Future development of economic cooperation between European Union, Russia, and Ukraine

1
Future development of economic cooperation
between European Union, Russia, and Ukraine

• Malgorzata Jakubiak
• workshop on economic integration of the CIS
  countries organized by the Center for Strategic
  Research and Ministry of Economy and Trade
  
• April 1 2006, Voronovo

2
Structure of presentation

• 2004 enlargement and new Eastern neighbours
• current framework for economic relations between
  the EU on the one side and Russia and Ukraine on
  the other
  
• possible future integration for both EU-Russia
  and EU-Ukraine
  
• effects of economic integration

3
Consequences of the 2004 enlargement (1/2)

• Enlarged EU in economic and geographic terms
  closer to the CIS
  
• Russia the EU is by far the most important trade
  partner for Russia, accounting for 60 of exports
  (of which 60 are sales of Russian mineral fuels)
  and 50 of imports (mainly machinery and various
  manufacturing goods)
• Ukraine 30 of exports going to the EU and
  around 50 of non-oil imports originating in the
  EU
  
• Labour migration

4
Consequences of the 2004 enlargement (2/2)

• Trade rules
• Adoption of EU common external tariff by NMS
  liberalisation of non-agriculture trade within
  enlarged EU, end of FTAs between some CIS and
  NMS
• Introducing visa regimes in some cases
• Economic relations EU/CIS are rather asymmetric,
  with the exception of Russia. Russia ranked
  fourth in the list of major EU external trade
  partners in 2004, mainly on the back of oil and
  gas trade

5
Current framework for economic relations
(1/6)ENP beyond 2004 enlargement

• Principles of European Neighbourhood Policy
• Share benefits of the 2004 enlargement in a way
  that is distinct from membership
  
• Prevent the emergence of new dividing lines
• Offer chance to participate in various EU
  activities through political, security, economic
  and cultural cooperation
  
• Help to build security in the neighbourhood

6
Current framework for economic relations (2/6)
ENP geographical coverage

• Russia is not a formal member but included in ENP
  budget
  
• Ukraine, Belarus, Moldova
• Armenia, Azerbaijan, Georgia (security strategy)
• Mediterranean region (Algeria, Egypt, Israel,
  Jordan, Lebanon, Libya, Morocco, Palestinian
  Authority, Syria, Tunisia)
  

7
Current framework for economic relations (3/6)
ENP action plans

• Individual approach jointly agreed and
  differentiated action plans covering
  
• Political dialogue
• Economic and social development policy (trade
  liberalisation, stake in the EU market following
  legal approximation, participation in EU
  programmes)
• JHA (cooperation in border management, migration,
  fighting crime, money laundering etc.)
  
• Action plans indicate crucial reforms agreed
  upon by a partner country and by the EU.
  
• Time span of action plans 3-5 years
• EU-RF cooperation as agreed in Four Common
  Spaces

8
Current framework for economic relations
(4/6)ENP financing

• ENP financing to support agreed reforms set out
  in action plans TACIS and MEDA complemented from
  2007 by a new financial instrument, which will
  focus on cross-border cooperation
• o ENPI (European Neighbourhood and Partnership
  Instrumentl the budget) is proposed to be close
  to 15 billion for 2007-2013, nearly double as
  the amount for 2000-2006
• o The share-out of these funds between individual
  partner countries not yet predetermined
  
• o Geographical coverage all ENP partners plus
  Russia

9
Current framework for economic relations (5/6)
EU-Russia Common Economic Space

• Aim lowering barriers to trade and investment
  and promote reforms and competitiveness, based on
  the principles of non-discrimination,
  transparency and good governance
• Actions foreseen within the sphere of regulatory
  policy, investment issues, competition, financial
  services, telecommunications, transport, energy,
  space activities and space launching, etc.
• Lately energy dialogue has been by far more
  important than other actions
  
• To-date EU financial support 2.6 billion from
  1991 through TACIS, to promote economic
  transition and reinforce democracy and the rule
  of law
• PCA (and MFN treatment) in place since 1997, EU
  granted market economy status in 2002

10
Current framework for economic relations
(6/6)Action Plan for Ukraine (Feb 21, 2005)

• WTO accession condition for creating EU-Ukraine
  free trade agreement
  
• Intensified bilateral trade links, focused on
  gradual removal of restrictions and non-tariff
  barriers. The EU will help in implementing
  necessary regulatory reform
• Improving investment climate (simplified
  administrative procedures, fight against
  corruption, tax reform, improved tax
  administration and sound management of public
  finances)
• Dialogue on visa facilitation
• Gradual approximation of Ukraines legislation,
  norms and standards with those of the European
  Union reinforcing administrative and judicial
  capacity use of TAIEX and Twinning instruments
• Dialogue on treatment of migrant workers
• Cooperation on resolving Transdniestrian
  conflict
  
