Ukraine will sign a sweeping economic and trade agreement with the European Union on Friday, finally completing a trade deal that plunged it into a revolution and ongoing conflict with its closest neighbour, Russia.
The deal would remove tariffs on around 98 per cent of the goods traded between Ukraine and the EU, and could begin the process of reviving its moribund economy.
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The EU deal holds out the hope of rebuilding Ukraine’s economy, which is rich in people and resources, but still based largely on privatized Soviet enterprises in mining, steel and machinery.
The deal offers "potentially as great a transformation as in Poland," said Nicholas Burge, head of the trade and economic section at the EU's delegation in Kiev. "That is what is potentially on offer for Ukraine, if they can sustain the pace of reform."
Trying to appease Russia
Despite the crisis tipped off by Ukraine’s desire to have closer trade relations with the EU – something that toppled a government and led to open conflict with Russia – Prime Minister Arseny Yatsenyuk said he is ready to talk with Russia about the EU trade deal.
"Ukraine is ready to hold public technical consultations on implementation of the agreement. We hope Russia will unveil all risks it may face," Yatsenyuk told a cabinet meeting.
'The question is the modernization of the whole economy,' - Volodymyr Sidenko, economist
His statement follows a moderation of Russian President Vladimir Putin’s language about Ukraine, with Putin rescinding a parliamentary resolution authorizing him to use the Russian military in Ukraine and urging peace talks with pro-Russian rebels.
At the same time, the EU and U.S. are talking about delaying further sanctions planned for this week that were aimed at penalizing large swaths of the Russian economy, including its lucrative energy industry.
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As the signing of the EU deal approaches, Ukraine is wary of further antagonizing Russia, which takes more than a quarter of its exports.
While former countries in the Soviet orbit, such as Poland, which joined the EU in 2004, have created better conditions for business and seen new industries develop, Ukraine’s economy is overregulated and frequently corrupt. Poland is now roughly four times richer than Ukraine, measured in economic output per person.
Adopting EU standards
The Ukraine-EU trade deal is 1,200-page document crammed with rules on everything from turkeys to tulips, cheese to machinery. It outlines a 10-year plan for Ukraine to adopt EU product regulations on everything from food to intellectual property, including adopting EU rules on government contracts and competition policy.
Ukraine currently sends about one quarter of its exports to the EU, but high tariffs and limits on imports have limited expansion of trade. The trade deal will eliminate 98 per cent of EU tariffs.
Europe lowered tariffs unilaterally in April to help Ukraine so the impact is already being felt. Nestle, whose Ukrainian business was originally aimed at the local market, has seen a twofold jump in exports of products from locally made foods to Europe.
But the EU was not prepared to open the doors fully to Ukraine’s low-priced agricultural goods and the deal maintains quotas on products such as chicken imports.
It could be 2015 before Ukrainian eggs or butter appear in Europe because of the need to modernize its dairy industry and gain EU certifications.
Ukraine to slowly drop tariffs
"The question is the modernization of the whole economy," said economist Volodymyr Sidenko at the Razumkov Centre research institute in Kyiv. "Without institutional change, all the trade and investment will not be very efficient."
Ukraine plans to open its markets slowly and bargained for a 15-year transition period to protect its auto industry.But, eventually, 99 per cent of its barriers to trade will be eliminated.
The key question is whether Ukraine’s government can follow through on reform. In 2008 and 2010, Kyiv signed up for International Monetary Fund assistance, pocketed loan money to pay urgent bills and then failed to make reforms. A third IMF program is just starting and it’s hoped the EU backing will reinforce the need to change.
"After several failures to reform this country, an external anchor is needed. External discipline is needed," said Sidenko.
Russia's reaction is a short-term risk. It has already cut off natural gas to the country, but officials in Moscow have threatened to drop Ukraine's current free-trade privileges.
More than 25 per cent of Ukraine’s exports go to Ukraine.