Pros and Cons of the SES Project

The project to create a Single Economic Space with the participation of Belarus, Kazakhstan, Russia, and Ukraine has become a subject of heated political debate.

However, the discussion has thus far concerned not so much the content of the documents signed in Yalta as the direction of Ukraine’s foreign policy. As opposition representatives formulated the question, it is either integration with the EU or union with Russia. Understandably, for some this controversy is a means of gaining more political weight. However, most likely this polemic has no direct bearing on the content of the documents signed.

It is not only that the SES pact signed in Yalta is merely a framework agreement. In its current form it is rather a declaration of intent, principles, and a joint approach to further actions. In their current form the documents signed do not envision the creation of a new international organization.

FRAMEWORK CONDITIONS

A major condition of the SES Concept and Agreement is that the procedure of forming the SES along with its stages, duration, and mechanisms, is to be agreed upon during subsequent negotiations and set forth in separate agreements. Thus the course of the SES project will be determined by the governments of member states to be guided by the political and economic interests of their respective countries.

In general, the draft agreements have been formulated in such a way that they require the signing of a new international quadripartite agreement for Ukraine to make another step as part of the SES project. Moreover, the documents envision an option for each party to stop at a stage of integration that most fully reflects its interests.

The first step required for the implementation of this project is the development and ratification of a Body of Measures to Form the SES. Put simply, this is a list of the agreements to be signed in the future. Also envisioned is the possibility of making amendments to the agreements already signed among the three remaining partners in the SES, if Ukraine ever decides to join in them.

Ukrainian government representatives have stated repeatedly that they are primarily interested in a free trade zone with Russia, Belarus, and Kazakhstan without any exemptions or limitations. Understandably, within this context the Russian and Kazakh markets are the most important for Ukraine’s economy. The Ukrainian government foresees that in all stages of the SES project Ukraine will have the option to choose the spheres of cooperation it finds most attractive and, accordingly, withdraw from the spheres it is not interested in. If you proceed from the principle that nobody will be able to force the Ukrainian government to sign agreements that are not to Ukraine’s benefit, then the SES pact in its current form appears relatively neutral. That is to say that in the form of a framework agreement it spells neither benefits nor costs in economic terms for Ukraine.

One may assume that in the initial stages any party to the agreement will be able to halt its transition to higher stages of integration and at least control its participation in the project. The terms put forth by the Ukrainian side, a so-called Kyiv Formula, have been fully reflected in the SES pact (Article 5 of the Agreement and Chapter II of the Concept).

Article 5 of the agreement reads, “The parties join in the agreements that ensure the formation of the SES [and their participation in it] to the extent of their preparedness. Simultaneously, the parties shall keep to the approved sequence of joining the agreements. Neither party shall prevent other SES members from accelerating their movement toward a higher level of integration.

“Integration at many levels and at different rates means that each party shall independently choose directions of integration or separate integration zones and determine the extent of participation.”

PROS AND CONS

Understandably, the SES agreement reflects not only the position of Ukraine but also that of other member states, and Russia above all. Otherwise, the Ukrainian side would not be able to win Russia’s consent to create a free trade zone without exceptions and limitations. After all, this issue has been the subject of negotiation over the past decade. However, thus far the Russian government has considered it economically unprofitable to establish a free trade zone within the CIS and refuses to lift duties on a wide array of goods in its trade with Ukraine. Obviously, the Putin Administration views the creation of the SES as a condition whereby Russia may lift limitations on trade with Ukraine. It is clear that the Russian side either expects to draw Ukraine completely into a new system of relations within the SES (although the SES agreement envisions an option of limited participation) or needs it for political ends.

The SES documents reflect the higher level of cooperation that Russia, Kazakhstan, and Belarus have achieved to date. Under the agreement, in the process of creation of the SES no party may prevent other member states from maintaining and developing the existing forms of cooperation.

One has to admit that the SES documents are not free from contradictions and discrepancies. It would be appropriate to exclude from the definition of the intergovernmental regulatory body, the committee, a reference to a “single” body and, instead, specify its status as that of an intergovernmental coordinating mechanism (Article 4 of the agreement). Simultaneously, decisions in the main representative body, the Council of the Heads of State, are made on the principle of consensus.

In principle, the main issue that causes many Ukrainian politicians to harbor suspicions is the absence of parity in the future regulatory body of the SES. Article 4 reads that the votes in the regulatory body “shall be divided as agreed by the parties.” However, paragraph 6 of Chapter V of the concept specifies that “the Committee shall decide all issues through voting. The number of votes of each party shall be determined based on its economic potential.”

However, more substantial differences can be traced in the political assessment of the signed agreement. Thus, representatives of the Russian government have already made some rash statements on this issue, speaking of a customs union and supranational bodies as the goal of the project and calling it a fait accompli.

Obviously, in order to prevent such rash statements in the future, the texts of the documents must be made more specific, which would rule out their different interpretations.

ECONOMIC COMPETITION

According to the government, a single economic space could foster the development of industry, more active cooperation, and help jointly manufactured products gain a foothold in the markets of third countries. This is a weighty argument, considering the fact that in the past decade half of the national economic complex was either destroyed or frozen. If this continues, many enterprises will never resume production. They will be absorbed by the secondary economy, and their obsolete equipment will be exported to the EU as scrap metal.

The key argument of the critics of the SES project comes down to the fact that supposedly Ukraine will lose its chance to integrate with the EU along with its Western political possibilities. Simultaneously, Ukraine cannot possibly count on significant success in its integration with the EU. Thus far Ukraine has been offered EU neighbor status similar to that of Russia, Belarus, and Moldova.

