Ukraine Seminar Paper

7/15/2015

Ukraine—to Integrate or not to Integrate?

Grace Douglas

A519The European Union and Its NeighborsSchomakerStudent ID # 0002775229

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ContentsCover Page

Contents……………………………………………………………………………………Page 1

List of Abbreviations………………………………………………………………………Page 2

Seminar Paper…………………………………………………………………………Pages 3-13

References…………………………………………………………………………………Page 14

Appendices……………………………………………………………………………Pages 15-16

Handout………..………………………………………………………………………Page 17-18

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List of Abbreviations

EU—European Union USSR—Ukrainian Soviet Social Republic DCFTA—Deep and Comprehensive Free Trade Area CIS—Commonwealth of Independent States EEU—Eurasian Economic Union

Douglas—Ukraine 3

The Ukraine has been in the process of forming and solidifying its relations with the EU

for years, as far back as 1993 (MFAUkraine 2012). At first glance, it seems like a fine idea.

Ukraine has had its own share of financial difficulties, which could be reduced from EU aid, and

there seem to be many positive things that could come from becoming a part of such a large

group of its neighbors. But to really determine whether or not it is in Ukraine’s best interests to

become a member state of the EU, you really have to look at Ukraine’s past and present, as well

as what is going on in the EU today.

The biggest question that must be answered by Ukraine before they can decide whether

or not to integrate further with the EU is whether or not to cut ties with Russia, and to what

degree. Cutting ties with Russia would be a very hard, probably long, process, but by choosing to

integrate into the EU, that is exactly what they are headed towards. Russia has already threatened

that Ukraine would lose their right to duty-free imports, that they “would lose a preferential

trading position in its $2.5 trillion market if it integrated closer with the EU” (TV-Novosti 2015).

Russia’s reasoning was that, with Ukraine’s increased trade with other European countries, an

influx would occur of “European goods into the Russian market via Ukraine, which could

threaten Russia’s economy” (TV-Novosti 2015). This makes it look as if Russia is just protecting

its own economic interests by not wanting its largest trading partner to start consorting with the

EU and its member states (Adomanis 2015). Based on knowledge of the Ukraine-Russian past

relations however, it is fair to say that maybe Russia isn’t being defensive at all, but rather

offensive, in its dealings with Russia.

Ukraine and Russia have had a long, complicated history, since the beginning of

Ukraine’s existence. Ukraine declared independence in 1918, and just a few years later Russia

decided to conquer two-thirds of it (BBC 2015). Later, in 1954, the Soviet leader at the time,

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Nikita Krushchev, decided to give the Crimean peninsula to Ukraine as a “gift” (BBC 2015). On

and off from there there have been many disputes over both political and economic issues, one of

the largest being the infamous Chernobyl disaster. The Chernobyl Power Plant in Ukraine, then

the USSR—Ukrainian Soviet Social Republic, had a meltdown due to design flaws and poor

safety hazard procedures (BBC, On This Day n.d.). But this was not the work of the Ukraine;

you can even tell from the name “Ukrainian SSR” that this was under the Soviet rule. The entire

Chernobyl Power Plant was “was under the direct jurisdiction of the central authorities of the

Soviet Union” (lowrijenphotgraphy n.d.). Though it was not the Soviet’s intent to cause such

destruction, it is sad that their push for control of more and more of Ukraine’s resources caused

them to cause this destruction in a country other than their own, in Ukraine.

The Chernobyl disaster is just one example of how Russia has always been trying to take

control of Ukraine and its resources. Over the years Russia has gone back and forth on its

agreements with Ukraine, one instance being in 2006 when Russia cut off the supply of gas to

Ukraine sue to arguments over pricing (BBC, Ukraine profile - Timeline 2015). It cannot be

completely determined whether that was a purely economic move or if it was caused by political

motives, but in 2008 Russia’s state-owned company, Gazprom, agrees with Ukraine on a new

contract to supply their industrial consumers directly, finally ending the arguments over money

(BBC, Ukraine profile - Timeline 2015). From the outside it looks as if Russia did have political

motives; by taking the gas away and then bringing it back a couple of years later, with the intent

to “supply their industrial consumers directly” makes it seem as if Russia just wanted to

maintain, and increase, its control over Ukraine and its relations with Ukraine.

