The ENP versus Russian integration ideas within the CISNISspace with focus on Ukraine and the SES4

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The ENP versus Russian integration ideas within
the CIS(NIS)-space with focus on Ukraine and
the SES4

• Zsuzsa Ludvig
• senior research fellow, Ph. D.
• Institute for World Economics of the
• Hungarian Academy of Sciences
• Moscow, 12-13 October, 2007.

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Economic integration - a theoretical approach

• 1. Free trade area - eliminating customs tariffs
  and quotas
• 2. Customs union - commonly established customs
  tariffs towards third parties, converging foreign
  trade policies
• 3. Common market - free movement of capital and
  labour (four freedoms)
• 4. Economic union - harmonisation of economic
  policies
• 5. Political union - creation of supranational
  power (based on Béla Balassa)
• in practice economic integration groupings
  combine the above mentioned elements, see for
  example Single market (EU)

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Economic integration ideas and initiatives are
spreading all over Europe

• West-East integration initiatives -
• strategical partnership with Russia - idea of 4
  common spaces including CES
• ENP goals - FTA-s with target countries (Free
  Trade or deep and comprehensive FTA)
• West-South integrations
• East-East integrations - within the
  CIS(NIS)-space
  (Union state of Russia
  and Belarus EurAsEC6 SES4 - Single Economic
  Space of Russia, Belarus, Kazakhstan and Ukraine
  - in our focus)

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Theoretical possibility to create a large
pan-European economic integration at first step
as a large Free Trade Area or Free Trade Zone

• From economic point of view it seems possible to
  link East-East ideas to West-East initiatives
  (SES4 to FTA-s)
• circle of affected countries is partly identical
  (EU, Russia, Ukraine, ???in the future Belarus,
  ??? Kazakhstan)
• both ideas incorporate similar economic elements
  (FTA and economic policy harmonisation measures
  FTA focus on the energy issue )
• EU encourages the creation of regional
  integration groupings (Non-paper 2007, based on
  ideas of the Communication (2006) 726 final of 4
  December 2006

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Dilemmas

• many of them are linked to the participation of
  Ukraine
• why is Ukraine so important in both integration
  ideas?
• second large CIS economy
• its strategic transit position
• may serve as an example for other countries (f.
  e. GUAM-members)
• the most developed FTA concept on EU-side -
  model building (1. in Spring 2006, EU and
  Ukrainian experts together - CEPS Institute from
  KielICPS 2. 2007- Ukrainian experts of ICPS -
  impact assessment, others)
• Why is the focus on SES4 from among CIS
  groupings?
• European point of view
• economic potential of the 4 countries
  (competitive or complementary intents?)
• a new modern type of integration initiative in
  the CIS-space (focus on processes not on
  institutions!)

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1. Dilemmas in EU-Ukraine FTA concept

• The depth of regulatory convergence in a
  sectoral approach ???
• Free trade in agricultural products? (EU papers
  say in principleYes, Ukrainian experts doubt
  it)
• The elaboration of potential East-East regional
  integration groupings, to be supported, is
  missing in the EU documents
• Time horizont ??? (medium to long term for
  FTA)
• inner political division (Is it possible to reach
  consensus in sectoral level on the very important
  details ? EU intention is to have binding
  commitments in the FTA-s!)
• one-sided approaches (f. e the ICPS suggestion
  for Ukraine to join the Pan-Euro-Mediterranean
  Cumulation System may create new relative
  disadvantages for those Ukrainian companies
  buying raw materials from Russia leading to new
  conflicts in Ukrainian-Russian, EU-Russian
  relations as well.) many of them are linked to
  the participation of Ukraine

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2. Dilemmas related to Ukraine in the
SES4-concept

• What stage of economic integration?
• Ukrainian interest and readiness only FTA but
  without exceptions???
• Russian interests (the essence of SES4 concept)
  to go further, to create in a short run a customs
  union, common market, and later on a kind of
  economic union (in line with theory)
• Customs union needs supranational organs!
• The final goals of SES4 idea mean an immense task
  of economic policy harmonisation, but Ukraine
  already committed itself to harmonisation and
  liberalisation process with EU legislation
  (regulatory convergence)
• BUT the either or option as regards the
  direction of trade liberalisation -harmonisation
  process is not a good solution for Ukraine
  (strong economic links in both directions)

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Ukraines major trade partners in 2006

• EXPORTS
• Russia 22.5
• SES (3) 27.9
• CIS 33.0
• EU25 28,3
• Turkey 6.2
• USA 3.2
• India 2.2

