The political, geopolitical and economic implications of the EU–Ukraine Association Agreement (AA) are highly significant. For Ukraine, the agreement provides a potential stimulus for profound and comprehensive reforms of the state and economy. For the EU, the agreement is a litmus test for its foreign policy at a time when Russia is sparing no efforts to punish Ukraine for seeking closer ties with Europe.
Signed in March 2014, the Association Agreement commits Ukraine to broad cooperation with the EU, including policy and regulatory convergence in a wide range of areas. The pact also contains provisions specific to trade, required to ensure Ukraine’s access to the EU’s single market, covered principally in an economic part of the agreement, the Deep and Comprehensive Free Trade Agreement (DCFTA). The combined AA-DCFTA fully entered into force on 1 September 2017, although the DCFTA started to be provisionally applied in January 2016.
This chapter explores the challenges Ukraine faces in meeting its new commitments under the AA-DCFTA, and surveys the progress (and setbacks) to date. A closer relationship with the EU has strong appeal for a Ukrainian population weary of corruption and economic hardship, and eager for better governance and higher living standards. The clear hope among supporters is that, by prompting Ukraine to adopt EU-derived rules and standards, implementation of the AA-DCFTA can transform political life and the economy.
However, the ‘local terrain’ presents an array of obstacles to rapid and effective reform. Implementation of the AA-DCFTA is hampered in the first instance by Ukraine’s decayed state institutions and economic difficulties – problems that are exacerbated by Russia’s coercive actions. Reforms are also impaired by what can be termed Ukraine’s ‘dual realities’ on the ground, namely the peculiar mismatch between formal laws and informal practices. Institutions are used by insiders to extract rents rather than to deliver public goods for society as a whole. Where reforms threaten to curtail the flow of rents, they meet strong and persistent resistance from state officials and much of the current political elite.
So daunting are its challenges that Ukraine has received unprecedented support from the EU, exceeded only by the level of assistance reserved for accession countries. However, the technocratic rule diffusion in which the EU excels is not sufficient to overcome resistance to reform. Experience so far shows that the EU needs to combine its diffusion of technical rules with building state capacity and applying a high level of political pressure, even on specific Ukrainian individuals. The EU should also more explicitly support reformist actors, especially within civil society, who are under pressure from the Ukrainian authorities.
The AA-DCFTA: commitments and challenges
The AA-DCFTA between Ukraine and the EU is the longest and most detailed agreement of its kind. It is a state-of-the-art exemplar of the ‘new generation’ of ambitious and comprehensive free-trade agreements (FTAs), which have increasingly superseded simple tariff-reduction and investment access deals to include ‘beyond border issues’, such as harmonization of regulations on product standards, anti-monopoly policy and public procurement. The agreement is dynamic and designed to have built-in flexibility, enabling the common bodies to change some of its annex provisions where necessary in the future. While stopping short of offering a route to EU membership, the agreement provides for a far-reaching and privileged relationship with the explicit aim of Ukraine’s economic integration within the EU’s internal market. Very few EU agreements with so-called ‘third countries’ provide such extensive access to the single market.
The AA-DCFTA contains detailed and binding provisions that require Ukraine to align its laws and policies with those of the EU (the acquis communautaire), in a complex process known as ‘legal approximation’. In addition to tariff elimination, the deal gives special prominence to institutional and regulatory convergence with EU templates. This approach reflects the centrality in EU policymaking of sector-specific, technical and internationally applicable rules. It also highlights the agreement’s broader purpose of socio-economic and political modernization.
The paradox for Ukraine is that the very problems that the AA-DCFTA seeks to address – limited administrative capacity, weak rule of law and a weak economy – are those that hamper the implementation of the AA-DCFTA
The problem with this framework, however, is that the AA-DCFTA is modelled on agreements that were never intended to be used for a situation such as Ukraine’s. The AA-DCFTA is similar in many of its objectives to the pre-accession deals drafted for countries seeking to join the EU, but with the crucial difference that the acquis is not, and was not designed to be, a blueprint for modernization of countries at a lower level of economic and institutional development. The acquis was actually developed for more advanced ‘market economies’ as part of the overall process of forming the EU’s single market. Some parts of the acquis are so sophisticated and complex that even EU member states struggle to implement them. The paradox for Ukraine is that the very problems that the AA-DCFTA seeks to address – limited administrative capacity, weak rule of law and a weak economy – are those that hamper the implementation of the AA-DCFTA.
Three other concerns about the agreement stand out. The first is that no roadmap exists for Ukraine’s economic integration with the EU. The AA-DCFTA envisages the approximation of 80–90 per cent of the acquis related to the single market, but there are no estimates of the scale and scope of the overall or sectoral adjustments (or size of investments) needed for implementation. Individual EU officials, project leaders and experts are heading into the unknown, tasked with devising a suitable pathway to legal approximation across different institutions and sectors.
The second concern is that the agreement is not yet sufficiently customized to Ukraine’s needs. In many respects, the AA-DCFTA represents ‘best practice’ rather than the ‘best fit’. It exports a sophisticated body of rules to an idiosyncratic Ukrainian context in which basic problems such as weak institutions and rule of law are yet to be addressed. The obligations listed by the AA-DCFTA vary across sectors, but transposition of the acquis is not necessarily a simple and cost-effective recipe for reforms. Much work is needed to operationalize implementation of the agreement in order to devise the best fit for the domestic context.
Third, the agreement lacks strong mechanisms, including sanctions, which could be used in the event that one of the sides (most likely Ukraine) fails to meet its obligations. The possibility cannot be ruled out that resistance to reforms proves stronger than expected. If this occurs, and if Ukraine suffers few material consequences for non-compliance, the EU could lose the very leverage over policy in Ukraine that the agreement is intended to create.
