2 – Trade and geopolitics
BSSB.BE epc.eu 10.04.2015
While Ukraine has had extensive trade relations with Russia, its formal commitments were limited to free trade. Even this was difficult to secure within the weak and basic bilateral trade agreement with Russia (the 1993 FTA), which allowed many exemptions from free trade. The exemptions have been renegotiated in annual protocols, giving Russia repeated opportunities to put pressure on Ukraine.
Trade relations lacked a stable, legally binding and, most importantly, predictable legal framework. And Ukraine lacked any legal protection from anti-dumping or other discriminatory trade measures imposed by Russia.
The CIS-wide multilateral context provided no remedies to Ukraine’s trade difficulties with Russia. The multilateral CIS FTA of 2011 seemed attractive to Ukraine because it contained references to the WTO regime and provided a basic dispute resolution mechanism. But in fact, the 2011 multilateral agreement made little difference:
it did not address trade barriers but granted the Eurasian Customs Union a unilateral asymmetric right to punish Ukraine (by reverting to the Most Favoured Nation status) in case of alleged harm (in Annex 6). Now Russia is invoking this Annex to demand the ex-ante revision of the EU-Ukraine DCFTA.
For two decades Ukraine’s trade relations with Russia have been plagued by trade wars. Moscow made removing various ‘trade obstacles’ conditional upon Ukraine’s participation in Russia-centred integration regimes.
Ultimately, Ukraine became dependent on a stronger neighbour which had no qualms in achieving its geopolitical objectives by using trade and energy tools. It was the need for a predictable, stable and rules-based trade regime that underpinned Ukraine’s demand for integration into the EU single market.
Ukraine’s dependence on Russian energy and Moscow’s exploitation of it has shaped their relations since the earliest days of independence. Like trade, energy has been embedded in a bilateral framework subject to short-term renegotiations. Until the 2004 Orange Revolution, Russia provided cheap gas to Ukraine. Since 2005, Ukraine has not been able to get low prices or predictable supplies, despite its willingness to bargain.
This does not imply that Ukraine has always been a reliable partner. Yet, having satisfied Russia’s demands in the 2010 Kharkiv agreements, Yanukovych ended up paying more for gas than Germany or Italy. Russia has also frequently departed from agreed obligations undertaken to secure political objectives. The EU felt the direct consequences in the gas spats in 2006 and 2009, when Russia cut off its gas supplies to Ukraine.
In sum, Ukraine’s trade relations with Russia have been extensive, but they are very weak in legal terms and reflect a strong asymmetric dependence on Russia which has been exploited at will. Thus, prioritising pre-existing relations with Russia over those with the EU is highly debatable.
Such an argument is at odds with Ukraine’s own past and current preferences: Kiev has favoured FTAs with Russia, and the Association Agreement clearly allows Ukraine to keep its economy open by having multiple FTAs. By objecting to the DCFTA, Russia is seeking to restrict Ukraine’s economic integration in the EU, thereby relegating Ukraine to the role of a passive object in international relations.
By agreeing to Russia’s demands the EU may actually facilitate the achievement of Moscow’s hitherto unsuccessful efforts to hamper Ukraine’s integration in the EU. Furthermore, it would seem to endorse Russia’s strategy in relation to its smaller and vulnerable neighbours, including Moldova and Georgia.
‘Ukraine was forced to choose’
The other problematic assumption is that Ukraine had an equal interest in both integration paths, and the EU forced Ukraine to choose between them. In fact, Ukraine’s interest in the Eurasian option was strictly circumscribed. Ukrainian elites and experts were sceptical of the advantages of entering the Eurasian regime and acutely aware of its systemic disadvantages, as a range of studies demonstrated.
Despite this lack of interest, Russia continued to pressure Ukraine into joining the Customs and then Eurasian Economic Union through full and binding membership.
‘Russia has identifiable, functional concerns’
Russia made extensive objections to the DCFTA, which, it alleged, harms its economy and to which it would have to respond by activating Annex 6. The EU responded by agreeing to suspend the DCFTA till the end of 2015 (this decision was taken in a broader context of ceasefire negotiations, the so-called ‘Minsk-1’).
The negotiations have so far confirmed that Russia’s claim of economic harm is a ‘non-story’, as Michael Emerson put it. Many potential conflicts can be resolved through technical negotiations within the WTO framework, but Russia has shown little interest in doing so. Instead, the trade issues have escalated to the highest political level and become entangled with matters of geopolitics and military security, most recently during the Minsk-2 negotiations. Although rules-based solutions are available, Moscow seems mainly to be concerned about who sets the rules.
‘The EEU is a functional, rule-based integration grouping’
Key argument in dealing with above challenges is that EU engagement with the EEU would promote the functional compatibility between overlapping regimes, thus diverting attention from a purely geopolitical agenda.
The proposal for the EU to engage with the EEU presupposes the existence of, and compatibility between, overlapping rules-based integration regimes in which geopolitics are absent. This assumption is hardly surprising.
The Eurasian integration regime has been a fast-moving, complex and ambitious project, making it difficult for observers to make an informed judgment about the new body. The EEU has undoubtedly made some significant achievements in overcoming previous integration flaws.
But the EEU has notable and increasingly apparent weaknesses, in terms of adherence to agreed-upon rules and in the extent to which geopolitics permeates decision-making. The development of Eurasian integration has been a relentless top-down driven agenda with little attention for implementation or economic functionality.
Its evolution from a customs union to a single economic space and economic union over the period of five years has primarily served Russia’s geopolitical agenda. Moscow has driven the internal development, often securing its partners’ participation via informal bilateral deals on issues beyond the remit of the EEU (energy for Belarus, security for Armenia).
At the same time, Russia has had the final say on the drawing of ‘red lines’ on internal integration (the elimination of export duties, the establishment of a free internal trade in energy). Although numerous improvements in the common legal and institutional framework have been made, the priority has been to have a ‘Union’ as an international actor.
For example, the revision of the Customs Code aimed to consolidate the first integration stage, the Customs Union, is to be completed only in early 2016 – overshadowed by the negotiations of a new treaty on the EEU, which launches a third stage of integration.
Dr Rilka Dragneva-Lewers is Senior Lecturer at the Birmingham Law School, and Dr Kataryna Wolczuk is Reader in Politics and International Studies at the Centre for Russian, European and Eurasian Studies, both at the Universty of Birmingham.
European Policy Centre
*This is the second part of the article about trade and geopolitics and current crises. More information You can find in the first and in the third parts of this article.