This wouldn’t be the only time that Russia would deny Ukraine gas; again in 2009 Russia

stopped all of their gas supplies to Ukraine, but this time only for a week before they got what

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they wanted: a 10-year deal on gas transit (BBC, Ukraine profile - Timeline 2015). Later that

same year Russia and Ukraine decide to also agree upon and sign a deal on oil transit for 2010,

preemptive to fears of supply cuts to Europe (BBC, Ukraine profile - Timeline 2015). Whether

or not Russia is using Ukraine for political purposes, it is clear that they are tightly intertwined,

so that, coupled with Russia’s negative perspective on Ukraine’s dealings with the EU, show that

if Ukraine really decides to go forward with integration into the EU, they will have to cut at least

some ties with Russia. The only question is whether or not that will be in Ukraine’s best

interests.

Besides Ukraine’s problematic dealings with Russia in the near and far past, they have

also had lots of problems within their own country, with things such as corruption and

government unrest. The Ukrainian people have not always been happy with their government

officials; in fact, in recent years especially, the Ukrainian people have had much discourse, to say

the very least, about the way their government and elections are being run. In 2004 there was so

much dissatisfaction from the Ukrainian people on the outcome of the election, with many

thoughts of widespread vote rigging, that campaigns of mass street protests and civil

disobedience occurred; this was the Orange Revolution (BBC, Ukraine profile - Timeline 2015).

The opposition candidate Viktor Yushchenko ended up taking office. Things seemed to

be going okay, until he decided to remove Yulia Tymoshenko from Prime Minister of Parliament

less than a year after she took office (in 2005). Then she was reappointed under the same

administration only two years ago. Things seem to be going well again until she is forced to step

down a few years later, after losing her supporters in Parliament and losing a no-confidence vote.

Later that year she was charged with abuse of funds, which she denies, and she accuses her

detractors of having political motives. In 2011 a summit of Central and East European leaders in

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Yalta was boycotted due to mistreatment of Yulia Tymoshenko while imprisoned (BBC, Ukraine

profile - Timeline 2015). This is just showing the political path of one politician in the Ukraine in

the past decade, one who has had support and been elected and who has also been accused of

things she may or may not have done and been sent to prison for them. This is just one case of

possible corruption in the Ukrainian government recently. The Ukrainian government obviously

has more problems going on than just how the Russian government may be using and trying to

control them.

Throughout much of Ukraine’s recent struggles, the EU has been very understanding and

supportive. The EU has continued to show a great deal of interest towards Ukraine and its well-

being. The EU has even taken the effort of making Ukraine a priority country within the

European Neighborhood Policy and the Eastern Partnership. By doing this, the EU has

committed to a policy of sequenced engagement with Ukraine and to a close relationship that

encompasses political and economic integration (EEAS n.d.).

Then on 27 June 2014, the EU-Ukraine Association Agreement was signed (EEAS, EU-

Ukraine Association Agreement: beginning of provisional application 2014). This new

agreement replaced the EU-Ukraine Partnership and Cooperation Agreement as the legal basis

and framework for EU-Ukraine relations. In simplicity this agreement means that the EU is

committed to supporting Ukraine in its path towards a modern European democracy. This

Association Agreement does not constitute the final goal in EU-Ukraine cooperation though.

This agreement means many things, one of the main being its commitment to cooperate and

converge economic policy, legislation, and regulation across a broad range of areas, such as

equal rights for workers, steps towards visa-free movement of people, the exchange of

information and staff in the area of justice, the modernization of Ukraine's energy infrastructure,

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and access to the European Investment Bank, as well as a commitment to regular summit

meetings. Another promise from this agreement is the EU’s aim at boosting bilateral trade in

goods and services between the EU and Ukraine, progressively cutting tariffs and aligning

Ukraine’s rules with the EU’s in selected industrial sectors and for agricultural products (EEAS,

The EU's relations with Ukraine n.d.).

