Ukraine and the EU
Ukraine has signed the famed EU Association Agreement with Georgia and Moldova. This agreement has a political side, but also an economic one. This includes a Free-trade agreement. One could doubt the wisdom of such an agreement if we look to the trade repartition for Ukraine. To not overweight the energy balance we took only Ukrainian exports from January 2010 to December 2012. The trade share with Europe (in its geographical sense, including non-EU countries like Switzerland and Norway) looks relatively small: around 1/4th of the global trade. For the last year when the economy went undisturbed, or 2012, percentages of Ukrainian exports were 37,7% with the CIS, 25,1 with the EU and 25,4% with Asia. From these results we can see that the CIS (and mostly Russia) is having the lion’s share of Ukrainian exports and that Europe and Asia are in a roughly similar situation.
Actually, Ukrainian exports look clearly oriented Eastwardly, either to the CIS (former Soviet Union countries) or to Asia (including the Middle-East). Europe is making between 25% and 27% of the exports trade. Actually, the European share declined recently after having topped 31%. If we look to the repartition between Russia and Europe, we will see that they are on par.
If we display cumulated values (in millions USD) on 12 months, we could see that there is even a small advantage for Russia. Then, with a quite reduced share of its exports toward Europe and a much bigger toward Russia and Asia, one wonders what could have been the economic rationale for the EU Association Agreement. Quite clearly, if we look to hard facts, trade potential is certainly greater for Ukraine with Asia or the Eurasian Union than with the EU. From a purely economic point of view it is hard to understand the insistence of the Ukrainian elite to have a Free-Trade agreement with the EU, which is making only 1/4th of total Ukrainian exports.
But this is only one dimension of the EU Association Agreement. The Ukrainian economy is to modernized and revamped if one wants it to be able to compete on not too unequal terms with EU economies. The Ukrainian Union of Industrialists and Entrepreneurs is putting the price tag at around 240 billions USD of direct investment for the next 10 years, or an average of 24 billions a year. In the current situation, and excluding the slump Ukrainian GDP is now suffering, this would imply around 16% of the GDP. By the way, infrastructures are is so poor a state that massive investments are needed here too. Even if we minimize investment on individual properties, that would imply diverting between 30% and 35% of the GDP to investment. Only China has reached actually such ratios. By the way, the estimation made by the Ukrainian Union of Industrialists and Entrepreneurs, about investments needed by Ukraine to modernize its economy looks quite realistic. But, this is not the end of the story. The country is to be ready to absorb such an amount of investment and we can have strong doubts about that in the current situation. The Ukrainian financial system is in a very parlous state and is to be completely revamped. The public governance structures as well as governance of private enterprises are to be dramatically improved too. This can be undoubtedly done, but there is a cost to do so. Could Ukraine really improve massively both its private and public governance and in the same time decrease dramatically its private consumption? One can have some doubts about that. By the way, Ukraine is to improve its labour productivity level. This implies heavy investments and also some reform in enterprises management. In the end, Ukraine could become competitive enough to be part of a Free-trade zone with the EU but this would imply considerable efforts and a tremendous amount of foreign help, which is not to come if we look at the current situation in the EU. Unfortunately the Ukrainian elite has been toying with the idea of EU membership when it was clear since the beginning that such membership was not to happen before at least 10 years and more probably 20, if ever. All leaders of the EU, Mr. Barroso but also Mrs Merkel and Mr Hollande have repeatedly told that the EU could not integrate Ukraine before several years. The main reason is first such a membership is to imply some considerable funding from the EU at a time where the EU budget is shrinking and second that such a membership is to imply a redistribution of funds through the EU, something to be opposed by countries now benefitting of structural funds like Poland, Romania, Bulgaria, Hungary and Slovakia.