion, but one should not forget that the disparities between the economies of Ukraine and the EU countries, even the least developed ones, are much more dramatic. Nevertheless, Ukraine has already pledged itself to unify some provisions of its national legislation with the laws of European countries. In my view, the economies of the four CES countries, however dissimilar, are equally geared to faster growth, to changes in the quality of that growth and to economic restructuring, whereas the economies of the EU countries, however attractive, are aimed at maximum stabilization of the high level already attained and at gradual modernization in accordance with the requirements of international competition. That is why the economies of the CIS countries are much more similar in functional terms, and a reasonable coordination of their policies (designed to maximize their national competitive advantages) will only help to accelerate growth and to improve its quality. Incidentally, this does not obviate the need to introduce European standards with respect to the quality and technical level of products. As a matter of fact, the latter has been proclaimed as one of the goals of Russian economic policy as well.

As regards the possible neglect of the national specifics of Ukraines economy and thoughtless unification of policies, I see no reason for such apprehensions. Under the CES development scenario, the primary concern of the partner states will be to ensure the maximum use of each countrys competitive advantages both for investment and for rational division of labor. Policy unification could nullify these advantages and is thus at odds with the interests of the owners of capital already invested in the economies of the four countries.

Meanwhile, Ukraines current position in trade with these countries gives grounds for optimism. Thus, on the results of 2002 the share of engineering products came to 35% of Ukraines exports to Russia (an increase of 10 percentage points during the year), 30% of its exports to Belarus, and 50% to Kazakhstan, whereas in trade with other countries of the world the share of such products was only 8.7% of exports. The situation in the export of finished food products is similar: 8.8% of all exports going to the CES countries and 1.6% to other countries. At the same time, the share of low-technology exports of nonprecious metals and metal products to the rest of the world is 45% compared with 18.9% to the CES countries. Within the trade in ferrous metallurgy products, exports of finished goods to the CES countries constitute 41%, whereas 94% of deliveries to other countries consist of crude metal. Consequently, there are reasons to believe that in the event of a simplification of trade relations with the CES partners the country will gain a significant competitive edge and will be able to supply its products to their downstream markets, which will help to establish an innovative model of national economic development.

Another major argument in favor of Ukraines entry into the CES is that under the agreements between the four countries the expansion of growing Russian capital into Ukraine, stepped up over the past few years, is to be converted into transparent direct investments. Ever wider circles of Russian business would like to see our two states establish a common economic and legal framework and conditions that would make it possible to influence the orientation and predictability of economic policy in Ukraine. Up to now such influence has been exerted solely in a nontransparent, shadowy fashion. An institutionalization of mutual relations will help to avoid a politicization of the activities of Russian capital in our country, to prevent it from shoring up shadow economy structures, and to switch the resolution of economic disputes to the level of international legal relations.

We must understand that regardless of the practical implementation of the decisions adopted at the presidential summit in Yalta the period of development of Ukrainian business under the existing patriarchal politico-economic system, which is a far cry from the modern institutional environment of market relations, is drawing to a close. Ukrainian business will have to learn to operate in the face of stiff competition and to uphold its economic interests by means of open economic and legal mechanisms. Continued uncertainty in relations with CIS partners will serve to maintain the gray zone in the territory of the republic (as practice shows, relations with the EU will remain entirely platonic for a long time to come). Fugitive Russian capitals, which are not inclined to civilized market activities or open competition, may try to take refuge in that zone. Such an outcome is fraught with much greater danger both for the attempts to enhance the competitiveness of the national economy and for the efforts to maintain economic independence and draw closer to European criteria in the social and economic spheres.

Dangers and Warnings

As it follows from the above, Ukraine can derive significant economic benefits from participation in the CES, which will help to pave the way for qualitative transformations in the economy and to create the economic prerequisites for switching the European integration strategy to a practical plane. The situation in the political sphere is more complicated. In the view of some government officials, a number of provisions of documents on the creation of a CES could be in conflict with Ukraines effective legislation, including the Constitution. As things stand today, considering the general character of the Yalta accords, this conflict can still be settled on the level of legal casuistry, but subsequent concrete documents will have to be drawn up and coordinated, legally speaking, in a more professional way.