At the same time, the Deep and Comprehensive Free Trade Area (DCFTA) was signed as

part of the broader Association Agreement. Due to political and economic challenges faced by

Ukraine, the EU unilaterally granted Ukraine preferential access to the EU market until 31

December 2015. Also, in order to avoid further destabilization of Ukraine and to guarantee

Ukraine’s access to the CIS market under the Ukraine-Russia bilateral preferential regime, in

September 2014 the EU postponed implementing the DCTFA until January 2016 (EC 2015).

It is important to see what the EU would get out of this integration with Ukraine, as well

as why Ukraine would benefit. In figuring that out, it is very important to look at trading

partners. According to the European Commission, the EU is Ukraine’s largest trading partner,

accounting for more than a third of its trade and its main source of Foreign District Investment

(FDI) (EC 2015). The main exports of Ukraine to the EU are raw materials, such as iron, steel

mining products, and agricultural products; chemical products; and machinery, while the main

exports of the EU to Ukraine are machinery and transportation equipment, chemicals, and

manufactured goods (EC 2015). Not only are those main exports important, but Ukraine is also

one of the biggest producers of electricity in Europe, providing electricity for four EU member

states (Hungary, Slovakia, Poland, and Romania) (Shumylo-Tapiola 2013). Ukraine’s industrial

potential, in conjunction with the DCFTA, provides an opportunity to make the country more

competitive and diversify its exports.

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Not only has the EU been helpful to Ukraine in terms of trade, but they have also shown

their support for Ukraine through political efforts. In response to the illegal annexation of Crimea

and deliberate destabilization of a neighboring sovereign country, the EU has imposed restrictive

measures against the Russian Federation (EU 2015). One such measure includes suspending

bilateral talks with the Russian Federation on visa matters, discussions on the New (EU-Russia)

Agreement, and preparations for participation in the G8 Summit in Sochi. Due to the absence of

de-escalatory steps following Russia’s illegal annexation of Crimea, the EU has imposed travel

bans and frozen assets against Russian and Ukrainian officials (EU 2015).

The EU makes sure that Ukraine has political support against Russia’s attempt to

destabilize the Ukrainian government. The EU stands by the efforts of the new Ukrainian

Government to stabilize the situation and pursue the course of reforms, including constitutional

reform. This is done by the EU in order to reaffirm the utmost importance of ensuring

inclusiveness at all levels of government by the Ukrainian authorities (EEAS, EU – Ukraine

Relations n.d.). The EU really wants to prove that it is determined to ensure that Ukraine has all

the support it needs, in the short and long term, to undertake the political and economic reforms

that are necessary to consolidate a democratic, independent, united and prosperous Ukraine.

Despite wanting to help protect Ukraine and to want to ensure it has a smooth path

towards inclusion into the EU, certain EU member states do recognize and support that when

considering including Ukraine in the EU, you must consider Russia and its implications on

Ukraine’s decisions. Just a few months ago the Spanish Foreign Minister Jose Garcia-Margallo

said the following after visiting with his Russian counterpart in Moscow: “Russian interests

should be considered in the association agreement between the EU and Ukraine...the essential

strategic partnership between Russia and the EU should be restored” (TV-Novosti 2015).

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Russian interests should definitely be considered in the association agreement between

the EU and Ukraine, for Ukraine’s benefit and for the EU’s benefit. It is already known that

Russia has a huge effect on Ukraine, due to its large trade with Ukraine and past issues with

Ukraine taking control of Ukraine and its resources. It is also known that Russia greatly dislikes

that Ukraine wants to integrate any further with the EU, causing them to threaten cutoff of

certain trade, which would really hurt Ukraine, since Russia and Ukraine are such huge trading

partners. This ultimately means that if Ukraine really wants to continue integration with the EU,

then they are in for a long, hard process ahead of them. The EU is a large trade partner of

Ukraine, but Russia is Ukraine’s largest overall trade partner, so cutting ties with Russia, to any

degree, will take a toll on Ukraine’s economy. As for the EU’s benefit, the EU is also a big trade

partner with Russia—though they are less dependent on Russia than Ukraine, so making them

mad could still hurt the EU economically; on the other side, working with Russia and finding a

deal that makes them happy could result in better trading and economies for Russia, Ukraine, and

the EU.

