Ukraine-EU cooperation on SMEs

The forecast scenarios for the development of Ukraine-EU relations on SMEs will depend on the level of EU strategic decisions, in particular its readiness to get rid of the conservative approach to the next EaP framework and the prevalence of a formal or substantive approach to AA renewal.

Subscribe for Newsletter

Yurii Vdovenko, European Integration Program Director at the Foreign Policy Council “Ukrainian Prism

A brief description of the current situation

The current situation regarding Ukraine’s cooperation with the EU in this area is thoroughly presented in the “Review of SMEs in Ukraine 2018/2019. Focus on European integration”.[1]

According to the AA, Ukraine must take into account both the general European principles of creating and maintaining an environment conducive to business development, especially in terms of small business, as well as specific rules of SMEs-related directives. Peculiarities of regulating legal relations concerning SMEs can be found in the directives and regulations that Ukraine must implement following the AA and the Action Plan for the AA implementation, approved by the Order of the Cabinet of Ministers №1106, dated 25.10.2017.

In 2019, the Cabinet of Ministers of Ukraine opened access to an online system for monitoring delivery of the Action Plan for AA implementation, named the “Pulse of the Agreement”. The system reflects current implementation progress year by year and the overall progress of implementation, starting from the moment of some AA provisions temporary implementation in 2014 and till 2024. In “Entrepreneurship” section, 81% tasks are now fulfilled. The lag behind the schedule began almost at the beginning of the AA implementation in 2015.[2]

Additional opportunities for SME development are available within the EaP, primarily due to the EU4Business initiative. The EU is paying close attention to building relations with partner countries on the basis of the “20 Deliverables for 2020”, officially approved at the EaP Summit in 2017. The final declaration of the summit identifies specific results to be achieved by 2020. Priority area I. “Economic development and market opportunities” has a section named “Small and medium business and regulatory environment”. This section objectives in one way or another correlate with the AA.[3]

In 2020, the UNP EaP CSFmonitoring showed some progress in achieving goals in this direction.[4]

According to the assessment of the Small Business Act (SBA) for Europe implementation, Ukraine increased the main indicators on the regulatory framework, operating environment, and support for SMEs by more than 10%, compared to 2015-2016 (indicators of institutional and legal framework, bankruptcy, entrepreneurship training, access to finance are among these indicators).

Funds provided to Ukraine by the EU for the SME sector since the start of the program were used to support 3,228 micro, small, and medium-sized enterprises, as well as to help create 7,226 new working positions (EU4Business Ukraine report).

The intensity of European aid significantly increased during the COVID-19 pandemic against the background of an increase in the number of national authorities assistance programs, in particular through special organizations for business support. For urgent assistance in overcoming the COVID-19 crisis, the EU allocated €18 million to EaP countries. The next financial package of about €800 million is to support the economic recovery. In December 2020, Ukraine received the first tranche under the new macro-financial (credit) assistance program with a nominal amount of €600 million as a long-term loan at 0.125% with a maturity in June 2035.

The main tools for public-private dialogue in Ukraine today are the SME Development Office under the Ministry of Economy (SMEDO) and the Better Regulation Delivery Office (BRDO); at the EaP level, the EU4Business project plays a greater role as a platform for dialogue. EaP business forums remain the primary tool for regional economic diplomacy.

SME support infrastructure covers business centers, business incubators, technology / science parks, chambers of commerce and industry, trade associations and industrial clusters (more than 400 active business support organizations in total), in particular, supported by EU projects (for example, the FORBIZ project of the EU4Business initiative). In turn, with the mediation of the EBRD, the EU created a network of business support centers in 15 cities of Ukraine.

In general, the dynamics of achieving 2020 goals met the stated indicators, but its full implementation is not ensured due to the lack of clear mechanisms for measuring the effectiveness of the EU support programs for SMEs and a limited range of tools to provide financial support to businesses under these programs. Relevant decision-makers from Ukraine and the EU should join forces to conduct a comprehensive analysis of existing / possible financial support mechanisms for SMEs, as well as to improve and strengthen the legal framework for non-bank financial instruments (micro-finance, factoring, venture capital, etc.).