We have already noted that it is incorrect to contrast Ukraines European and Eurasian foreign policy vectors. Of course, it is hardly right to regard as critical the current deviations from European standards in regulatory policy at the present time, when the stage of practical consideration of the question of Ukraines possible accession to the EU is still a long way off (ten years, as EU officials have admitted). In addition, it is by no means certain that a harmonization of economic policy within the CES framework will signify that Ukraine is moving away from European standards and not drawing closer to them: after all, Russia has its own European strategy, albeit not providing for full-fledged EU membership. Many Western experts, for their part, draw attention to the forthcoming cardinal changes in the enlarging EU, and it is a rare futurologist who will venture to predict how the Union will look ten years hence and how meaningful by that time will be Ukraines current achievements in bringing its legislation closer to European standards.

In the context of creation of a common economic space, mention is also made of a more immediate task facing the country: accession to the WTO. The CES Agreement does not in itself contain any direct obstacles to Ukraines entry into the WTO on a unilateral basis, while the CES Concept merely provides for a coordination of the positions of the participating countries in the talks on accession to that organization. Moreover, according to official documents, the CES is to operate on the basis of WTO rules. The contradiction that arises here is of a deeper nature. The point is that a pragmatic turn in economic policy once again raises the question of the intrinsic value of Kievs achievements in the WTO accession talks. As has often been noted at the highest level, such decisions were frequently made without regard for the interests of our republic. To this day there is no proper long-range assessment of the positive and negative consequences of Ukraines accession to the WTO and no strategy for adapting the economy to operation within the framework of its requirements. Hence the potential possibility of a decision to postpone Ukraines entry into the WTO, which will enable the republic to review some of the bound tariff rates and to develop countervailing measures for the transition period. At the same time, given a positive decision on the part of the WTO, Ukraine will be able on formal grounds to join that organization even if it is part of the CES free trade area.

In view of all that, the Ukrainian authorities have decided to limit the depth of integration to the establishment of a free trade area. Such an approach appears to be well-balanced and rational, since at this level it will already be possible to determine with sufficient accuracy the long-term potential of the CES, to position the key interests of the member countries, and to form institutional mechanisms for cooperation and dispute resolution. However, as world experience shows, free trade conditions tend to worsen the problem of asymmetry of the factors underlying the competitiveness of the participating states. That is why it is only natural that they will eventually come to realize the need to coordinate their pricing and taxation principles, their labor, environmental and antimonopoly legislation, etc.

The thesis that Ukraine is threatened with loss of sovereignty over its economic policy is far from simple either. Any form of international cooperation presupposes an actual sacrifice by the country of a part of its sovereignty. Take, for example, Ukraines commitment to harmonize its legislation with the EU written into its Partnership and Cooperation Agreement with the European Union. WTO membership also entails significant restriction of sovereignty in economic policy. Among the memories fresh in our minds is Ukraines active cooperation with the IMF, whose specialists both in Washington and in Kiev openly dictated to the republics highest officials what kind of policy it had to follow in order to receive the next credit. Economic and, what is more, political sovereignty will suffer much heavier losses if Ukraine cannot lay the foundation for long-term economic growth enabling it to make real progress toward integration with European structures.

In goes without saying that in acceding to an international treaty on such a scale as the CES Ukraine must have confidence in the safety of the mechanisms ensuring respect for its national interests on the part of the other CES states, although in general, as noted above, there are no manifest economic prerequisites for attempts to infringe on the economic interests of any of the CES countries, since each of them has its own interests asymmetrical in relation to those of the other countries. One of the issues that could prove to be problematic for Kiev is the establishment of uniform tariffs for transit across CES territory. In view of Ukraines special transit status, it is not interested (in contrast, say, to Russia) in their excessive reduction. Nor can one rule out direct attempts to add certain political functions to the integration groupings foreign economic activities in order to put pressure on one of the CES states or on third countries.