Box 2: The EU–Ukraine Association Agreement
The EU–Ukraine Association Agreement (AA) is very complex treaty with a sophisticated, multi-layered structure, including numerous, often very long, annexes. Its content is best grasped when divided into four nmain parts:
- Part I. Political Principles, the Rule of Law and Foreign Policy
- Part II. Deep and Comprehensive Free Trade Agreement (DCFTA)
- Part III. Sectoral Cooperation
- Part IV. Institutional Provisions
This deals with political issues, ranging from democracy, human rights and the rule of law to anti-corruption policy and foreign and security policy. Arguably, this part of the agreement represents what could be termed ‘soft law’, in the sense of containing political pledges and ‘best endeavour’ clauses in respect of cooperation. However, European values, such as democracy and support for human rights, are defined as essential to the agreement, and violations of these principles can result in its suspension.
The DCFTA is a particularly substantive part of the Association Agreement, dealing with core trade aspects of bilateral relations. Many of the Association Agreement’s extensive annexes pertain to the DCFTA.
The DCFTA part of the agreement covers the sophisticated ‘legal approximation’ mechanisms required to ensure uniform interpretation and effective implementation of relevant EU legislation in Ukraine. The ‘deep’ economic integration envisaged by the DCFTA requires extensive legal and regulatory approximation. The AA-DCFTA is designed to be future-proof, and thus includes several mechanisms to accommodate dynamic evolution of the EU acquis communautaire.
An important feature of the DCFTA is far-reaching conditionality: market access is subject to specific and continuous monitoring of compliance. To ensure this, the Ukrainian government is obliged to report periodically to the EU according to approximation deadlines specified in the agreement. The monitoring procedure may include sending investigatory missions to make on-the-spot inspections, with participation from EU institutions, bodies and agencies, non-governmental bodies, supervisory authorities and independent experts. The strict conditionality in the DCFTA reflects the EU’s cautious approach to opening up the single market to post-Soviet countries, which have less developed political and economic systems than those of most EU member states.
This deals mainly with economic cooperation and covers 14 ‘sectoral’ issues, including energy, transport, financial services, agriculture and civil society. Provisions on some sectoral issues, such as ‘services’, are as complex and detailed as those in the DCFTA. This is a very-wide ranging section of the agreement, and it underlines the breadth of this comprehensive treaty.
This deals with the legal and institutional provisions. The Association Agreement has a sophisticated dispute resolution mechanism and a sophisticated institutional architecture. Within this structure, a key body is the Association Council. The Council meets at ministerial level. It operates as a forum for exchange of information and is also competent to update or amend the agreement’s annexes to keep pace with evolutions in EU law.
The deliberately dynamic structure of the Association Agreement makes it distinct from the previous EU–Ukraine pact, the 1994 Partnership and Cooperation Agreement (PCA). The PCA was a fixed and static agreement, meaning that its common bodies could not change and adapt its content. In contrast, the new Association Agreement allows for some updates and amendments. However, revisions are only possible with regard to the annexes – the Council cannot change the main body of the agreement, not least because this would trigger a complex ratification procedure involving the two parties, with a particularly drawn-out procedure in the EU.
The Association Agreement came into force on 1 September 2017, following a lengthy ratification procedure within the EU (see timeline, Box 1, Chapter 1).
Source: Wolczuk, K. (2017), Demystifying the Association Agreements. Review of the Trilogy of Handbooks: on the EU’s Association Agreements and Deep and Comprehensive Free Trade Areas (DCFTAs) with Georgia, Moldova and Ukraine, Brussels, Centre for European Policy Studies.
European integration and Ukrainian realities
Despite a measure of reformist rhetoric, very little systematic economic or political reform occurred in Ukraine prior to the so-called ‘Revolution of Dignity’ in 2014. Instead, from the very first days of independence in 1991, Ukraine was overwhelmed by ‘a process of institutional erosion [that] led to a weakening of the constraints on state actors and a blurring of the boundaries of acceptability between formal, rule-based behaviour and informal actions for private gain’. As in most other post-Soviet states, policies and goals were undermined and institutions became the private fiefdoms of powerful actors. Transformation in the future will depend on the reformers ‘taking control’ of these institutions to ensure a focus on delivering public goods for society as a whole, rather than on generating rents for a few insiders. It will also depend on Ukraine ending a long tradition of what could be termed ‘declarative Europeanization’, in which officials fluently use the rhetoric of integrating with the EU while failing to put promises into practice. All too often, the authorities in effect mimic reforms without truly implementing them.
The Ukrainian authorities
Integration with the EU affects virtually all aspects of Ukrainian policymaking and requires strong institutional coordination. Yet the constitutional system, though fairly effective in protecting against the monopolization of power, does not provide for effective government. The 2004 version of the constitution, re-introduced in 2014 after the Euromaidan protests, created a ‘split executive’ consisting of two decision-making centres: a cabinet responsible for most policy areas; and regional-level and law enforcement structures controlled by the president. This split structure creates major difficulties: on the one hand, it hampers policymaking by blurring lines of authority; on the other, it provides ample channels to resist reforms (for example, by allowing the president to veto legislation). International donors struggle to understand the logic behind such a byzantine system. The National Reform Council, created in 2014, is designed to overcome these problems. It brings together the president, prime minister, ministers and parliamentarians, as well as business and international representatives. However, it has not yet developed into a strategic decision-making centre. As one EU expert put it: ‘Any other system would be better than this dysfunctional hybrid.’
Structural deficiencies in the executive branch are amplified by problems in the Verkhovna Rada, Ukraine’s unicameral parliament. Although the October 2014 election brought to power a wave of new members of the Rada, pro-reform forces in the legislature remain fragmented and weak, and vested interests entrenched. Factions and political parties often consist of little more than groups of people gathered around prominent political figures, such as President Petro Poroshenko or former prime minister Yulia Tymoshenko, both of whom are prone to populist rhetoric and policies. At the same time, the Presidential Administration hampers constructive policy development by neutralizing reformists in parliament.
