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Aug 16, 2012

On closer look, a Potyomkin village-style trade agreement

Kyiv Post

Since Aug. 9, when Ukraine ratified a free trade agreement with Russia and Belarus, the nation’s officials have not stopped praising it. Iryna Akimova, deputy head of Presidential Administration, said the deal will create 60,000 jobs in the country and will boost tax revenues by Hr 9.4 billion per year, and so on.

But economists say that the agreement will actually change little in reality. It’s basically another stunt pulled out by Russia. A clever trick, no more.

“Little has changed,” says head of the Institute for Economic Research Ihor Burakovsky. “The deal supersedes more than a hundred bilateral free trade agreements that regulated trade between different countries in CIS – Russia and Ukraine, Ukraine and Belarus, and so on.”

The current trade with Commonwealth of Independent States, or CIS, accounts for 42 percent of Ukraine’s merchandise turnover. But most export duties that currently exist will remain.

Duties on export of machine building and pipes, which make up a large part of Ukraine’s exports to Russia, will be lowered when then agreement comes into effect in mid-September.

Viktor Pinchuk, one of the nation’s richest men and the biggest producer of pipes, is one of the beneficiaries of this agreement.

But other commodities, like energy and sugar, only get duties lifted if the exporting country is a member of the Russia-led Customs Union.

“In the FTA, Russia has canceled the duty on energy commodities and raw products only for members of the Custom’s union, which Ukraine is not,” says Oleg Ustenko, executive director of The Bleyzer Foundation.

This trick looks like another ploy by Russia to push Ukraine into the Customs Union, which it has so far resisted. Previously, Russia’s Vladimir Putin has pushed for it by suggesting that Ukraine will get big discounts on gas if it decides to join the Customs Union. Ukraine pays one of the highest prices in Europe, $450 per 1,000 cubic meters, for imported Russian gas.

Ukraine, however, has been pursuing a deep and comprehensive free trade agreement with Europe. Although on hold at the moment for political reasons, the agreement could potentially give an important boost to Ukraine’s economy by gradually opening up a large and rich market next-door.

The free trade agreement the European Union is offering Ukraine would not immediately scrap all trade restrictions, either. But it includes a detailed transition period and time frame during which trade restrictions will be phased out.

In contrast, the CIS free trade agreement offers nothing of the sort. It offers no clear-cut prospect for free trade at all. Rather, it offers free trade on paper followed up by more years of negotiations for most of the commodities.

The agreement does provide some benefits, though.

“The treaty’s key advantages are that it will complicate expanding the list of exemptions, introduce a common disputes settlement mechanism based on WTO [World Trade Organization] principles, and require that technical barriers, sanitary and phytosanitary measures comply with WTO rules,” says Olena Bilan, chief economist at Dragon Capital.

The free trade agreement makes it harder to wage “trade wars,” like the cheese war Russia started against Ukraine earlier this year. It banned some cheeses, claiming they are not produced to the Russian health standards.

Experts agree that the free trade deal does not prevent Ukraine from signing a similar deal with the European Union, which the sides initialed on July 19.

“The more free trade agreements Ukraine gets with foreign countries, the better it is for our trade and economy, since we are an export-oriented country,” Ustenko says. Currently the government is negotiating similar documents with Canada, Israel and Turkey.

Moreover, Armenia, Uzbekistan, Azerbaijan and Turkmenistan are expected to join the FTA between Ukraine, Russia and Belarus later in 2012.

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