No matter what though, this will be a long, hard process. It could be possible to appease

Russia’s negative feelings about Ukraine’s integration into the EU, but as of right now they are

threatening to cut some trade. Besides worrying about upsetting Russia, Ukraine has to worry

about upsetting its own citizens, who are either pro-Russia separatists who want to side with

Russia or they are pro-EU integration and are upset that the current Ukrainian government is

pushing back signing the agreement with the EU (BBC, Ukraine profile - Timeline 2015). The

Ukrainian government has people mad externally as well as internally, so it will take a lot for

them to make all sides content with any decisions they make. That being said, it is not at all

impossible. “Difficult doesn’t mean “impossible,” but the current effort to re-orient Ukraine

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towards Europe will be a decades-long process, not something that can be accomplished through

holding a few press conferences or signing a few bills into law. It’s going to be a much more

protracted process than a lot of people currently expect and the enormous amount of trade that

Ukraine conducts with Russia will mean that Russian influence (while diminished) will not

disappear” (Adomanis 2015).

Integration for Ukraine will be hard no matter what, but it is still yet to be determined

whether or not this is indeed the best move for Ukraine, or even the EU for that matter. As for

Ukraine, there is at least one major setback that integrating into the EU could cause, and that

setback would be from adopting the Euro as their new set of currency. “Under the Treaty, all EU

Member States have to join the euro area once the necessary conditions are fulfilled” (EC,

Adopting the euro 2014). There are two countries—Denmark and the United Kingdom—that

have avoided this by negotiating an ‘opt-out’ clause that allows them to remain outside the euro

area (EC, Adopting the euro 2014). Most countries in the EU have not been able to do that

though, but with the Eurozone crisis that is going on, it does not seem like a good idea at all to

adopt the euro.

There are many reasons why the euro is such a bad idea, but the two main ones seem to

be too little trade and too much financial interconnection (O'Brien 2013). “Excluding Germany,

just over half of all euro trade is with each other. But with bad policy pushing southern Europe

into depression and northern Europe towards recession, euro zone countries can't afford to buy as

much stuff from each other. That adds a degree of difficulty to recovery for southern European

countries that need to export their way out of trouble” (O'Brien 2013) [see Appendix A]. Trade is

important to any economy, but when there is too little diversification in trade opportunities, then

some countries will not be able to recover, or at least will not be able to recover as quickly, from


financial difficulties. It is also hard when other countries won’t “take one for the team.” “The

euro zone's weak links are dragging the rest down -- but only because the rest refuse to pull the

weak ones up” (O'Brien 2013). It’s understandable to not want to do anything that could hurt

your own country, economically or otherwise, but when you have the opportunity to help out

your fellow member state, then maybe putting more effort and giving more than you will get

back in the short-run will be better for everyone in the long-run.

This is also where too much financial interconnection comes in. “Other country's

problems can quickly become your own if your banks own their bonds. Especially if your banks

are bigger than your economy” (O'Brien 2013) [see Appendix B]. This is especially a problem in

the Eurozone, where there is so much financial interconnection. If one country has financial

difficulties, then it could turn into a Domino Effect, hurting many more countries in the

Eurozone, besides just the primary country that was going through a hard time financially.

If those are not enough reasons to think that the euro may not be the best thing, Greece

may have something to say. Greece has been going through a huge financial crisis lately, and

currently they are at a 25% unemployment rate (Lee 2015) [see Appendix C]. This would be bad

if Greece was the only country in the Eurozone with these kinds of statistics, but Spain has debt

problems almost as high as Greece’s, with a 24% unemployment rate, Croatia and Cyprus

following them with unemployment rates over 15% (Lee 2015). That’s not to say that that is true

for all countries in the Eurozone. Austria and the United Kingdom are just barely over 5%, with

Germany just recently going below 5% (Lee 2015). That’s still a problem though. Even if it isn’t

touching those countries directly right now, it very well could affect them in the near future, and

even if it doesn’t or it takes years and years to catch up with them, it should be viewed as a


problem with the entire EU when any of its member states have financial issues and

unemployment rates above 20%. That should never be considered acceptable.