Real (rather than merely rhetorical) European integration lacks support within the Verkhovna Rada. Various EU initiatives have had little traction
Real (rather than merely rhetorical) European integration lacks support within the Verkhovna Rada. Various EU initiatives, such as the Pat Cox-led European Parliament mission to Ukraine aimed at strengthening and improving the role of the legislature, have had little traction. Domestically, the Parliamentary Committee on European Integration lacks proper leadership, and has been unable to establish itself as a coordination centre or to overcome political resistance to the AA-DCFTA. On average, it takes one year to deliberate and pass a law in the Verkhovna Rada. In 2014–15, an important package of laws on sanitary and phytosanitary standards, technical standards, competition and state aid was passed relatively quickly. But since then, key stakeholders and interest groups have resisted other measures, such as environmental impact assessments, on the grounds of cost. In contrast, laws needed for ‘export reorientation’ (to facilitate the penetration of Ukrainian exports into EU and other markets), which are of interest to many business tycoons, are passed relatively quickly.
It is clear that stakeholders in the current rent-based system are unwilling to level the playing field for other domestic and international businesses. The logic of rent-seeking – rather than competition and profit – remains entrenched. On many DCFTA-related issues, reform fails from a lack of political support. For example, policy initiatives relating to transport, the gas market and intellectual property rights have all been blocked in the Verkhovna Rada. Many other measures remain incomplete, and infighting occurs around virtually every draft law. The Bloc of Petro Poroshenko (BPP), the largest political faction in parliament, is internally divided between supporters and opponents of reform, with the former frequently taking positions in opposition to those of the Presidential Administration.
Within the cabinet, European integration at least has formal recognition as an issue but is still not a priority. Responsibility for the portfolio sits with the deputy prime minister for European and Euro-Atlantic integration. The EU insisted on the creation of this dedicated position to improve coordination on the AA-DCFTA. Yet while Ivanna Klympush-Tsintsadze, appointed to the role in the spring of 2016, has been active in the international arena, European integration has not risen higher up the agenda.
The deputy prime minister heads the Governmental Office for European Integration (GOEI), which sits within the secretariat of the Cabinet of Ministers. The GOEI was established in June 2014 with a nominally strong mandate – a group of experts wrote a comprehensive concept for the office, intending to create a powerful policy coordination centre. New staff were recruited, and the department’s relevant expertise started to grow. However, by the summer of 2016 – after a new prime minister, Volodymyr Groysman, had taken office – most had left the GOEI, rendering it largely incapable of fulfilling its wide-ranging tasks. Of the original 30–40 staff, most of those who remained had little experience. Moreover, the GOEI’s portfolio requires not dozens, but hundreds, of well-trained officials. Besides European integration, it is responsible for regional development, transatlantic relations and reform of public administration. In its current state, the office lacks the necessary formal competencies, personnel and budget to handle a mandate of this size and complexity. The GOEI’s scope of operation is simply too broad, and its standing within the government too weak, for it to be effective.
With the deputy prime minister lacking real political backing and the GOEI unable to override opposition to reform within parliament or the government, no single centre oversees European integration. The Ministry of Economic Development and Trade (MEDT), in charge of international assistance, has been coordinating activity on the DCFTA. But this creates the problem of overlap between the GOEI and the MEDT. The Ministry of Foreign Affairs also wants to be involved in EU-related matters. With no leadership or ownership of the reform process, ‘everything seems soft and fluid’, in the words of one EU expert.
Overall, the lack of strategic and financial planning around implementation of the AA-DCFTA reflects a measure of indifference to European integration among political leaders in Ukraine, and a profound lack of understanding of the processes involved. Lacking unity and an overarching strategy, the government is failing to provide leadership for reform in general and implementation of the AA-DCFTA in particular.
Despite these problems, important changes are taking place as policymakers adapt their approaches. In the pre-Euromaidan period, mid-level officials typically promoted policies within their own ministries and agencies, often teaming up with international experts to create pro-reform enclaves that acted as informal policy transfer networks. But such enclaves were often weak and isolated. As a rule, they failed to overcome the resistance of anti-reform players intent on protecting rent-seeking networks.
Since 2014, pro-reform groups have developed stronger and broader coalitions to promote reforms of policies and institutions, from public administration to the anti-monopoly agency. These coalitions have emerged across different institutions and sectors, and consist of a variety of actors, including reform-minded politicians, state officials, members of civil society, members of the media and international experts. At the same time, the rise of such coalitions has been fostered by somewhat more favourable political conditions for policy advocacy: some ministries, such as the Ministry for Ecology and Natural Resources, now have reformists at the helm; in other ministries, such as the MEDT, reform-minded figures among top officials are helping to drive reforms even though they lack the political mandates of their opponents.
Since 2014, pro-reform groups have developed stronger and broader coalitions to promote reforms of policies and institutions. These coalitions consist of a variety of actors, including reform-minded politicians, state officials, members of civil society, members of the media and international experts
International support is also helping. For example, to strengthen pro-reform enclaves, in 2017 the EU set up a programme to pay higher salaries to staff in as many as 2000 designated ‘reform posts’ in the central government. The idea was for funding to continue until reforms generated sufficient budgetary gains to sustain higher salaries in other positions as well. The programme enabled the establishment of dedicated reform support teams in individual ministries. As a result, for example, the Ministry of Infrastructure, hitherto a reform laggard, now has a 20-strong team tasked with devising a reform strategy for the ministry. In addition to providing funding and expertise, international donors – most notably the EU – are able to apply limited pressure through conditionality. The EU Delegation to Ukraine issues public statements prior to votes in the Rada on important reform- and EU-related laws. These interventions play a crucial role in pushing reformist laws through parliament.