In this context, there is some cause for concern in view of the projected establishment of a supranational governing body to run the CES: a commission which is to be invested with relatively broad powers to influence the current economic policies of the member states and which is to adopt decisions by weighted voting, when the number of votes assigned to each country is determined with due regard for its economic potential (which means that Russia will hold virtually full sway in this agency). In my view, such a provision discredits the idea of a common economic space and of partner relations between the participating states. Decisions within the CES framework must be made solely by consensus (at any rate, the four founding countries must have such a right).

Tentative Forecast

Unfortunately, logical (let alone economic) arguments are rarely used as a guide to action in political decision-making in the post-Soviet space. Despite repeated attempts, it has so far proved to be impossible to develop a viable model of sustainable economic cooperation within the framework of Ukraines relations with Russia and other CIS countries. Specialists have every reason to note that the current agreement on a common economic space does not differ in any significant way from the Program for the Development of Economic Cooperation with the Russian Federation for 1998-2007, which has never actually been implemented.

The practical implementation of adopted political decisions has been hindered by political ambitions and apprehensions, conflicts of economic and geopolitical interests, pressure from third countries and international organizations, and simply by red tape. A negative role was also played by the use of routine approaches under which economic cooperation was often regarded as a return to inter-republican division of labor and restoration of a kind of economic U.S.S.R. With such an approach, any initiative was doomed to failure.

At the present stage, there is reason to hope for a fundamental change in the approaches to economic integration. First, this follows from the radical changes in the economies of the FSU republics, from the fact that active national capitals drawing on market models of development are on the rise. Second, whereas in the past these states tried to integrate in the conditions of an economic recession, the current model of cooperation builds on the growth of industries and capitals which have exhausted their internal development resources. This conclusion is also confirmed by the text of the agreement on the creation of a CES, in which special attention is paid to the compliance of CES rules with WTO rules and other international standards.

In order to live down the negative experience of earlier attempts and to ensure the effectiveness of the present phase of economic integration in the post-Soviet space, I think it necessary:

  • to consider such integration in the context of Ukraines overall strategy of economic reform and implementation of its European choice, focusing on comprehensive measures to stimulate the development of domestic production and enhance its competitiveness;
  • to lay down the establishment of a free trade area without exception as a mandatory condition for Ukraines participation in the CES, and also as a criterion that must be fully met before Ukraine can advance to any form of further economic integration with the quartet countries;
  • to envisage, based on the example of the package of WTO agreements, the right of any participating country to suspend the performance of undertaken commitments if such performance turns into a threat to its national security, and to introduce other principles for protecting parity in mutual relations as developed by the WTO;
  • to propose and adopt, as a matter of priority, transparent mechanisms for equal participation of CES members in working out political decisions and controlling their implementation;
  • to adopt decisions on the content and direction of further steps toward economic integration in close cooperation with domestic business communities, with the participation of major public associations of businessmen;
  • at the initial stage, to focus attention on invigorating the exchange of information on socioeconomic development indicators in the quartet countries and the CIS as a whole; on goods and investment offers in the markets of the states parties to the agreement; on the conditions of activity in these markets; on the present state and prospects of adjustment of regulatory policy; on the maintenance of investment and cooperation projects; on facts of unfair competition and economic crimes, etc. Priority attention should also be paid to measures designed to create an effective common system for ensuring security in economic relations, protection of property rights, maintenance of economic and legal discipline, and free dissemination of information required for mutually beneficial economic relations.

One can only regret that at the present stage Ukrainian political circles are still unprepared to make an active effort in order to channel the CES integration process along lines that are most advantageous to Ukraine. Unfortunately, the extreme politicization of the issue of accession to the CES does not provide for any alternative to passive acceptance of integration models developed without Ukraines participation. That is why, from all appearances, even in the event of ratification of the agreement by the Verkhovna Rada we shall find that the adoption of concrete decisions is being put off under the guise of Eurochoice phraseology and under the impact of the European Unions well-tried policy designed to maintain Ukraines equidistance both from Russia and from Europe. Such a position means that for a long time to come Ukraine will be unable to enjoy the potential advantages of regional integration. At the same time, it will reap all the benefits of being a gray zone lying between two key geopolitical players, a sanctuary for fugitive semi-criminal Russian capitals and a field of battle between them and capitals being forced out of the new Central European members of the EU.

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