EU-Ukraine Free Trade Agreement sees the light as Moscow’s reaction once more looms

Jean-Claude Juncker, President of the EC, Federica Mogherini, High Representative of the Union for Foreign Affairs and Security Policy and Vice-President of the EC, Maroš Šefčovič, Vice-President of the EC in charge of Energy Union, Valdis Dombrovskis, Vice-President of the EC in charge of the Euro and Social Dialogue, and Johannes Hahn, Member of the EC in charge of European Neighbourhood Policy and Enlargement Negotiations, participated in the EU/Ukraine meeting with Donald Tusk, President of the European Council, Martin Schulz, President of the EP, and Petro Poroshenko, President of Ukraine, pictured here. © European Union, 2015 / Source: EC – Audiovisual Service, Shimera / Photo: Etienne Ansotte.

The new year started with big news on trade for the European Union, and not just for the economic relevance of the matter. On January 1st, the free trade deal between Ukraine and the EU officially came into effect, as part of a broader EU Association Agreement, which was signed at the end of June 2014 by the bloc and the former Soviet Republic.

The finalization of the agreement with the EU is not just a big move for Ukraine’s economy, but it is rather the latest act of a deeper change in Kiev’s relations with Russia. Moscow, for its part, will not just sit and watch this “westbound shift”, and that’s something that deserves our attention.

The history of the deal

Let’s have a brief look at the background first. The EU and Ukraine signed the Association Agreement with its “Deep and Comprehensive Free Trade Area” on 27 June 2014. The EU has then declared that the whole Association Agreement Area will fully enter into force as soon as “the ratification procedures in all 28 Member States will have been finalized”. General provisions and many parts of the agreement, on the political and cooperation association sides, are already being applied provisionally since November 2014, and the Jan 1st trade related provisions (the DCFTA) are now the latest part to be added.

“A milestone”

“The application of the DCFTA of the EU-Ukraine Association Agreement constitutes a milestone in the bilateral relationship, as it will offer new economic benefits to both sides”, the European Commission said in a statement last Thursday. “Ukrainian businesses receive stable and predictable preferential access to the largest market in the world with 500 million customers, while EU businesses will be able to benefit from easier access to the Ukrainian market and build new relationships with Ukrainian suppliers and cooperation partners”, the EU statement adds.

A big hit for Ukraine then, with Brussels also saying that the DCFTA would thus help Kiev “improve its business climate and attract foreign investment” and “further integrate with the world economy”. Something that Ukraine is desperately seeking after a long lasting turmoil.

“Unique” opportunities for Ukraine

European Trade Commissioner Cecilia Malmström welcomed the news and expressed confidence in the prospects for Ukraine: “The entry into force of this trade area on 1 January 2016 creates unique opportunities for Ukraine to stabilise, diversify and develop its economy to the benefit of all its citizens”, she stressed during a press conference last week. “The change will not occur over night, it will require work and investment” she then warned. “Gradually, the DCFTA will contribute to a prosperous Ukraine and to stronger economic integration with the EU”, she added.

Moscow’s reaction

Despite the enthusiasm around the news, Moscow’s response to this “integration with the EU” wasn’t so warm. Let’s not forget how Putin’s obsession to show his power was recently the cause for a civil war in Ukraine and the annexation of Crimea. This time, the kick-off of Ukraine’s free-trade deal with the EU coincided with the start of Russia’s food embargo against Kiev. Almost immediately, Moscow banned the import of food coming from Ukraine, which has been for decades the historic “wheat-belt” of the Soviet Empire.

The suspension of Russia-Ukraine deal

Moreover, Russia allegedly retaliated by formally canceling – or at least suspending – its free trade regime with Ukraine on the same day. Ukrainian government has then vowed to prepare sanctions against Russia in response, and it’s now expected to announce a list of banned Russian products in the near future.

Also the whole implementation process of the DCFTA deserves a mention, as the road to the formalization of the EU-Ukraine free-trade adoption of the deal has been sprinkled with complications and obstacles. At the end of 2013, Ukraine’s then pro-Kremlin president Viktor Yanukovych turned down the agreement, triggering pro-European protests that led him to leave his role and eventually to the conflict in eastern Ukraine.

A heavy damage

Now Ukraine’s President Petro Poroshenko reportedly stated that Russia’s alleged retaliatory move would cause “damage” to Ukraine’s economy but also underlined that he was “ready to pay the price” and try to push to join a European Union free-trade zone, as reported by Agence France-Press (AFP).

Moscow’s response is something Ukraine surely cannot ignore though. Russia is still Ukraine’s largest trade partner, with around € 9.5 billion in trade made during the January-October 2015 period. Kiev’s Presidential office says it expects to lose some € 550 million as a result of the measures, which is something that will have an enormous impact. Obviously Kiev now hopes to cover the gap putting rocket boosters to its trade machine towards the EU, but it’s still hard to see how fast the “European treatment” will bring the expected results.

According to the European Commission the EU exports to Ukraine amount to € 17 billion. According to the Ukrainian government, the free trade area with the EU would boost Ukraine’s annual economic growth by at least 0.6 percent, promote exports by 2-3 percent each year, and create up to 190,000 new jobs.

The European Sting will be monitoring the case closely.