Within civil society, meanwhile, a coalition called the Reanimation Package of Reforms (RPR) has emerged as a key actor in pooling the efforts of NGOs and experts to facilitate and implement reforms (also see Chapter 6). The RPR has been involved in preparing and lobbying for many laws related to European integration, as well as in overseeing their subsequent implementation. Journalists support the process by publishing information on reform measures, often in real time, and by drawing attention to various efforts to sabotage reform.
The emergence of the National Anti-Corruption Bureau of Ukraine (NABU) represents an early – though still tentative – success story for Ukraine’s reform coalitions (see Chapter 7). The creation of the NABU in 2015 was one of the EU’s conditions for visa liberalization for Ukraine. The involvement of the European Commission’s European Anti-Fraud Agency (OLAF) in the selection and nomination of Ukrainian and European staff for the NABU appeared to ensure an unprecedented degree of independence for the new body.
Despite its promising beginnings, political tensions over control of the NABU have persisted. They are indicative of the covert political warfare that still surrounds every aspect of institutional and economic reform in Ukraine. This experience indicates the importance of external conditionality, as well as the need for continuous vigilance and pressure from reform coalitions at every step of the policymaking process.
Overall, it is evident that reform coalitions continue to encounter significant resistance both in parliament and in many parts of the government. The Ministry of Interior, for example, which controls the police and National Guard, remains ridden with inefficiency and corruption. Clearly some politicians (across all political parties) still see reforms as optional or even as a threat to their careers. Nonetheless, opposition to reforms – and even the sense of a creeping restoration of the old order – has not derailed the determination of reformers to spearhead the country’s systemic transformation. Instead, it has brought the scale of the problem and the depth of resistance into view.
Coping with Ukrainian realities: EU policy and adaptation
The EU has provided Ukraine with a level of assistance well beyond that usually offered to ‘third countries’, and exceeded only by its support to accession countries. The EU is the biggest donor in Ukraine, having provided almost €11 billion during 2014–17 (with microfinancial assistance alone amounting to €3.4 billion in that period). The EU Delegation to Ukraine is the EU’s second-largest delegation in the world.
Legal approximation of the EU’s acquis is usually regarded as ‘low politics’, as a technocratic process in other words. However, the reforms envisaged under the AA-DCFTA have a potentially high political impact. Recognizing that it is not enough to focus on assisting legal approximation alone, EU institutions are seeking to support capacity-building in Ukraine’s state institutions.
The EU has provided Ukraine with a level of assistance well beyond that usually offered to ‘third countries’, and exceeded only by its support to accession countries
One noteworthy innovation in this respect, pioneered by the European Commission, was the formation of a dedicated Support Group for Ukraine (SGUA). Established under the initiative of the then president of the Commission, José Manuel Barroso, in early 2014 and continued under Jean-Claude Juncker, the SGUA consists of officials from the Commission and EU member states. It is headed by Peter Wagner, and has become, in the Commission’s words, a ‘catalyst, facilitator and supporter of reform’.
The SGUA has been central to coordinating the efforts of European donors. It acts as a strategic centre for the development of local knowledge, utilizing linkages with various parts of the Commission, such as the Directorate-General for Trade and Directorate-General for Energy, as well working with institutions in Ukraine to identify needs and deliver assistance. This is a massive task given that about 260 assistance projects – including 18 large flagship initiatives – in Ukraine are funded by the EU and member states. Some EU member states, however, still work on their own, bypassing the SGUA.
Coordination of assistance is complicated by the clustering of donors around specific aspects of reform. For example, in 2016 an estimated 480 consultants were working on decentralization (devolving competences from the central government to the regional level), a favourite theme of international donors. Such situations make overlap and duplication of mandates and effort almost unavoidable. There is a clear risk that at least some of the decentralization projects will create inefficiencies.
The SGUA has nonetheless made a noticeable difference in devising a more agile and tailored strategy for promoting reforms. Within the European Commission’s Directorate-General for Neighbourhood and Enlargement Negotiations (DG NEAR), this more dynamic approach has been supported by the commissioner, Johannes Hahn, and the deputy director-general, Kataríná Mathernová, who have adapted the nature of EU assistance to Ukraine in response to challenges on the ground. Assistance has become more systemic, addressing the dysfunctionality of Ukrainian institutions through a shift – as mentioned above – towards capacity-building.
Most of the reforms launched to date have been related to European integration. They have included initiatives on sanitary and phytosanitary standards, judicial reform, technical standards, energy, public procurement, decentralization and tackling corruption. Sectors not directly related to European integration have received relatively little assistance in the first instance from the EU or other international donors, even though policy in several of these areas – such as public health, education, infrastructure and social policy – attracts considerable public interest. In recognition of this gap, the EU has become more involved in both healthcare and social policy reforms in an effort to provide demand-driven support.
Despite the SGUA’s successes, few tangible results are in evidence as of 2017. The most successful policies so far have resulted in the creation of new institutions and systems – examples include the NABU, an ‘e-declaration’ system for electronic asset declarations and the ProZorro electronic public procurement system (see Chapter 6 in particular). Reforming existing institutions has proven far more difficult, even though these are the target of most of the EU’s assistance. Paradoxically, capacity-building projects often struggle to achieve results because the state institutions with which they collaborate lack ‘absorption capacity’.
