Ukraine comes closer to having single economic space with Russia, Belarus, and Kazakhstan

First Russian Vice Premier Viktor Khristenko declared there was a possibility to make certain concessions in terms of exported oil and natural gas duties for Ukraine after creating a united economic space. “We realize that Russia must pay for economic integration and a political decision has been made,” noted Mr. Khristenko. He was in a good mood after the UES concept talks in Kyiv. True, the said concept had to allow for the needs and interests of all four countries, as Belarus and Kazakhstan are also expected to join the joint space with Russia and Ukraine. President Kuchma earlier felt rather skeptical about any customs union with Russia unless it agreed to lower its export duties on energy supplies, and because the difference between the domestic and external costs of Russian gas was too large, placing the countries on an unequal competitive footing. The Kyiv round of UES talks made it possible to assume that Moscow was prepared to steer a middle course. The fact remains that the Russian budget receives over $600 million in energy export duties a year, with the lion’s share contributed by Ukrainian consumers.

In Kyiv, Ukrainian, Russian, Belarusian, and Kazakh dignitaries approved the draft UES concept in general. In the first place, it envisions coordinated customs duty rates for the four countries. The governments have exchanged lists of current rates and begun an analysis of the pros and cons of lowering them. In Kyiv, the four sides also exchanged lists of the so-called sensitive commodity groups: products whose import tax rates the contracting parties would like to keep intact. Ukraine’s lists numbers 84 such commodity groups, the shortest of all. Belarus and Kazakhstan presented 100 commodity groups each and Russia would not mind keeping 153 tariff rates unaltered. However, the lists are expected to become considerably shorter after the Moscow round this July. So far one thing is certain: commodity groups sensitive for all the parties concerned will remain outside the UES.

It is strategically important for Ukraine to have free sugar, alcohol, and metal exports to Russia. These three commodity groups could well dominate the Russian market, but for the existing prohibitive duties that reduce the potential to practically nil. In Russia such prohibitive duties are effective for 11 Ukrainian commodity groups and the overall damage sustained by the suppliers is assessed at a billion dollars. If and when these barriers are lifted, the UES idea, a long with lowered gas and oil duties, will look quite attractive to official Kyiv. First Ukrainian Vice Premier Mykola Azarov believes that the four countries have come considerably closer to the formation of the UES after the Kyiv round of negotiations. It was agreed in Kyiv that the final UES development objective will be a free trade zone without exceptions. However, this objective is not likely to become a reality in the next few years, since it threatens Russia with losses too heavy for it; its economy is too dependent on energy exports and its output efficiency noticeably lags behind that of Ukraine and even of Kazakhstan. Quite possibly, the UES will become a kind of semi-free trade zone, although even this option might benefit the Ukrainian economy.

The situation in the political domain is much more complicated. The US and EU are wary of Kyiv’s integration with Asia. In fact, Ukraine is simultaneously negotiating (albeit in a dilatory way) a single economic space with the EU, although Mykola Azarov stated that he does not see any special problems here; one thing does not interfere with the other. He also believes that the UES should not slow down Ukraine’s accession to the WTO. True, the rate at which the four countries are moving toward the WTO is different in every case, with Ukraine being far ahead of the rest. The main advantage of joining the WTO ahead of Russia is the possibility of formulating requirements for Russia’s customs treatment. Moscow will have to meet them, otherwise Kyiv will not consent to its WTO membership. Yet, should the diplomatic games concerning the UES end in the signing of an international trade agreement, Ukraine would have considerably less room for political maneuver. Again, everything will depend on the price Russia will agree to pay Ukraine for joining the UES first and WTO afterward.

Ukraine’s internal political risks stemming from Asian integration could be described as insignificant. Verkhovna Rada passed a resolution in June, formally approving the UES idea; it was initiated by the Communists and supported by the majority factions. The right-centrist factions opposed, but they are obviously on the losing side. This is further evidence that the UES agreement could be signed this fall, unless Belarus makes a mess of the whole thing by proposing a single currency within UES. The four presidents agreed to meet again this September in Yalta, most likely to sign a framework instrument as a concept, the general draft of which was signed in Kyiv. Considering that none of the contracting parties is willing to discuss the draft, work on it will continue until the end of August.