• To-date EU financial support over 1 billion
  from 1991 145 million per year on average
  during 1998-2004 the majority under TACIS
  
• PCA (and MFN treatment) in place since 1998

11
Future EU-Russia economic integration

• WTO membership the most realistic step to
  happen in near future (2007)
  
• EU-RF free trade area can be negotiated after
  Russia enters WTO (2008)
  
• If FTA in manufacturing is signed, it usually
  takes 10 years to be implemented
  
• Along further convergence of legislation and
  standards
  
• Common networks in telecommunications, transport,
  energy, space, environment
  
• More integrated market in the future, with the
  exact form of integrated market not known yet
  

12
Future EU-Ukraine economic integration

• Realistically, Ukraine can enter WTO in 2007
• Possibly FTA talks will start in the same year
• EU-Ukraine FTA in manufacturing most likely
  implemented in 2017
  
• Along Ukraine participation in EU networks
  (transport, energy, space)
  
• Further approximation of norms and standards

13
Future EU-Russia and EU-Ukraine economic
integration (1/2)

• Remaining questions
• Will agricultural trade be liberalised in the
  near time?
  
• What form of integration going beyond FTA in
  manufacturing is to be pursued?
  
• Is some version of arrangement similar to EEA,
  yet with less regulatory convergence possible?

14
Future EU-Russia and EU-Ukraine economic
integration (2/2)

• Systemic issues
• Harmonisation of norms and standards in services
  
  
• services that do not require full harmonisation
  financial services, telecommunication, some modes
  of transport
  
• where harmonisation is necessary air transport,
  electricity
  
• How to avoid asymmetric decision sharing in
  future when Russia and Ukraine get partial access
  to EU internal market?

15
Effects of EU-Russia and EU-Ukraine economic
integration (1/4)

• WTO membership encourage market reform, enhance
  equal treatment of foreign and domestic
  investors, improve investment climate increased
  investment links with the EU are expected for
  both Russia and Ukraine
• Various studies estimate WTO accession to be
  welfare improving for both Russia and Ukraine
  (welfare gains also through elimination of
  domestic subsidies)

16
Effects of EU-Russia and EU-Ukraine economic
integration (2/4)

• FTAs in manufacturing with the EU estimated to
  increase production (at least in Russia), with
  negligible result for welfare
  
• With adoption of EU acquis in manufacturing
  production, growth of exports to the EU can be in
  the range of 15-35
  
• Typical EU FTAs have locked-in reforms that go
  beyond WTO commitments and that stimulate mutual
  long-term investment (competition provisions,
  rights of establishment, liberalisation of
  capital flows, public procurement etc.)

17
Effects of EU-Russia and EU-Ukraine economic
integration (3/4)

• Effects for the EU from WTO entry and FTAs in
  industrial goods
  
• Elimination of barriers to trade in industrial
  goods would open new markets for EU manufacturers
  and at the same time expose them to new
  competition
• Existing studies suggest that overall direct
  effects of these processes on the EU would be
  positive, albeit very small
  
• In the longer term, initially small positive
  effects can be enhanced by better direct
  investment opportunities in the European
  Neighbourhood

18
Effects of EU-Russia and EU-Ukraine economic
integration (4/4)

• Trade is services
• Liberalisation of trade in services means fewer
  restrictions on movement of people and capital as
  well as freedom of establishment
  
• Although supposed to bring beneficial effects to
  both sides, it is likely to be objected by
  interest groups and has already proved to be
  difficult within EU25
• EU-Russia and EU-Ukraine service trade will grow,
  although the impact will vary by country and by
  service market
  
• Integration will most likely further enhance CIS
  transport and financial sector

19
Effects of EU-Russia and EU-Ukraine economic
integration migration

• Migration flows seem to be weakly connected with
  any type of mentioned economic integration
  between the EU on the one side and Ukraine and
  Russia on the other
• Flows depend rather on domestic situation, plus
  on migration policies
  
• However, it is possible that deeper integration
  will encourage more temporary than permanent
  migration

20

• Remaining concerns
• Are benefits from integration attractive to
  domestic actors in the CIS?
  
• Is EU ready to offer deeper integration
  perspective?