Whether or not the euro is a good idea though does not necessarily matter in the current

issue with Ukraine. It could be a potential valid reason to want to not become a member state in

the EU, but by the time Ukraine had to worry about actually converting to the euro, many years

will have passed; there are more pressing issues for Ukraine-EU relations, like the issue of

Russia, so converting to the euro would not be the first change on the list for Ukraine.

Nonetheless, it is a reason that any country should consider before integrating into the EU, since

at the current period of time it is required to convert to the euro to integrate into the EU.

A much more important question is why the EU wants to integrate Ukraine. Ukraine is a

good trade partner with the EU, but Ukraine seems to benefit more from the trade setup. Besides

that, Russia seems to be a much bigger trade partner with the EU, so it can’t be just about the

economic and trade benefit. The EU first began to be interested in Ukraine during the Orange

Revolution, when it looked like the new Ukrainian government was more pro-Western and

seemed to be more democratic-leaning, but since then Ukraine has shown signs of actually

moving in the opposite direction (Shumylo-Tapiola, Why Does Ukraine Matter to the EU?

2013). It is hard to say what the Ukrainian government really does want or what they will really

do; they have so many pressures from so many sides, so they cannot appease everyone at once.

They have internal pressures, from civilian citizens who get upset and go on strike over elections

or over their decisions to move more towards Russia or more towards EU integration, from

Russia, who threatens to cut off trade and make life hard on Ukraine if they decide to move

further in integration into the EU, and even from the EU, who wants to help them but also has its

own agenda (BBC, Ukraine profile - Timeline 2015). Ukraine is being pulled in all directions at


the same time. What decision is best for Ukraine—to integrate or not to integrate?—is not a

simple question to answer. In fact, there is probably not one perfect answer. Whatever Ukraine

decides, there will be repercussions coming from somewhere. What Ukraine should probably do

at the moment is just keep its peace with Russia and the EU, continue its trade as it is, and work

on itself before it signs itself over to anyone—the EU, Russia, or the EEU.

References


Adomanis, Mark. 2015. "Russia Is Still Ukraine's Largest Trading Partner." Forbes. January 5. http://www.forbes.com/sites/markadomanis/2015/01/05/russia-is-still-ukraines-largest-trading-partner/.

BBC. n.d. "On This Day." BBC News. http://news.bbc.co.uk/onthisday/hi/dates/stories/april/28/newsid_2500000/2500975.stm.

—. 2015. "Ukraine profile - Timeline." BBC. February 25. http://www.bbc.com/news/world-europe-18010123.

EC. 2014. "Adopting the euro." European Commission. July 23. http://ec.europa.eu/economy_finance/euro/adoption/index_en.htm.

—. 2015. "TRADE: Ukraine." European Commission. May 7. http://ec.europa.eu/trade/policy/countries-and-regions/countries/ukraine/.

EEAS. n.d. "EU – Ukraine Relations." EEAS. http://www.eeas.europa.eu/ukraine/about/index_en.htm.

—. 2014. "EU-Ukraine Association Agreement: beginning of provisional application." EEAS. January 11. http://www.eeas.europa.eu/top_stories/2014/011114_ukraine_agreement_en.htm.

—. n.d. "The EU's relations with Ukraine." EEAS. http://www.eeas.europa.eu/ukraine/.

EU. 2015. "EU sanctions against Russia over Ukraine crisis." Europa. July 10. http://europa.eu/newsroom/highlights/special-coverage/eu_sanctions/index_en.htm.

Lee, Timothy B. 2015. "The euro was a big mistake, and Greece is paying the price." Vox Policy & Politics. June 30. http://www.vox.com/2015/6/30/8868973/euro-greece-crisis-mistake.

lowrijenphotgraphy. n.d. "LOWRI JÊN PHOTOGRAPHY." LOWRI JÊN PHOTOGRAPHY The Art of Abandonment. http://www.lowrijenphotography.com/rooftops/.

MFAUkraine. 2012. Ukraine-EU Relations. Edited by Ministry of Foreign Affairs of Ukraine. http://ukraine-eu.mfa.gov.ua/en/ukraine-eu/relations.

