Is Ukraine Heading East or West?

It has been five years since the European Union started negotiating with Ukraine on Deep and Comprehensive Free Trade Area (DCFTA), which is part of a larger EU-Ukraine Association Agreement replacing Cooperation Agreement form the late nineties. The final step, the official signing of the Agreement is planned for the EU-Eastern Partnership Summit, which will take place in Vilnius in November. The DCFTA should eliminate up to 99 percent of customs duties on imports and exports of most products and for the rest, there will be a transition period for progressive elimination.

For Ukraine, EU is the most important market when it comes to both exports and imports, accounting for almost 40 % of all imports and 21.8 % of exports. Ukraine is also very important partner for Czech businesses and therefore it is listed among 12 priority countries under the governmental Export strategy of the Czech Republic 2012-2020. Although it seems that signing of the Agreement is a done thing, the situation got a bit complicated in the last weeks. As the signature of the Association Agreement with the EU approaches, Russia made clear to Ukraine that it will have a very severe impact on economic relations between both countries. Russian authorities expressed themselves that if Ukraine signs the agreement, the door to the Eurasian counterweight to the European internal market, the Customs Union led by Russia, will get closed. Ukrainian President Viktor Yanukovych expressed his belief that even after signing the Agreement with the EU, Ukraine and Russia will be able to continue in current economic relationship; however, the Russian-side view of the situation is less optimistic.

Russia announced, that it will pull back all the preferential clauses that Ukraine has been making use of, meaning that Ukrainian exports and imports to the Customs Union member states will become considerably more expensive. All of them together – Russia, Belarus and Kazakhstan, represent almost 30 percent of Ukrainian imports and over 26 percent of exports, which is a significant share. In addition, other regional players are negotiating the membership in the Customs Union and so the importance of (not) being part of the Customs Union might even increase in the years to come. It is clear that Ukraine will have to decide which way to go, either to the East or to the West. So far, it seems that the EU placed a better offer, but the Agreement hasn’t been signed yet.