The most successful policies so far have resulted in the creation of new institutions and systems, whereas reforming existing institutions has proven far more difficult
A further problem is that EU officials are reluctant, as a rule, to engage on a political level. The lack of the prospect of EU membership is often cited as one of the reasons why the EU cannot be too demanding in terms of reform expectations, given that Ukraine is a ‘third country’ rather than an accession candidate. EU officials are aware that excessive reform zeal could have unintended political consequences. According to one official, they are apprehensive about ‘pushing too hard as Ukraine may end up with a different government’. From an EU perspective, working with the current pro-European administration in Kyiv is preferable, despite the slow pace of reform, to triggering a change of political leadership by undermining the government’s popular legitimacy. EU officials typically put a premium on stability and predictability rather than change.
However, ‘going too easy’ on Ukraine carries its own risks. Given the resistance they encounter, some EU officials show an unwarranted level of trust and empathy towards their Ukrainian counterparts. The EU’s indulgence of the ruling elites in Ukraine threatens to repeat the flawed strategy vis-à-vis Moldova, where the EU supported a pro-European government out of fear of a return to power by the Communist Party. Suitably emboldened, the Moldovan governing elites used reformist, pro-European rhetoric as a ‘fig leaf’ to mask their true hostility to substantive reforms, and duly continued to engage in extensive rent-seeking. This fostered the perception among the public that the EU had colluded with self-serving elites in promoting corruption in Moldova. The resulting popular disillusionment paved the way for the election of a pro-Russian president in 2016. As Ukrainian citizens become more frustrated with the slow progress of reforms, any reluctance on the part of EU officials to criticize the government could create a similar impression of indifference, or even collusion.
This leaves EU officials in a difficult position. They rely on the pro-European rhetoric of some Ukrainian politicians and officials to create political will and galvanize support for reform. Yet in giving the benefit of the doubt to the Ukrainian political class, the EU may in effect be turning a blind eye to policy obstruction, thereby inadvertently undermining its own credibility as a constructive actor in Ukraine.
As Ukrainian citizens become more frustrated with the slow progress of reforms, any reluctance on the part of EU officials to criticize the government could create an impression of indifference, or even collusion
Many aspects of EU assistance are not yet fully attuned to the specific challenges of Ukraine’s ‘dual realities’. As one EU official put it: ‘Organizationally, we don’t really care that it’s a challenging country. Ukraine is different, but nobody takes notice of this and draws lessons.’ Many EU officials overestimate the political will and capacity of formal institutions inside Ukraine to eradicate informal rent-seeking networks and practices. For example, the Anti-Monopoly Committee (AMC) has benefited from international assistance and pursued a visible reformist agenda since 2014. Yet despite its expertise and mandate, the AMC remains too weak to confront powerful political and economic players, such as those in the highly monopolized energy sector, where companies owned by business tycoons (notably Rinat Akhmetov and Dmytro Firtash, owners of regional electricity and gas distribution companies, respectively) are dominant. In light of these fundamental constraints, the AMC cannot achieve its goals through technical assistance alone. High-level political pressure needs to be exerted on the Ukrainian government, so that vested interests in political life and the economy can be curtailed.
The nature of this challenge is perhaps best illustrated by the programme of the European Union Advisory Mission to Ukraine (EUAM) to assist reforms in the civilian security sector. This sector comprises agencies responsible for law enforcement and the rule of law, including the Ministry of Interior, the Security Service of Ukraine (SBU) and the Prosecutor General’s Office (PGO). The EUAM team of over 200 international advisers from EU member states brings a considerable degree of expertise to what is supposed to be ‘a joint effort to expedite the civilian security sector reform’. However, the presence of such a large contingent of experts does not guarantee effective international support for reforms. If anything, it illustrates the classic shortcomings of technical assistance, as the Ministry of Interior, one of the major beneficiaries of EUAM assistance, remains largely resistant to reforms. Ukrainian leaders often depend on extra-legal means to enforce loyalty and intimidate opponents, so there is little appetite within the political establishment for deep-rooted reform of law enforcement. Meanwhile, the ‘business as usual’ implementation of the EUAM’s technical recommendations undermines the reputation of the EU because:
… ineffective aid is actually damaging to Ukraine, as it fills in the vacuum created by the lack of reforms with a pointless process of aid programmes that cannot possibly reach their declared goals.
Ukrainian reformers find it difficult to understand why EU officials ‘do not stand up more and bang the table’ when the Ukrainian government fails to enact its reform pledges.
The EU’s position on a recent programme of macroeconomic assistance is a case in point. In 2015, the EU offered Ukraine a package of support to be disbursed in three tranches, subject to a number of conditions. The first tranche was delivered in 2015. The second was delayed because the Ukrainian government had not met all the necessary conditions. Indeed, it had introduced further trade irritants, such as a ban on wood exports. Yet the EU still showed a high degree of indulgence towards the Ukrainian authorities (some in Ukraine would even call it naivety), ultimately disbursing €600 million in funding while praising the country’s political elites for progress on reforms. The main reason for the EU’s decision to release this second tranche in 2017, despite Ukraine’s non-compliance with relevant conditions, was that the funds would otherwise have been reassigned to different projects.
Ukrainian observers have drawn attention to the profound implications of the EU’s weak enforcement of conditionality:
So far, the EU and the IMF (through their financial aid) were the main stimuli for reform implementation. But what if the EU through its own actions destroys these incentives? This is especially at the time when hopes for the political will of the government has almost evaporated. Will the EU continue to insist that the Ukrainian government fulfill its obligations? […] As a result, the price of EU’s macro-economic assistance to Ukraine may be higher than the refusal to disburse these funds. What is more important for the country: 600 million euros or reforms? The government and society may have different answers to this question.
