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    December 15, 2014

    Dmitry Medvedev Manifesto: Russia and Ukraine - Life Under the New Rules. Part 2. The Troubling Present

    Dmitry Medvedev, Prime Minister of Russia - NG.ru

    THE TROUBLING PRESENT

    What brought Ukraine to the edge 

    The outgoing year will go down in the history of Ukraine as one of the most severe and tragic. President Viktor Yanukovych held talks on Association with the EU, promising the country a "European choice", but trying to continue the game with Russia. Eventually after an economic analysis of all risks and possible consequences, and realizing that there were no guarantees of serious and rapid infusions from the West, he slowed down the process of Association with the EU. As a result on February 22 a violent seizure of power took place in Kiev.

    Further actions of Ukrainian authorities, including the military, led the country into that economic abyss, over which it now stands.

    I will not go in detail on the social and economic statistics. Moreover, many countries of the world, and not only Ukraine, are experiencing difficulties. Including Russia. But in any case, this is not an absolute drop in GDP of 7-9% (according to the IMF and the Ministry of Finance of Ukraine), not a 20 percent annual inflation rate, not a decrease by almost 40% in gold and currency reserves, not a rise in utility rates of one and a half to two times, not closing or actual bankruptcy of large enterprises. And not a problem of external debt, hanging over the country, which no one knows how to pay off and which at the end of the current year will exceed GDP. Apparently, our neighbors will have to go through another "nineties". And, unfortunately, the problem of default and wider - lasting threat of the social and economic collapse of Ukraine - is not a fiction of the "Kremlin" or any other political scientists. By the way, a significant part of the debt package is in the hands of Russia. Only recently, Russia has invested about $33 billion in Ukraine. It is the capital of banks, loans, and money from Gazprom.

    The Ukrainian elite calms itself and the population that "everything will be fine". And it will be good thanks to the "European choice", the Association Agreement with the EU and achievement of independence from Russia.

    Who dictates the rules in Ukraine

    Many of the problems of Ukraine began precisely at the moment when the Kiev leadership - with the obvious pressure from Western partners - began to talk about the need to reduce the notorious dependence on Russia. Then politics took precedence over the economy. Major projects, including economic ones, were seen through the prism of possible changes in the balance of political power in the world. After 2009 through the format of the "Eastern partnership" Ukraine and several other countries, in fact, were imposed the idea of reducing cooperation with our country.

    In economic terms, the approach of the Europeans even resembled "orders". Ukraine was simply ordered, and in detail, everything that it has to do in almost all areas of life. And we are talking not about a small European country with a population of several million people, but about one of the largest countries on the continent.

    This position is clearly reflected in the Association Agreement with the EU. It requires - without joining the EU - to bring national legislation into full compliance with EU standards in the framework of the "deep and comprehensive free trade area". And further to take into account current changes in the EU legislation. In fact, establishes an absolute priority to European norms and directives over the national legislation, and at the same time and over national interests. Just one example is the duty to adopt a law on restitution, which may lead to a complete chaos in property issues. Moreover, property rights may be presented not only by the citizens of Ukraine, but mostly by the citizens of Russia, Poland and other countries, the ancestors of which owned property in Ukraine before 1940.

    From the point of view of economic cooperation attitude of the EU towards Ukraine is more like neo-colonialism. Under the guise of "fair European" competition unilateral advantages for European and closely related to them Ukrainian companies were pushed through. European Union needs Ukraine primarily as a source of some raw materials. And, of course, as a market for European companies. Let's look at the structure of foreign trade of Ukraine with the EU: the vast majority of imports are goods for final consumption (food, medicine, automobiles, electronics, appliances, and so on), while exports are dominated by commodities.