O'Brien, Matthew. 2013. "Why the Euro Is Doomed in 4 Steps." The Atlantic. March 30. http://www.theatlantic.com/business/archive/2013/03/why-the-euro-is-doomed-in-4-steps/274470/.

Shumylo-Tapiola, Olga. 2013. "Why Does Ukraine Matter to the EU?" Carnegie Europe. April 16. http://carnegieeurope.eu/publications/?fa=51522#.

—. 2013. "Why Does Ukraine Matter to the EU?" Carnegie Europe. April 16. http://carnegieeurope.eu/publications/?fa=51522#.

TV-Novosti. 2015. "Ukraine – EU Association Agreement should consider Russian interests." TV-Novosti. March 10. http://rt.com/business/239305-russia-ukraine-eu-association/.


Appendices

Appendix A

Appendix B


Appendix C


Handout

Ukraine—Should Ukraine integrate into the EU?

Ukraine Background

o Ukraine History

o Ukraine Relations

EU

Russia

Ukraine Now

o Ukraine Relations

EU

Russia

What is best for the EU?

What is best for Ukraine?

o Not the EU

Euro

Look at what they did to Greece (and Spain)

“As long as the European Union remains a loose confederation of independent nations, the Euro will be an economic menace.”…“deeply integrate the economies of Eurozone nations so that a sharp divergence between European countries becomes impossible”…“ structural flaws in the eurozone's architecture — not irresponsible conduct by individual governments — are the root source of the trouble.”…“ And the key source of those problems was the flawed design of the eurozone itself.”

o http://www.vox.com/2015/6/30/8868973/euro-greece- crisis-mistake

From the outside, the EU looks like an amazing idea; to be able to allow all of these countries, with completely different languages, cultures, etc. to come together for the betterment of each country, for the overall good…but in reality, it isn’t working. You need more consistency between countries, especially in regards to economics, to make this kind of union feasible.

http://www.vox.com/2015/6/30/8868973/euro-greece-crisis-mistake

http://www.vox.com/2015/6/30/8868973/euro-greece-crisis-mistake


“In political terms, Greece's best hope is probably that the mission of the European Union is "ever closer union." Direct fiscal support for Greece is hideously unpopular in northern Europe, as is the idea of having the European Central Bank monetize Greek debt. But both would, in fact, be a form of ever closer union. By contrast, kicking Greece out of the eurozone is the opposite of ever closer union. So in a sense, the broad current of history is on Syriza's side. But everything else in short-term political and economic dynamics cuts the other way.”

The European Union was formed as more of a political unity, rather than an economic unity, since it obviously does not make sense for these countries, so different in their economies, would join economically in this way. In this sense, why add the Ukraine at all? If so, why not add all European countries? Why be so selective? Economics obviously isn’t a very important criteria, so why add so many countries, when it is just likely to hurt them?

“The political meaning of the eurozone and the European Project differs a bit from place to place. To France and Germany, it means the end of war. To Ireland, it means independence from the United Kingdom. To Finland and Latvia and other eastern states, it means independence from the Russian sphere of influence. For Spain and Portugal, it means the end of dictatorship and integration into the realm of democracies. For Greece, it means (unlike Turkey) certification as a real European country.”

So what is the meaning for Ukraine? They like Russia…why tear them away from that?

The single currency itself caused the original eurozone economic crisis

The full details of Europe's economic problems are complicated, but the original source of the trouble is actually quite simple. The main tool modern countries use to recover from recession is monetary policy, but the nature of the eurozone is that when countries fell into recession they didn't have central banks of their own that could help promote recovery. Outsourcing monetary policy to the European Central Bank in Frankfurt left Ireland, Portugal, Greece, and Spain defenseless against the 2008 recession.

This program of austerity and structural reform has worked best in Ireland, where the unemployment rate really has fallen substantially from its 15 percent peak. Still, Irish unemployment is far higher than the unemployment rate in the US or UK, where independent monetary policy has been used to combat joblessness. That Ireland's years-long spell of double-digit unemployment is considered a eurozone success story goes to show just how bleak the overall situation is.

Documents

Ukraine Seminar Paper