News analysis: Ukraine's free trade deal with EU sparks controversy over impact on economy

The free trade agreement between Ukraine and the European Union (EU) is expected to come into force soon as the 28-member bloc recently said it has completed all procedures needed for its implementation.

However, analysts believe that the free trade deal would not bring immediate positive results, instead, it might pose serious challenges for the Ukrainian economy, especially in the light of trade tensions with Russia.

DEAL OF GREAT PROMISE

After almost four years of preparations, the Ukraine-EU free trade pact, which removes tariffs on more than 90 percent of the goods traded between the two sides, moved very close to becoming a reality.

The EU has signalled that it was ready for a deeper economic integration with Kiev two weeks ago after Belgium -- the last of the 28 alliance members -- has ratified the Association Agreement, which establishes a free trade area (FTA) with Ukraine starting from Jan. 1, 2016.

Ukraine's reaction was not surprising. Kiev regarded the move as a landmark step towards new trading opportunities for Ukraine and adoption of the EU standards in production and services.

"This opens a perspective for Ukraine to become a factory of Europe," said the country's Economic Development and Trade Minister Aivaras Abromavicius.

The Ukrainian government suggested the implementation of the FTA would boost the annual growth of the country's economy by at least 0.6 percent, promote exports by 2-3 percent each year, and create up to 190,000 new jobs.

Ukrainian authorities said that such results would be achieved through modernization of the country's economy, implementing new technologies designed to improve the quality and competitiveness of Ukrainian-made goods and easier access to the market of 500 million consumers.

Another big aim of the FTA is to align licensing of the Ukrainian products with international standards, which would allow the East European country to boost trade not only with the EU, but also with other foreign partners.

"When we will begin to certify our products according to European standards, in fact we will open up our goods to the world. In many cases, there would be no need to certify the Ukrainian products for sales to other markets, such as the United States or China, as the European license would be suitable," said Lubomir Shavaluyk, analyst at the Kiev-based Kinto investment company.

NO QUICK BENEFITS

While some experts firmly believe that the FTA with the EU will rapidly yield gains for Ukraine, others fear that it won't, and may even cause losses.

Critics of the deal suggest that Ukraine, which is gripped by its worst crisis in decades, currently does not have enough funds to carry out reforms prescribed in the deal and won't be able to enjoy its projected economic advantages from the FTA.

Indeed, the outlook for Ukraine's export opportunities to the EU does not look rosy, given a previous experience of introducing relaxed trade rules. The preferential trade tariffs, which have been in place since last year and removed about 85 percent of EU custom duties on imports from Ukraine, appeared to be ineffective.

"Although the EU has unilaterally opened its market for Ukraine, our exports have dropped by 35 percent in the first half of this year. The only export items which have demonstrated significant growth in sales were nuts, goods made of straw and wool. The rest of Ukrainian goods are currently not competitive in the European market," said Viktor Suslov, the country's former economy minister.

As the FTA comes into force, nothing would change in principle for Ukraine's export opportunities -- in the midst of an economic crisis, very few producers will allocate funds to introduce the EU standards in their production and establish new logistic and supply chains.

Those businesses which nevertheless decide to enter the new markets would have to increase their manufacturing costs, which will seriously reduce the competitiveness of their products.

Ukrainian analysts are also worrying that after the implementation of the agreement, which would allow the EU's exports to flow to Ukraine without import duties, local producers would be unable to compete with foreign rivals even at home.

"It could result in many Ukrainian producers being forced to reduce their production, which will lead to a cut in jobs and reduction of contributions to the state budget," said political analyst Alexiei Yakubin.

RETALIATION FROM RUSSIA

Along with internal challenges related to implementation of the free trade pact with the EU, the Ukrainian economy is facing serious risks concerning Russia's retaliation against the deal.

Moscow, which has a separate preferential trade agreement with Kiev, has long warned that it would curtail access of Ukrainian products to its market once the deal takes effect to protect Russia from European goods flooding in via Ukraine without import duties.

In mid-November, Russia's Economic Development Minister Aleksey Ulyukaev gave a clear signal that Russia will implement its plans, saying that Moscow will impose a food embargo against Ukraine starting from Jan.1, 2016.

However, the food sector is not the only industry which risks being subject to tightened trade rules with Russia. The Ukrainian economy ministry said that in the framework of retaliatory measures on the Ukraine-EU trade agreement, Moscow may cancel duty-free imports for a range of other Ukrainian products, including chemicals, construction and repair materials, textiles, footwear, working equipment and vehicles.

While Kiev said the possible ban would have a modest impact on the Ukrainian economy, analysts warn that it could cause the country's revenue to lose billions and have grim implications for the overall financial system.

"Starting from Jan. 1, when the FTA with the EU enters into force, our losses from declined trade with Russia would be between 4 and 5 billion U.S. dollars per year. In the medium-term perspective, they could reach 10-11 billion dollars," said Alexander Okhrimenko, head of the Kiev-based Ukrainian Analytical Center.

To solve the problem, Ukraine must engage in dialogue with Russia to find a mutually acceptable compromise for further trade ties, the expert said.

"Imposing a ban on re-export of EU products from Ukraine to Russia could be a middle-ground solution to satisfy both sides," Okhrimenko said. He added that the compromise decision could be adopted during the next round of talks between Ukraine, the EU and Russia slated for Dec. 1, which are designed to address Moscow's fears regarding the trade treaty between Kiev and the 28-member bloc. Endi