The DCFTA, Russia and trade reorientation
Ukraine’s integration into the EU’s single market is a long-term objective of the DCFTA, which provisionally came into force in January 2016. Since 2013, the EU has been Ukraine’s largest trading partner, accounting for over 40 per cent of the latter’s trade in 2016. Ukraine’s main exports to the EU are metals, grains, electrical machinery and equipment, ore and slag, fats and oils, wood and wood products. In principle the DCFTA offers major opportunities for Ukrainian businesses, especially for food producers and manufacturers of machinery. However, the practicalities of gaining access to the EU single market pose significant challenges.
The EU promoted the DCFTA on the premise that it would deliver economic benefits to Ukraine over the medium to long term, as institutional reforms and regulatory convergence are achieved. However, the 2014–15 economic crisis and Russia’s punitive measures changed the context and shortened time horizons. Access to the EU market has taken on more urgency following Russia’s halt on trade with Ukraine in retaliation for the DCFTA.
This underlines the fact that the shift in Ukraine’s trade orientation is partly a reflection of circumstance as well as design. The DCFTA was never intended to exclude one market in preference for another, and is compatible with Ukraine’s numerous other FTAs, including those with Russia and other Commonwealth of Independent States (CIS) countries. Indeed the Ukrainian government actively sought to prevent further trade restrictions by Moscow, through trilateral EU–Ukraine–Russia negotiations on the DCFTA conducted in 2014–15.
For the first time since independence, Ukraine was ready to sever the ‘umbilical cord’, leading to a drastic reduction in its economic and energy connectivity with Russia
However, these negotiations were unsuccessful. They merely exposed the lack of substance in Russia’s claims about the potential adverse effects on its economy of increased EU–Ukraine trade. The negotiations also exposed a lack of interest on Russia’s part in finding technical solutions to trade-related issues. Although Moscow had started blocking some Ukrainian exports as early as the summer of 2013, access to the Russian market became increasingly restricted following the Euromaidan and the signing of the DCFTA. This culminated in Russia’s unilateral exclusion of Ukraine, with effect from 1 January 2016, from the multilateral 2011 CIS FTA (which Ukraine had joined in 2012). The move was consistent with Moscow’s well-established pattern of using trade and energy dependency to force political concessions.
For the first time since independence, however, Ukraine was ready to sever the ‘umbilical cord’, leading to a drastic reduction in its economic and energy connectivity with Russia. As of 2017, according to one EU expert in Kyiv, ‘nobody now thinks that access to the Russian market is possible’.
Trade with Russia declined from 25.7 per cent of Ukraine’s total trade in 2012 to 11.6 per cent in 2016. This change is an immediate blow to the economy but may force structural flaws to be addressed more quickly. Overdependence until recently on Russia as an export market and energy supplier has had a distorting long-term effect on the Ukrainian economy, for example, by discouraging energy efficiency. It has lowered the competitiveness of Ukrainian companies: ‘What was sufficient for the Russian market is not enough for the EU,’ notes an EU official in Ukraine.
The adjustment has been complicated, however, by domestic economic crisis, military conflict in the eastern part of the Donbas region and inconsistent EU support. Initially, in response to the difficulties in Ukraine, the EU offered a special package of Autonomous Trade Preferences (ATP) which temporarily provided access to the single market on an asymmetrical basis during 2014–15. This separate instrument was not part of the DCFTA and thus required the support of EU member states and the European Parliament. In 2016, the European Commission proposed some new and very modest temporary Autonomous Trade Measures (ATM) for Ukraine, which were finally adopted in 2017 and have a duration of three years. However, this initiative was largely symbolic and was intended mainly to indicate political support rather than boost Ukraine’s exports to the EU.
Ukrainian business and access to the single market
The challenges of making the DCFTA work stem from Ukraine’s reluctance to implement the reforms stipulated; and more broadly from the inhibiting effects of an oligarchic, monopolistic and predatory business culture, which hampers competition and makes it harder for small and medium-sized enterprises (SMEs) to grow. The 2014–15 economic downturn exacerbated these challenges, forcing many businesses to focus on crisis management rather than revenue growth, investment and expansion.
Demographic and cultural factors have played a role. Whether at large state-owned firms or smaller private companies, the success of efforts to diversify export markets has tended to reflect generational differences between younger and older entrepreneurs and managers. Businesses with younger owners are more dynamic and adjust more quickly. Those set up by the older generation are typically more oriented towards Russian/CIS markets. They have tended to view trade as a state-led activity, and to place a premium on cordial political relations with Russia as a means of ensuring market access for Ukrainian producers. As trade relations with the EU have come to the fore, these more traditionally minded business people have anticipated – incorrectly – that high-level political support would similarly facilitate swift access to the EU single market.
In order for the DCFTA to be effective, Ukrainian businesses need to do more than leverage political connections. They must adapt to a more competitive environment
In order for the DCFTA to be effective, Ukrainian businesses need to do more than leverage political connections. They must adapt to a more competitive environment. The commercial expertise, international networks and access to finance needed for this are in very limited supply. Foreign direct investment in Ukraine remains negligible. Among the older businesses, there is an aversion to diversification. Ukrainian companies are afraid of European competition, and thus lobby for protectionist measures. Oligarchic businesses resist moving from a rent-seeking model to a profit-based one. At the same time, while championing protectionism, they remain able to some extent to take advantage of the DCFTA by adopting EU standards on an ad hoc, self-regulated basis. As a result, there is an incentive for business actors with strong representation in the Ukrainian government and parliament to oppose the creation of a level playing field for rival domestic producers and European business.
The DCFTA requires Ukraine to open its borders to EU goods and services progressively, with transition periods of up to 10 years in most sectors. As of 2017, the Ukrainian government is preparing to promote trade reorientation and boost the competitiveness of domestic businesses, but progress has been limited. While there have been some success stories, such as increased poultry sales in the European market, Ukraine’s exports to the EU have increased largely because of higher shipment volumes of mainstay products such as sunflower oil. Even though exports to the EU have increased as a share of Ukraine’s total exports, their composition has not changed significantly.
