Free trade zone: the most Ukraine can afford

I am convinced that there can be no justified objections to the economic relevance of the statement signed by the presidents of Belarus, Kazakhstan, Russia, and Ukraine, concerning further efforts toward creating a free trade zone for the benefit of these countries. Likewise, accusations addressing Leonid Kuchma’s “unpredictable stand” are totally groundless. A CIS free trade agreement was signed back in 1994 and President Kuchma made his stand perfectly clear in his campaign speeches in 1994 and 1999. We all know that the issue has been actively promoted by the head of state at all official and unofficial meetings with his CIS counterparts. Nor is it Ukraine’s fault that this exceptionally important task remained unaccomplished. At the quadrilateral CIS summit in Moscow, February 22-23, institutional mechanisms were defined to help implement this policy and this could only be regarded as a long-awaited positive result.

The above equally applies to the improper accusations that the Ukrainian president allegedly shows a controversial approach, considering the Moscow statement and Ukraine’s stated European integration strategy, the latter being perfectly consistent with Pres. Kuchma’s initiative. I would refer such skeptics to the basic document dealing with the matter: “The European Choice.” It reads, in particular: “Economic relationships with Russia are inherently in agreement with the course of European integration adopted by our country... Ukraine is interested in further liberalizing foreign economic contacts with other CIS countries. One of the guidelines of this cooperation is the formation of a free trade zone that would help intensify business relationships, the active exchange of capital, goods, services, and manpower.” This makes it clear that allegations that the president’s stand is unpredictable simply holds no water. I am convinced that our Western partners are interested in the stated course of events. Fenced off from its Western neighbors by a stone wall, Ukraine might appear unattractive in their eyes. We must all keep this in mind.

However, I would not want to oversimplify the problem. It requires principled updating and we have no right to ignore the need. This upgrading addresses above all the prospects of our relations with the Russian Federation, showing an economic as well as political context. The following in fact deals with precisely this context.

THE EUROPEAN CHOICE

Being directly involved with the European choice strategy, this author is well aware of the president’s stand with regard to the ratio of the European and Russian trends in Ukrainian foreign policy. This has been stated in a sufficiently clear and transparent manner. While formulating our European integration strategy, the president could not help but bear in mind the key factor: Russia being our most important trade partner, leaves no alternative but to deepen the Ukrainian- Russian strategic partnership. Such is Ukraine’s unwavering stand.

Another as important aspect is that Russia is a large European country playing an increasingly important role in European politics. As is the case with Ukraine, Russia most naturally strives to integrate into the European economic domain. In late 1998 an agreement on Russian-EU partnership and cooperation was ratified; in 1999 Russia adopted a strategy of furthering its relationships with EU. Bearing this in mind, the Russian trend cannot be regarded as minor; it offers tremendous opportunities and will remain significant as one of the cornerstones of Ukrainian foreign policy.

Still another aspect here is the efforts to optimize our economic relationships with Russia and Ukraine’s European integration policy. The European Choice clearly defines this position: our relationship with Russia must be “subordinated to the idea of European integration.” In dealing with this problem it is necessary to proceed from the fact that Russia is trying to develop relationships with the European Union in an essentially new format (compared to Ukraine’s aspirations). Ukraine and Russia have different objectives, so they use different mechanisms in the integration process. Russia’s concept of European economic integration is primarily a matter of mutually advantageous economic cooperation. Russia does not raise the issue of EU membership. Most naturally, it claims the status of an independent integration center in the post-Soviet space occupied by independent states. To Ukraine, European integration is primarily a model of domestic systemic transformations and adjustments providing the objective prerequisites for the establishment of a free trade zone, customs union, and currency integration in the long run: first associate and then full-fledged EU membership. Leonid Kuchma offered this step-by-step pattern to our Western partners in his European Choice strategy. We are not trying to hurry this process, because we understand that it is a complicated and long-term one.

Bearing this in mind, with regard to a free trade zone within the boundaries of CIS, Leonid Kuchma’s support of the idea in no way contradicts his stand on European integration. Foreign economic experts are well aware that a free economic zone is not a system-making structure of some integrationally isolated groups. EU is an economic space based on superior integration principles, those of a customs union. Simultaneously (as I see it), it is not the lowest but highest rung on the ladder of our quadrilateral economic relationships. We cannot avoid it, we have no right to do so.

I might also point out that forming a free trade zone is one of the objectives set forth in the Russian-EU agreement on partnership and cooperation. Moreover, I am inclined to regard the issue of expanding FTZ boundaries on a considerably broader scope, in terms of implementing the Greater Europe idea, by whose cradle stood noted European politicians, among them French President Charles de Gaulle.

Events of the past couple of months, including mounting geopolitical differences between Europe and the United States, evidence the appearance of the objective preconditions for the revival of this idea. A civilized and democratic Ukraine can play quite an important role here.

This, of course, is a matter of future prospects, yet in this context it is apparent that the free trade zone proclaimed by the leaders of four CIS countries must rely on the principles set forth by the World Trade Organization. Of course, I know only too well that it is a stand clearly stated and dwelt upon at length and depth by President Kuchma in an interview with Russian RTR television several days before the CIS summit in Moscow. A free trade zone within the CIS, based on WTO principles, is a mechanism which will not contradict but fundamentally expand Ukraine’s European integration potential. A free trade zone relying on any other principles would be detrimental to this potential. It would be a road leading backward, away from Europe, aimed at expanding Eurasian integration, making the Eurasian domain functionally isolated.