• IMPORTS
• Russia 30.6
• SES (3) 35.5
• CIS 44.8
• EU25 34.7
• China 5.1
• Korean Rep. 2.1
• USA 2.0

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Structure of Ukrainian exports to the EU and
Russia ()
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3. Dilemmas in EU-Russian FTA ideas

• Interests in FTA on Russian side are limited due
  to the specific Russian export structure (the
  bulk is energy facing no restrictions )- no hurry
• There is no sense to put FTA into the centre of
  bilateral economic relations
• Special features of FTA are still to be
  elaborated for Russia (takes much time - time lag
  in comparison with Ukraine, national interests
  may prevail)
• The necessity of the harmonisation element (with
  EU legislation) is questioned in Russia
  (acceptance for a regulatory convergence is
  higher in multilateral framework -WTO)
• the focus is on energetic co-operation, but
  harmonisation in this field seems to be very
  problematic

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4. Dilemmas regarding other affected countries of
SES4

• There is no EU FTA offer towards Belarus and
  Kazakhstan (there might be a fear on EU-side to
  get into one FT zone with countries outside the
  set of the ENP-offer)
• But, a potential EU-offer in the future
• Belarus - hindered by the political foundation,
  but after a democratic turn the EU-offer may be
  expected
• Kazakhstan - there are no significant economic
  arguments on EU-side against a FTA with
  Kazakhstan based on present trade structure
  (except a few products)
• Kazakhstan may be a looser in liberalisation
  (proper timing, assymetry?)
• FTA - the two countries committed themselves
  to harmonisation within SES (and EurAs AC6) -
  they are ready to do it, and will have to do it
  in WTO-accession process as well.
• Until the potential EU-offer comes rules of
  origin and more their implementation are expected
  to cause problems in trade relations!

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5. Dilemmas related to future WTO-memberships

• Ukraine - advanced WTO-negotiations - a major
  reason not to be a member of SES customs union,
  main obstacle in further process with SES idea -
  no hope to change, BUT regulatory convergence
  within the multilateral framework may pave the
  way towards harmonisation with EU legislation
• Russia - may be the second, BUT harmonisation
  process started also in multilateral framework
• Kazakhstan, Belarus - lagging behind, but hopes
  for better WTO negotiating positions as members
  of the then existing customs union with Russia

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Conclusions

• Linking East-East integration ideas (SES!) to
  West-East ones is a possibility from theoretical
  and economic point of view (but serious problems
  have to be dealt)
• it is not problem that two EU-frameworks (common
  spaces ENP) exist since the EU has already
  introduced into them stealthily very similar
  contents
• Is linking of the ideas also a necessity? Yes,
  for all interested partners (Ukraine, Russia, the
  EU)
• Sound expert opinions on all sides are for it
• What is missing? - political will and consensus
  (inside and between all affected parties!)

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Major risks are of political character

• On EU-side the no one voice-syndrome (some
  member states may insist on the isolated
  treatment of Russia and Ukraine)
• On Russian-side excessive patriotism based on
  the image of the possibility to built own
  economic block (competitive approach)
• On Ukrainian-side different emphasises in
  EU-orientation and in relations with Russia

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1. RecommendationsHow to realise the idea?

• Recommendations for SES
• to keep Ukraine in the whole SES idea (SES4
  instead of SES3), but give up forcing the
  establishment of customs union (giving up the
  theoretically suggested stages of integration for
  SES4, which is still possibility for SES3)
• to strengthen the harmonising element (? SES4
  aFTA) in line with EU legislation where
  possible (selectivity), (WTO accession processes
  pave the way towards this.)
• to give up the competitive approach towards EU
  initiatives and ideas

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2. RecommendationsHow to realise the idea?

• Recommendations for the EU
• to keep the two frameworks (EU-Russia common
  spaces ENP), but with a clear intent to
  harmonise their contents by involving all the
  affected parties into the same discussion
  (especially important on energy issues!)
• common thinking on pan-European FT Area with
  regulatory convergence (to be worked out with
  appropriate timing and carefulness in details for
  each country)
• The way towards the dreamed Neighbourhood
  Economic Community - NEC ( Brussels, non-paper,
  2007)

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Gains of co-operative approach?

• for the EU
• step towards overcoming the EUs Russia-problem
• step in solving the EUs Ukraine problem
• more potential for strengthening world economic
  (and general international) position
• for Russia
• to have the EU as a strong ally, real strategic
  partner
• to help solving intra-CIS problems (integration
  intentions versus desintegration processes)
• for Ukraine
• to avoid and overcome the eitheror dilemma in
  foreign orientation and economic integration
• more stable economic relations with Russia
• for all of us
• Europe with fewer conflicts

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Thank you very much!