15 декабря 2011, Киев

EU – Russia – Ukraine: a view of the future

I) In late 2011, Ukraine’s principal international partners are indeed facing profound crises of governance. I do not think they will prove terminal in either case, but they test the foundations of the status quo to the limit.

The EU is facing a severe crisis of governance:

• The future EU is likely to see a greater cooperation in fiscal and economic policy and ever greater pressure to integrate.

• If the EU cannot pass this test, then the project will unravel, with unpredictable consequences. We can be sure, however, that the results would be damaging for the economies of major partners worldwide – not least Ukraine and Russia whose trade with the EU represents 31% and 46% trade turnover, respectively. It is difficult to imagine member states abandoning efforts to save the grouping: the agreement of 26 on a treaty change shows the importance placed on finding a solution. Russia is also in a crisis of governance, the authorities facing their first genuine crisis of legitimacy in over ten years.

• It is unlikely that the elite will lose control – the Kremlin is handling the crisis skilfully, allowing protests to play out and producing candidates for the presidential election that
simulate competition.
• It is clear that the advent of civic engagement represents a new feature in the political development of the country – although its sustainability remains to be demonstrated. For the EU-Russia-Ukraine triangle, it is important to underline that it is the models of internal governance of Ukraine’s principal partners are in crisis, the principles of their foreign policies are not.

III) With foreign policies left relatively intact, the EU will continue to pursue a rules based approach to its relations with the East (albeit with certain compromises to Russia’s position as a global player);

Russia for its part will continue to prioritize security and global influence. The security concerns of major European states will not change – France and Great Britain continue to place their stock in NATO, as does Germany. Russia will continue to prioritize an interpretation of herself as a great power, at the very least a regional great power.

• As a result debates over Ballistic Missile Defence will remain contentious and the Collective Security Treaty Organization & Shanghai Cooperation Organization will be developed in Eurasia as a counterbalance to NATO. Economic integration projects are different. They are not antagonistic, but they are mutually exclusive.

• The EU perceives economic integration through Deep and Comprehensive Free Trade Agreements as a means to forestall the subject of enlargement.
o In that the EU will fail: the possibility of membership is just too important to the
partners in question.

• Russia sees integration in the Customs Union and Common Economic Space as a precursor to political integration through the Eurasian Union.

o This can be identified with security concerns and desire to maintain global influence.
o This is not to say the project is economically doomed – if it enables trade creation then it will succeed; if the current trend toward trade diversion persists, it will fail.

II) In terms of modernization: both Ukraine and Russia looking to the EU (at least in part) as a source of technology and capital for the rejuvenation of their economies.

• This modernization and the investment it presupposes will not come about through the will of the EU member states – they will be the result of decisions taken by individual companies and investors.
•For this the business climate needs to be dealt with – in the time of crisis companies are even more risk averse. For the moment only the most profitable sectors are able to overcome the negative risk assessment attached to these business environments.

o The crisis is already demonstrating this risk aversion as banks implement the requirements for greater capital by scaling back their loan operations – including in Eastern Europe. The coming second wave will make this reality even harsher.

• The DCFTA and Association Agreement with the EU can provide the framework for an overhaul of the Ukrainian economy, if Kiev wants it.
• Russia could see a similar development once accession to the WTO is ratified, presuming the negotiations of the economic chapter in the new framework agreement with the EU are productive. This is really where the real added value of a new accord lies.

IV) In context of mutually exclusive programmes, Ukraine has a unique position. It wants to benefit from ties with both Russia and the EU, but wants to redefine relations with them at same time. Ukraine now seems to be pushing for the same relationship with the EU as Russia has: difficult

partnership founded on interdependence, but with minimal call to shared values.

Three problems arise with this

o The EU is not satisfied with its relations with Russia – some member states hope for a more democratic Russia, others adopt a “make do” attitude bilaterally, but the EU level is fraught with disagreements and sensitivities;

o Ukraine cannot prosper economically on its own; nor in my opinion can Russia – this is something that Russia has been tackling since 2009;
o The EU does not need Ukraine politically in the same way as it needs Russia – it needs Ukraine as an example and as a transit country, but not in major international forums where major discussions take place – Middle East peace, Iran, Afghanistan, etc. 

Strangely, Kiev officials continue to talk about EU integration, despite obvious problems:

• Increased policing of opposition groups and activities;

• The politically influenced trials of the opposition;
• Muted media criticism and the wariness of civil society.
o The fundamental question whether Ukraine understands what the process entails, or
if European integration is just a political slogan, remains to be answered.

Ukraine is also pushing for a different relationship with Russia:
• It wants the privileges of being Russia’s partner without making significant sacrifices.
o The agreement on the Black Sea Fleet in April 2010, is a notable exception, but Kiev aims to make no further significant concessions.

• The example of Belarus does not seem instructive, seeing as it is deeply subordinate in its relationship with Russia; it is reliant upon Russian goodwill and subsidies to sustain the

economy.

o The recent gas deal is very attractive from a pricing point of view, but it is described by Vladimir Putin as an “integration discount” – Kiev does not want to duplicate this subordinate role. As the situation develops, all sides with doubtless undergo significant changes, but the essential priorities in their relations will not change in any drastic way. The EU will continue to operate a differentiated policy towards Ukraine and Russia – if only because the declared goals of each diverge sharply.

While Ukraine has a choice over its “economic affiliation”, the current leadership seems averse to paying the political costs of either path. This risks leaving Ukraine vulnerable to the impact of external shocks, which may ultimately force her decision one way or the other.