Trade promotion strategies continue to vary from one sector to another. Ukrainian producers of high-value-added goods such as machinery have been trying to diversify into other markets, such as the Arab countries. But Ukraine has yet to penetrate international value chains to a meaningful degree. Its agricultural sector has massive potential, but the costs of compliance with EU standards are high. Although the DCFTA imposes quotas on trade in only 36 items, these caps apply to agricultural products in which Ukraine enjoys a competitive advantage, such as grain and honey. The issue of quotas has attracted considerable media attention in Ukraine.
So far, large businesses have found it easier than smaller ones to take advantage of the DCFTA. Large agricultural companies more readily qualify for tariff-free quotas – offered on a first-come-first-served basis – while SMEs lack the expertise and resources to apply for such facilities. To overcome this and similar impairments, the European Investment Bank (EIB) launched a project with EU funds to support SMEs via a variety of measures, such as loan guarantees, and through channels such as the governmental deregulation office in Kyiv and business advice centres in the regions. But out of 15 planned centres, only four were open as of mid-2017. There is still insufficient support to help SMEs cope with competitive pressures once the DCFTA’s transition periods are over. This remains a major weakness in the EU’s strategy, and an area in which institutional support to Ukraine differs from that offered to accession countries.
The economic crisis and partial closure of the Russian market to Ukrainian exports have raised the stakes, and have made businesses impatient for progress on the DCFTA. However, prospects are limited by the fact that the DCFTA was never intended to offer ‘quick fix’ solutions. It was designed as a process of gradual economic integration, involving incremental trade intensification and regulatory convergence. To improve the outlook for bilateral trade in the current context, it is therefore of pivotal importance that the EU and Ukraine move swiftly to identify and sequence the necessary phases in DCFTA implementation, in order to facilitate trade reorientation in the most efficient and cost-effective way.
The Euromaidan protests in 2013–14 and the conclusion of the Association Agreement appeared to be game-changers in EU–Ukraine relations. Popular demand for life in a ‘normal European state’ was clearly demonstrated during the protests, and has continued to be in evidence since then. Given this context, the progress of AA-DCFTA implementation will provide an essential point of reference for institutional and economic reforms.
Milestones so far include the signature and ratification of the overall Association Agreement, the launch of the DCFTA and the introduction of a visa-free regime for Ukrainians travelling to the EU. More broadly, the Ukrainian debate on Europe has shifted from history, geography and geopolitics to European values, rules and technical standards. This represents a sea change in EU–Ukraine relations, and has resulted in an incomparably better understanding among Ukrainian policymakers of the preconditions for integration with the EU.
However, as this chapter has discussed, Ukraine’s elites still have a propensity for ‘declarative Europeanization’, in which pro-European rhetoric fails to translate into policy changes. For many politicians and their associates, reform remains optional. After two decades of mismanagement, the scale of reforms required and the domestic barriers to enacting them are formidable. Meanwhile, the necessary political will, capacity and resources remain in short supply.
To compound these problems, signs of ‘Ukraine fatigue’ have started creeping into EU institutions and policy circles since 2016. This is perhaps inevitable in light of the unrealistic expectations that had previously prevailed in the EU. Rebuilding the Ukrainian state requires a long-term vision and commitment. ‘Institutional impatience’ is a well-known flaw of international assistance: donors generally lack the patience (or long-term budgets) to sustain institution-building, even though such a project requires visible, predictable and continuous support over many years.
The AA-DCFTA has transformational potential, but implementation needs to factor in the political, economic and geopolitical context. Success depends not only on technical rule diffusion and capacity-building, but also on political engagement by the EU to cement Ukraine’s ‘European vocation’. Networks of patronage and rents remain powerful. In addition to providing technical assistance, therefore, EU institutions and officials need to step outside their comfort zones and empower reformist forces in the country, while exposing the anti-reformers. Only then will societal demand that Ukraine become a ‘fully European country’ have a chance of being realized.
49 For a compact and accessible analysis of the AA-DCFTA, see Emerson, M. and Movchan, V. (eds) (2016), Deepening EU-Ukrainian Relations. What, why and how?, London: Rowman & Littlefield International.
50 In the spring of 2017, some Ukrainian officials asked to move beyond the current Association Agreement and start negotiations on ‘more enhanced relations’. This was a surprising and unproductive move. The EU is certainly not ready to start discussing a new format in EU–Ukraine relations until the AA-DCFTA has been implemented. This raises the question as to why the issue was raised. It seems that the initiative was a pre-emptive ploy to counter EU criticism of Ukrainian policymaking, the idea being that if the EU criticized Ukraine for not implementing reforms, the Ukrainian side would be able to argue that the EU was not in a position to ‘tell them what to do’ since it had refused to enhance relations with Ukraine. However, there are good reasons for revising the tariffs and tariff-free quotas in the DCFTA part of the AA, something which can be done if the EU and Ukraine agree to change these provisions of the AA.
51 This follows the structure adopted by Emerson and Movchan (eds) (2016), Deepening EU-Ukrainian Relations. What, why and how?
52 Leitch, D. (2016), Assisting Reform in Post-Communist Ukraine, 2000–2012. The Illusions of Donors and the Disillusion of Beneficiaries, Stuttgart: ibidem Press, p. 69.
53 Kosals, L. and Maksimova, A. (2015), ‘Informality, crime and corruption in Russia: A review of recent literature’, Theoretical Criminology 19(2), doi:10.1177/1362480615581099, p. 279.
54 Interview with an expert from an EU member state, Kyiv, February 2017.
55 Interview with a civil society expert, Kyiv, February 2017.
56 Klympush-Tsintsadze is a member of the BPP but does not belong to any core group within the bloc that could provide her with reliable political support. This underscores the dysfunctional composition of the BPP.
