Oleksandr SHLAPAK: Free trade, yes; with Eurasia let’s do the calculations

The Ukrainian government is not exactly enthusiastic over Russia’s proposal that this country join the Eurasian Economic Community (EAEC) in exchange for lifting the VAT on Russian oil supplies. Prime Minister Anatoly Kinakh, just back from Moscow talks with his Russian counterpart Mikhail Kasianov, has instructed the Ministry of Foreign Affairs and the cabinet economic branch to calculate all the pluses and minuses of Ukraine’s membership in the EAEC. A preliminary analysis has given ministers ample grounds to be skeptical about the Kremlin’s chances to draw Kyiv into the company of Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan. Minister of the Economy Oleksandr Shlapak believes that the gains this country will make from joining this organization appear rather dubious.

“What do you think will be the final answer of Ukraine to Russia’s proposal about joining EAEC in exchange for lifting the VAT on exported oil?”

“It is too early to speak about the final answer, for questions like this are not solved on the fly. I will not touch on the political side of the matter, but, as far as economics are concerned, we must make very serious calculations. One should not forget that EAEC membership will require radical changes of our law and the rules by which we now live and work. This is an entirely different form of market openness. I do not quite agree with Mr. Kasianov that Ukraine will make serious gains by joining the EAEC. All this should be carefully calculated. This task was assigned to us, as well as to other ministries and departments. We will carefully calculate everything, and only then will we decide.”

“Judging by your words, economic negotiations with Russia will mostly focus, as before, on establishing a free trade area rather than on EAEC membership.”

“A free trade area is more beneficial under any circumstances, but only if it exists on a full scale, i.e., without exclusions, in compliance with our agreements of 1994 and 2000. We need a free trade area with a trouble-free mechanism of taxation based on the country-of- destination principle – again without exclusions. Ukraine should press for this irrespective of whether or not we join the EAEC. These rules, already agreed upon by the two states, are beneficial to Ukraine today, and they are suitable for market- oriented conditions.”

“What is the progress in establishing the free trade area and is it true that Russian position is the main obstacle to signing the treaty?”

“We have agreed thus far that some results should be achieved by mid-May. We have also drawn up a tentative list of exclusions which does not satisfy us. What we don’t like is the Russian proposal on the schedule of these exclusions. The schedule is too long: until 2009- 2012, while we want to put an end to this procedure by 2004. A more difficult situation exists with drawing up a treaty on indirect taxation, which usually precedes a treaty on free trade as such. There are a number of fundamental differences here. This is what needs close scrutiny. First of all, it is Russia’s desire to reserve the right – for itself – to levy the same VAT on critical energy resources. Nor does Russia accept our proposal that no export or import duties be applied in our trade.”

“Do you consider the talks promising?”

“We will continue to negotiate. We agreed to meet in mid- May at the level of ministers and thoroughly review the whole package of documents in order to decide which problems should be referred to a higher level and which ones we can solve ourselves.”

“The introduction of new trade barriers by Russia and of protective measures by other countries has plunged Ukrainian exports into dire straits. Does the Ministry of the Economy plan to revise a rather optimistic outlook for GDP growth in 2002?”

“Not yet. There are no first-quarter results that force us to do so. We did not plan sufficiently serious export growth for 2002. The idea was to sustain at least the export-import dynamics we had in 2001. It is also important to maintain the current positive balance of trade in Ukraine. In our opinion, this will be enough for the time being. As to the planned 6% annual growth rate, it should be achieved by activating the domestic market. We see no reason so far why this pattern should be altered, for we did have some, if small, growth of exports at the end of the first quarter. Moreover, this was quite a foreseeable growth. We are, of course, worried over some problems on the principal commodity markets, such as protective measures by importer countries and George Bush’s steel tariffs, but even these quite influential factors do not entail any fundamental changes in our intentions.”