In any case, the main condition of European integration are high democratic and economic standards. Despite the fact that Ukraine’s failure to comply with the Copenhagen Criteria of EU membership is obvious to all, certain Ukrainian politicians still view Ukraine’s European possibilities as an impending reality. Simultaneously, they seem to forget that Ukraine’s economic development in recent years did not match our European aspirations. And if the country continues to move in the same direction, the European prospects will remain an empty slogan without any real substance. As a result, the issue of Ukraine’s European future broached either by those in power or the opposition is often of a purely speculative nature.

Currently, Europe is looking at the formation of a macro-region that will encompass both the EU and Russia. At least, the Europeans map out their fuel and transport strategies with the participation of Russia. EU executive bodies prefer to deal with Ukraine, Russia, and Kazakhstan separately and ignore Belarus for political reasons. Ideally, the four former Soviet republics could coordinate their participation in pan-European economic projects.

To follow this train of reasoning, the SES can be viewed as a variation of the idea expressed in the motto, to Europe with Russia. Obviously, SES members will one day sign an agreement on the Common European Economic Space (that established a free trade zone between the EU states and Iceland, Norway, Switzerland, and Liechtenstein that were members of the European Free Trade Association until 1992). In turn, a gradual opening of markets and adaptation to the conditions of international competition, along with foreign investment will foster the modernization of the economies of post-Soviet states.

As part of the Enlarged Europe program, the EU Commission envisions the creation of a free trade zone with EU neighbors, in particular Ukraine, Russia, and Belarus. In this connection, Anti-Crisis Research Center director Yaroslav Zhalilo noted that, in general, the discussion concerning the SES is on the level of arguments, which can be used to dispute any forms of Ukraine’s economic integration, including the free trade zone with Europe, let alone full membership in the EU. The Ukrainian political discussion is dominated by the opinion that Ukraine cannot participate in a number of free trade zones at a time. However, some experts believe that in such cases steps can be taken to prevent the negative consequences of goods passing from one free trade zone to the next. In this case, each of the free trade zones can take steps to protect itself from unsanctioned imports of goods from a different one.

Conceivably, if it proves successful the SES project could be compared to the Visegrad Group created in 1991 uniting Hungary, Poland, and Czechoslovakia. Members of this group coordinated all their economic relations and acted jointly in their preparation for EU membership.

A comparison of the competitiveness of Ukraine’s economy with that of Russia and the EU prompts the conclusion that at the current stage economic risks for the Ukrainian economy in case of Ukraine’s SES accession are much lower compared to the risks involved with the establishment of a free trade zone with the EU. Meanwhile, Ukraine’s participation in the shaping of the SES alone cannot affect Ukraine’s chances of WTO accession. It will be recalled that members of the EU, ASEAN, MERCOSUR, and NAFTA are also WTO members despite their membership in customs unions and regional economic pacts. Thus, it would be more productive for the government to embrace a development strategy that would envision increasing the competitiveness of enterprises and preparing the most vulnerable sectors of the economy for the liberalization of the foreign trade regime. This is where we yet again face the problem of speeding up reforms in the country.

INTERNATIONAL CONTEXT

In the assessment of Ukraine’s prospects of participation in the quadripartite SES agreement the following aspects merit special note.

Considering Ukraine’s tradition of balancing between the West and Russia, one can assume that the Ukrainian side will attempt to use the SES initiative in two ways, both to reduce competition in its relationship with Russia and to give a new push to the discussion of the specific directions and prospects in its relationship with the EU.

Under the norms of international law referred to in the SES documents, participation in the agreement should not impede the fulfillment of the existing international agreements by the parties to it. Thus Ukraine should keep its option open to join the WTO independently. Its SES membership will not impede the fulfillment of the Agreement on Partnership and Cooperation with the EU either.

The essence of the SES project will become clear only in December, by which time the Body of Measures to Form the SES will have been drafted. As for the first practical results of the SES, they will become visible only in late 2004 on condition the parties approach this project seriously.

In a comment on the formation of the SES, European Commission representative Jean-Christof Floret noted that Brussels sees nothing contradictory about Ukraine’s aspiration to develop its relationship simultaneously with former Soviet republics and the EU. “However, if this fraternization leads to a customs union [envisioned under the SES framework agreement], then Ukraine will have to make sure that this formula tallies with its current bilateral agreements with the EU and its European aspirations in general.” According to the EC, a simple free trade zone [within the SES] will not create any obstacles for deeper trade relations between Ukraine and the EU. However, the creation of a customs, economic, or currency union could cause certain complications.

In connection with the signing of the SES agreement certain leaders of CIS member states called the SES an international union. However, the SES pact is a purely economic agreement in its essence. Neither the Concept nor the Agreement on the SES envisions any political decisions.

Simultaneously, it remains unclear whether Ukraine will be able to find a form of membership in the SES that would eliminate all possible obstacles and loopholes. As Russian President Putin told the September 19 press conference in Yalta, “As for the free trade zone, I believe it is possible even if separate countries join the WTO. Our stand on this issue is an open secret. The free trade zone can be established taking into account of the interests of the parties to the agreement, and this can be achieved by means of certain reservations and exemptions from the free trade regime.”

Thus, again we are talking of exemptions and limitations. And considering the fact that the Ukrainian government sees the essence of its participation in the SES above all in the possibility to create a free trade zone, we can expect major complications and problems when it comes to negotiating specific terms of economic agreements.

Understandably, only mutual respect for the interests of the parties can make the SES a viable structure designed to redress the economic damage that has resulted from the collapse of the USSR and jointly solve common economic problems. Otherwise, despite its seeming attractiveness, the SES will follow in the footsteps of all previous economic projects in the post-Soviet space.