“Free trade” with the CIS: consequences for the economy

The parliament has adopted the draft law No. 0266 “On Ratification of the Agreement on Free Trade Zone” during an extraordinary session on Monday. A total of 277 MPs were present there, and 260 of them voted for the bill. The Agreement might come into force during this fall.

Let us remind that on October 18, 2011, eight CIS countries agreed to create a free trade zone. Back then the document was signed by the heads of governments of Russia, Ukraine, Belarus, Kazakhstan, Armenia, Tajikistan, Moldova, and Kyrgyzstan. Azerbaijan, Turkmenistan, and Uzbekistan did not sign the agreement, but it was declared these countries would join later. The agreement was also ratified by Ukraine’s neighbors, Russia and Belarus.

What impact will this step have on the country’s economy? Will the simplification of trade rules with the CIS countries affect Ukraine’s European integration plans? Experts were interviewed by The Day with regard to these questions.

“This is a significant event in the country’s political and economic life. The CIS member states are Ukraine’s largest trade partners. The major share of Ukrainian commodities is exported to these countries. The ratification of this agreement establishes main trade rules according to the WTO standards among all the participants. It is also important that this agreement provides for the transit freedom,” says former minister of economy Viktor SUSLOV to The Day. According to him, the transit article of the agreement stipulates for temporary reduction of free transportation exclusively to pipelines. But it is stated in the document that the CIS members have to design a new agreement on energy sources pipe transit within six months, starting from the moment the agreement comes into force. “It means that Ukraine received one more chance to buy gas from the third countries freely and transport it through Russian territory in close perspective. This is a real mechanism of strengthening our energy independence,” Suslov says. The main thing is to stand our ground during the negotiations when it comes to the gas issue.

“Ukraine has trade deficit with the CIS free trade zone participants, especially with Russia. That is, we spend more money on importing goods from these countries than we earn from exporting Ukrainian goods there. There is a serious risk that after the customs restrictions are cancelled, the deficit is only going to increase faster. And the flow of goods from these countries will exceed export from Ukraine,” this evaluation of cooperation with the CIS countries was given by president of the All-Ukrainian Association of Economists Oleksandr KENDIUKHOV. In his opinion, this may lead to the growth of Ukraine’s external debt. He says that during the past 20 years the trade credit balance (which appears when import prevails over export) was and still is evened out by the external loans.

On the other hand, former representative of Ukraine to the EU, senior advisor at Alfa Bank (Ukraine) Roman SHPEK thinks the ratification of the agreement on the free trade zone within the CIS will not affect the creation of the free trade zone with the EU. This had actually been stated by the EU, he said. In his opinion, it is in Ukraine’s best interest to cooperate in the conditions of free trade zone with as many countries as possible instead of concentrating on one partner. “The world has become global, and it is important for Ukraine to produce commodities that would be competitive in the international market. The example of recent events regarding the quality of Ukrainian cheese shows that we will not be able to sell low quality produce in Russia or Kazakhstan, not to mention the EU countries,” he says. He sums up that before fighting for free markets we need to increase the quality of our goods. Then all the markets will be opened for us.

According to Shpek, the thought that it is easier to export commodities to Russia should be erased from our minds. Russians demand high quality just as everybody else, and this was proven one more time by the embargo on Ukrainian cheese. “In order to speed up the reforms we need to accept European business rules: transparency, disclosure of information about shareholders, management’s accountability to shareholders,” he says.

According to authorized representative on cooperation with the Russian Federation, CIS member states, Eurasian economic cooperation Valerii Muntian, participation in all trade associations should be made on the basis of global development tendencies and challenges. He says that the preliminary analysis of possible options of trade alliances indicates larger profit from cooperation with the CIS countries. He explains that the trade turnover with Belarus, Russia, and Kazakhstan in 2011 reached 65.5 billion dollars (38.4 percent of the total trade turnover), and with the European Union – 50.5 billion (29.6 percent), so the difference is 20 percent! Only 13 out of 38 main Ukrainian economic sectors will experience slight growth after Ukraine enters the free trade zone with the EU. The GDP will decrease by 0.68 percent; export will grow by 4.5 percent, and import – by 7.2 percent. Similar calculations considering the three countries mentioned above look more appealing: the growth is expected to take place in all 38 sectors by 3.3 percent on average, the GDP will increase by 2.2 percent, and the unemployment rate will go down.

The experts are unanimous in one matter: the government needs to lean towards the multiple-vector trade activity. It is fallacious to give preference to development strategies and business models that show large competitive advantages within a single trade union. “A company cannot work with just one market, it has to work with many markets, because that is when its produce becomes competitive in the global market, and the company is able to attract resources from the market and mobilize investments,” Suslov continues.

In other words, the experts think that it should be realized that there will be no manna from heaven in the EU, or the CIS, or the Customs Union. The level of competition is high everywhere, but instead of suffering from it, we should be prepared to face it.