    A significant part of Ukrainian companies will not be able to compete with European goods on their own market, which will rush to Ukraine with the introduction of a free trade regime, as under the terms of the agreement, Ukraine will almost completely cancel the import duties. And what will happen with the Ukrainian manufacturers in that case - nobody, it seems, has calculated. Nobody can say, what prospects, in turn, will open in front of Ukrainian enterprises in the highly competitive European market. The amount of preferences which Europeans will give Ukraine was estimated at 400 million euros per year. But it is unlikely that it would compensate for even a few percent of future losses. A result of tariff liberalization, which will cover up to 98% of goods from Europe, will be a gradual displacement of competition by European products from the Ukrainian market. And the second wave of the European trading "tsunami" will take this entire volume to the markets of the Customs Union countries, which will affect business conditions in CU. Of course, we are not going to just observe this process, and will take retaliatory measures, which will lead to a drastic reduction of export of Ukrainian goods to Russia, Belarus and Kazakhstan. In this case, Kiev losses may reach up to $15 billion.

    If we talk about the agricultural sector of Ukraine, which accounts for 17% of GDP and 27% of national exports, its outlook is also not so rosy. And this is in a country that has always been the breadbasket and was famous for the best yields. And now Ukrainian farmers at no fault of their own find themselves in a losing position. Including - because of the subsidies, which are allocated to European farmers and which the Ukrainian farmers can only dream of. And this is despite the unique quality of farmland and highly recognized skills of the Ukrainian peasantry.

    According to experts, in the framework of the Association Agreement with the EU, Ukraine receives a discriminatory quota system, absolutely not consistent with the principles of a free trade zone. For example, the annual quota for the export of wheat is set to 950 thousand tons with an increase in over 5 years up to 1 million tons. Thus, without export duties Ukraine will be able to export to the EU only 50% of wheat. The rest of the volume will be subject to duty at a rate of 95 euros per ton, which will increase the price of Ukrainian grain for the consumer at least one and a half times.

    Individual efforts and huge costs will be required for a transition to European technical standards and norms, which in a few years will be required for industry and agriculture. In some sectors such replacement will need to be even faster. For example, machine-building must move to the EU standards in full within two years. The path which took the industrialized countries of Europe (Germany, France, Holland and so on) the past 5-6 decades, Ukraine must overcome in 5-10 years. In order to assess whether it is possible, it is enough to remember that a large share of Ukrainian enterprises use Soviet-era equipment and technologies.

    Possibly, the estimates of the costs of these transformations, announced by Yanukovich government - from 160 to 500 billion euros over 10 years, are inflated. But in any case it is associated with very large expenses. To expect the EU to compensate these costs would be naive.


    Ukraine's Quaterly Manufacturing January 2010 - October 2014
    Why Ukraine is not welcome in the EU

    Characteristically, that the further we go, the more modest are the statements of the West about money allocated to Ukraine. US guarantees (I would underline guarantees, not money itself) for $1 billion were described as if they were talking about a new Marshall Plan. But when Ukraine took 1.45 billion euros to prepay for Russian gas - as a loan or other form, the Europeans answered: yes, help is needed, but we are not ready to give the money. And Kiev had to declare: we will pay from our foreign currency reserves. Although these reserves also are largely dependent on external assistance.

    Actually nobody wants to give money to Ukraine even for urgent needs. Europe, as a last resort, may allocate credit to cover the debt that may shortly default. Europe's economy is barely getting out of a crisis. And Brussels will not help Ukraine as it helped Greece, Spain, Ireland and others during the 2008 crisis. And this step demanded prolonged negotiations from the European Union. Not all "European brothers" were eager to give their taxpayers'  money to help another country. But then it was about the members of the EU, and now it's just about a country which no one even wants to accept into the EU.

    Speaking of the "European choice" and a possibility of quick, within a few years, entry into the EU, Ukraine's leaders in some way perhaps repeat the mistake of Yanukovich. With only one difference. Yanukovich, realizing his mistake, found the strength to try to halt this process. But the current Ukrainian leadership does not want to focus the attention of its people on the "little things". Does not want to talk about the fact that Ukraine has all the standard obligations of a EU candidate, but does not have the status of a candidate. There was no public discussion of the association document, nor any honest analysis of all its pros and cons - for the economy as a whole, for individual enterprises and industries, for different population groups. For a long time there was not even a translation of the text into Ukrainian.