THE RUSSIAN ASPECT

I hope the reader will understand me with regard to yet another aspect. Raising the matter of FTZ based on WTO principles is not an abstract theoretical construction. It addresses existing realities. The dangerous stagnation of Ukrainian-Russian foreign trade relations has an appropriate subtext. Our constant requests that Moscow level out domestic energy supply costs are among the WTO underlying principles; without such leveling it will be impossible to assert equal FTZ competitive opportunities. On the domestic Russian market gas sells at $15 per cubic meter, but Ukraine has to buy it for $66. This makes one expect Russia to take its time joining the WTO. Kazakhstan might adopt a similar stance, since its domestic costs are about the same as Russia’s. The obvious inference is that the chances of these countries (including Ukraine) to become WTO members are simultaneously rather questionable. For Ukraine it would be a step back. Ukraine’s exports make up almost 60% of the economy; it is quite open in this sense and will be most vulnerable to the unfair competition sanctions envisaged by WTO regulations.

Russia’s two other proposals make one wary. First, they want to have a “single legal space” — meaning that CIS countries have to bring their legislation into conformity with that of Russia. Second, the possibility, in the long run, of introducing a single legal tender — the Russian ruble — within the framework of the new integrational formation.

Personally, I resolutely reject this economic scenario. The point is not only that such proposals are obviously directed against the stated FTZ’s European integration. Russia’s stance is also erroneous in that, despite, so to speak, common genes, the economies of Ukraine and Russia have essential structural distinctions, so they cannot evolve by means of adequate economic political mechanisms. We made a bad mistake, following in Big Brother’s footsteps in attempting our reforms. This is evidenced primarily by the logic of economic growth over the past three years. In Russia, two-thirds of the GDP increment has been provided by the oil-and-gas sector which has also consumed over two-thirds of investment. The same applies to the accumulation of capital. This is a system-forming factor in a market economy. The latest Forbes ratings point to 17 Russian billionaires, among them twelve in oil. Russian press estimates show that economic growth over the past couple of years is entirely due to the fuel-and-energy sector. This is particularly true of machine building. Last year its increment ratio was a mere 2%. Processing industries continue to stagnate. In Ukraine the reverse is true. 1999-2002: 20.5% GDP growth; 40.2% consumer goods; 38.4% machine building. These sectors remain in the lead in Ukraine.

In fact, Russia and Kazakhstan betray a situation we know only too well from the Brezhnev era: an economy completely dependent on petrodollars. The Russian newspaper Nezavisimaya gazeta wrote on February 14 that the current petrodollar dependence “ought to be compared not to a syringe sticking out of a vein but to a gun put to one’s head.” The Russian leadership is especially alarmed by the possibility of dropping oil prices after the Iraq crisis is solved one way or the other: “Russia has to wait for the war in Iraq the way one would watch an asteroid rushing toward the Earth” (ibid., February 4). Russian analysts admit as much: “...the status of the budget, the development of whole sectors of the economy, and external ties all remain hostage to the oil prices.” Thus the Russian government does not know a higher priority than these prices and their dynamics, notes the newspaper.

Those on more or less friendly terms with economics realize that such distinctions between the Russian and Ukrainian economies are quite serious, and they could well prove most substantial.

I have always believed — and remain convinced — that Ukraine’s economic potential is not inferior to that of Russia. The presence of considerable natural energy resources is not only an advantage but also a weak spot of the Russian economy. An economy oriented toward one product becomes most vulnerable in terms of competition. Japan practically has no natural wealth, yet it showed the best economic progress after World War II. Over 20% of Russian budget revenues come from oil, but one should always remember that economy means a balance of incomes and expenses. The net cost of Kuwait oil is $4 a barrel; that of Russia $14. Add here the high transport costs in Russia, and the picture will become completely clear.

Nor should we overstate Ukraine’s economic dependence. The past decade of reforms aimed at forming the nation’s economic potential was not totally wasted. On the contrary, our efforts are evidence of Ukraine’s ability to assert itself and make progress. All those previous years ought to be regarded as a period of not only a deep economic crisis, but also structural and technological renovation at operating enterprises, raising their competitiveness, mastering new industrial markets, and adjustment to foreign market conditions. This can be questioned only by biased politicians. Here the most important thing is the declining dependence of Ukrainian exports on the Russian market. In 1994 that market consumed almost 50% of Ukraine’s exports, in 1996 it was down to 38.9%, in 2000 23.9%, and in 2002 17.8%. By contrast, Ukrainian exports to the EU countries rose from 7 to 19.2% over the same period.

I am stressing this not to call into question our economic relationship with Russia. By no means! The point I want to make is different: our relationships must be balanced and on a parity basis. When they broach the subject — even if a priori — of a new vector in the adjustment of Ukraine’s legal domain, meaning the rejection of all that has been accomplished to date in terms of European integration, or the possibility of introducing the Russian ruble — even if in the long run — as the CIS only legal tender, this is an altogether different story. Here one finds evidence of things relating to both economics and politics. We have no right to ignore any of this.