57 Interview with an EU expert, Kyiv, February 2017.
58 Leitch (2016), Assisting Reform in Post-Communist Ukraine, 2000–2012. See also Wolczuk, K. (2009), ‘Implementation without Coordination: The Impact of the EU Conditionality on Ukraine under the European Neighbourhood Policy’, Europe-Asia Studies 61(2), doi: 10.1080/09668130802630839.
59 Office européen de lutte antifraude.
60 This resistance was evident, for example, during the appointment of the auditors of the NABU. The auditors have the exclusive power to dismiss the NABU’s head. It was also evident in the resistance of parliament to authorizing the NABU to conduct wire-tapping. There is no political will in support of an effective, fully fledged corruption investigation agency.
61 European Commission (2016), Support Group for Ukraine: Activity Report: The first 18 months, October 2016, https://ec.europa.eu/neighbourhood-enlargement/sites/near/files/neighbourhood/pdf/key-documents/ukraine/20161028-report-sgua.pdf.
62 Comments by Oksana Syroid, deputy parliamentary speaker, DGAP conference, Kyiv, September 2016.
63 See Leitch (2016), Assisting Reform in Post-Communist Ukraine, 2000–2012.
64 There have been some valiant examples of more determined engagement, such as those by the EU Delegation during the tenure of Jan Tombinski. His timely intervention broke the deadlock over electronic asset declarations by warning that failure to pass the relevant law would endanger Ukraine’s progress towards visa liberalization. See Gressel, G. (2016), Keeping up appearances: How Europe is supporting Ukraine’s transformation, London: European Council on Foreign Relations, October 2016, http://www.ecfr.eu/publications/summary/keeping_up_appearances_how_europe_is_supporting_ukraines_transformation.
65 Interview with an EU official, Kyiv, February 2017.
66 For example, during a focus group on EU–Moldova relations in Chisinau in May 2014, some participants claimed – when asked the role of the EU in Moldova – that ‘the EU promotes corruption’.
67 Interview with an EU official, Kyiv, February 2017.
68 Interview with an EU official, Kyiv, February 2017. For a perceptive overview of the anti-monopoly policy, see Shavalyuk, L. (2016), ‘The daily life of cartels’, Ukrainian Week, No. 11, December 2016, http://ukrainianweek.com/Economics/180154.
69 The EUAM’s mandate is divided into three pillars of activity: 1) strategic advice on civilian security sector reform; 2) support for the implementation of reforms, through hands-on advice and training; and 3) cooperation and coordination between Ukrainian authorities and international actors.
70 Granovsky, V. and Nanivska, V. (2010), ‘Eurointegration: Rest’, Inside Ukraine, No. 11, Kyiv: International Centre for Policy Studies, p. 15.
71 Interviews with EU and Ukrainian experts, Kyiv, February 2017. There are many lessons and instruments from Romania, Bulgaria and the western Balkans, which could inform the EU’s support for promoting the rule of law in Ukraine, but they do not seem to inform the EU’s strategies in Ukraine. See Popova, M. (2017), ‘How Can the EU Help Ukraine Build the Rule of Law and Fight Corruption? Romania and Bulgaria as guideposts’, PONARS Eurasia Policy Memo No. 469.
73 Ukraine’s exports to the EU grew by 24.5 per cent in the first quarter of 2017 in comparison to the same period in 2016, according to the MEDT. See https://twitter.com/mineconomdev/.
74 Adarov, A. and Havlik, P. (2016), Benefits and Costs of DCFTA: Evaluation of the Impact on Georgia, Moldova and Ukraine, Vienna: The Vienna Institute for International Economic Studies.
75 Wolczuk, K. and Dragneva-Lewers, R. (2015), ‘No Economic Bright Spot in Tensions Between the EU, Ukraine and Russia’, Chatham House Expert Comment, 17 December 2015, https://www.chathamhouse.org/expert/comment/no-economic-bright-spot-tensions-between-eu-ukraine-and-russia; Wolczuk, K. and Dragneva-Lewers, R. (2014), ‘EU pragmatism has rewarded Russia’s brazen trade bullying’, The Conversation, 25 September 2014, http://theconversation.com/eu-pragmatism-has-rewarded-russias-brazen-trade-bullying-32050.
76 European Commission (2017), ‘European Union, Trade in goods with Ukraine’, p. 8, http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113459.pdf.
77 Interview with an EU official, Kyiv, February 2017.
78 The ATM mainly apply to agricultural products of lesser importance to Ukraine or provide only modest increases in tariff-free quotas for Ukraine’s key agricultural commodities, such as grain. The fact that even these very modest trade concessions encountered resistance within the European Parliament indicates the limited support for integration from the very institution that had championed closer EU–Ukraine economic links. See European Parliament (2017), ‘MEPs back further trade concessions to Ukraine, with exceptions’, press release, 1 June 2017, http://www.europarl.europa.eu/news/en/press-room/20170529IPR76233/meps-back-further-trade-concessions-to-ukraine-with-exceptions.
80 For example, the annual quota for honey was exhausted within the first two weeks of 2017; exports exceeding the quota are subject to a 9 per cent tariff. With the ATM, adopted in 2017, the increase in tariff-free quotas for honey is only modest.
81 See the project website, http://www.eu4business.eu/ukraine.
82 Wolczuk, K. (2016), ‘Ukraine and Europe: Re-Shuffling the Boundaries of Order’, Thesis Eleven, 136(1), pp. 54–73, doi: 10.1177/0725513616667666.
83 Birdsall, N. (2005), ‘Seven Deadly Sins: Reflection on Donor Failings’, Centre for Global Development Working Paper, No. 50.