    The Association agreement with the EU does not contain not only obligations, but also a mention about the prospects of Ukraine's membership in the EU. There is no talk about possible representation in the European Parliament and other governing bodies. Not to mention the possible provision to the Ukrainian citizens of equal rights with the citizens of the EU, medical and social services according to European standards, as well as a visa-free regime.

    The EU is in no hurry to invite Ukraine to the table of the European powers as an equal partner. Does not even want to pull a side chair, and purposefully keeps it on the rights of the "poor Liza": just dating, which will never end with a wedding. Just look at Turkey: it signed an Association Agreement 51 years ago and still is not a member of the European Union. It even became a subject for jokes. Back in his day Viktor Chernomyrdin answered to a question, when will Ukraine become a member of the EU: "After Turkey"- "And when will Turkey?" - "Never".

    Kiev should also look at the experience of those of its South-Western neighbors, which joined the EU. To assess what has changed since that time in their economies, if their GDP increased afterwards, if incomes increased or decreased and what are the dynamics of unemployment. And, more importantly, how much foreign investment they received during these years, or, on the contrary, whether the volume of investments decreased significantly. For example, in Bulgaria after the country's entry into the EU in 2007 during 6 years unemployment increased from 6.9 to 11.8%. Foreign investment declined over the same period, nearly 9 times (9,051 billion euros to 1,092). And these countries are no worse than Ukraine, roughly comparable to the level of development and climatic conditions.

    We should also mention the role that the EU commitment played - even in times of Yanukovich - to rush Ukraine into the Association Agreement. Let me remind you that Russia, as a major trade and economic partner of Ukraine then repeatedly offered to discuss in a trilateral format (Ukraine, Russia and EU) the problems arising in connection with this. And every time the European Union through the mouths of its high-ranking representatives announced that Russia has nothing to do with it, it is a bilateral process, let Moscow wait on the sidelines. No one wanted to hear us. What this sudden hearing loss lead to, we already know well. Even for the new Ukrainian government, which replaced Yanukovich, it is obvious that it is impossible to ignore Russia's position. Otherwise in July of this year in Brussels trilateral talks between Ukraine, Russia and the EU would not be held regarding issues related to the association, and in September, the parties have agreed that certain provisions of the agreement will not be implemented before 2016. But between a decline and a consent to discuss together these issues ran a chain of dramatic events. And now it is impossible not to wonder: what if Europe then "descended" to a joint - actually a completely natural and necessary discussion? Many tragedies could be avoided. There would not be a war in Eastern Ukraine. And hundreds of thousands of refugees would not seek shelter in Russia. Of course, we will continue to provide humanitarian assistance to these burning regions. However, the Ukrainian authorities - if they really believe that Eastern territories are Ukrainian - should understand that the business of bringing life there back to normal - is first of all the area of their responsibility. As the Russian Federation has assumed the responsibility for organizing the life of people in Crimea, who via a referendum on March 16 returned to Russia. This decision was made, and we consider this topic closed.

    Kiev, according to its latest steps, is not ready to assume responsibility for the Eastern regions. Not ready to such extent that Donbass and Lugansk face economic blockade declared on its own citizens by their Central authorities. Is it not enough that civilians are shot by their fellow countrymen? Is it also necessary to economically destroy people and entire regions? This is an unprecedented case. Or the decree on the termination of activity of state organizations, the removal of their property and documentation, and termination of servicing bank accounts of all businesses and households, which deprives people of all means of existence, issued in the hope that hunger and poverty will make the residents of the Eastern regions more compliant? Apparently, this is how Kiev understands the peace process. This, of course, is the "strongest" argument for Eastern Ukraine to convince it to follow the European path together with the entire country.

    Translated by Kristina Rus for FortRuss.blogspot.com


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