As part of the EaP, the EU4Business initiative aims to improve the business climate in partner countries. For Ukraine, the initiative’s programs make it easier for SMEs to obtain funding, provide training and targeted support for women-led enterprises and those working in the green economy. SMEs receive some technical support in compliance with EU standards. According to the 2019 report, the initiative indicators continued to grow. The total number of projects in Ukraine is 22, with the largest group focused on improving access to finance. Six of the 22 projects are now completed and the rest are ongoing with a total cost of almost €173.2 million euros.[5]

Official plans for the EU and Ukraine’s work within EaP

The main framework for EU cooperation on SMEs is defined by the Small Business Act for Europe and the Association Agreement.[6]

According to the provisions of Article 282 of the AA, the parties shall create and maintain an effective and predictable legal environment for market participants engaged in business in their territory, especially for small ones, with due regard for legal certainty and proportionality. Article 378 provides that the parties shall develop and strengthen cooperation on industrial and business policy issues and thus improve the business environment for all enterprises, with a special focus on SMEs. In-depth cooperation should improve the administrative structure and regulatory framework for Ukrainian and European enterprises in Ukraine and the EU and should be based on the EU policy on SMEs and industrial development, taking into account internationally recognized principles and practices in these areas. According to Article 379, the parties shall cooperate to implement SMEs development strategies based on the principles of the European Charter for Small Enterprises and to monitor the implementation process through annual reporting and dialogue. Such cooperation also means special attention to micro and craftsman’s enterprises, which are an extremely important element of the economy of Ukraine and the EU.

The completion of the 2020 cycle in the EU marked the emergence of a certain vacuum of official plans. The standby mode for SMEs is connected with:

– the emergence of a new document to replace the Joint Working Document “Eastern Partnership – 20 expected deliverables by 2020: focusing on key priorities and real results”;

– the degree of Ukraine’s interests during the AA renewal, especially in the part of the DCFTA;

– the speed of the negotiation process in sectoral areas that will have an impact on the SMEs development, in particular Ukraine’s accession to the Customs Union, the Energy Union, the Digital Single Market, the European Green Course, the Common Aviation Area, etc.

Currently, the Action Plan for the AA implementation remains to be the main relevant official document; in addition to tasks directly related to entrepreneurship, it covers areas that have a greater or lesser indirect impact: customs and financial policy, taxation, financial services, competition, energy, energy efficiency, transport, digital sphere, science, technologies, innovations, etc.

Under current conditions, the development of relations in the near future will be based on the actual plans of projects under the EU4Business umbrella in addition to the updated Action Plan for the AA implementation.

Forecast scenarios for the development of relations by 2025

The forecast scenarios for the development of Ukraine-EU relations on SMEs will depend on the level of EU strategic decisions, in particular its readiness to get rid of the conservative approach to the next EaP framework and the prevalence of a formal or substantive approach to AA renewal.

  1. If the current approach is maintained and extended by the EU, the “business as usual” scenario will be implemented. Despite the neutral name, the scenario is negative, as it will not be possible to maintain the current dynamics of Ukraine’s approach to the EU on SMEs. Ukraine’s external transformation factors and unfulfilled expectations will put SME integration under pressure, slowing it down.
  2. A positive scenario of in-depth development can be roughly marked as an “upgrade”. The scenario will be implemented provided that the EU is ready to recognize the failure of the EaP as a single regional policy for the six countries and readiness to differentiate it by deepening cooperation with AA signatories in the A3 format (Georgia, Moldova, Ukraine). Relevant changes should also affect the updating of the AA not only concerning the adoption of new EU regulatory rules, but also the revision of tariffs, updating of provisions on non-tariff barriers, Agreement on Conformity Assessment and Acceptance of Industrial Products, etc. It is an ambitious task to enable domestic SMEs to use the financial instrument of the COSME program (Single Market Program).

The priority task for both scenarios is to ensure the transparency of financial support to SMEs (in particular, from the EU), which is provided through both traditional and new mechanisms – it is advisable to introduce a register of recipients of financial assistance from the state and the EU built as an online analytical platform.

The Ministry of Economy will continue to be the key EU partner on SMEs. Given the COVID-19 pandemic impact, the new goals will include SME sector digitization, so the Ministry of Digital Transformation of Ukraine’s activity in the business development field should not be ignored. The state institution for entrepreneurship development, which is to be created by the Action Plan for the implementation of SME Development Strategy in Ukraine until 2020 and the draft National Economic Strategy – 2030 (“Entrepreneurship” direction), should become an entity directly responsible for implementation.

[1] Part 3. Integration into the EU and support to SMEs.

[2] Pulse of the Agreement.

[3] Comparative analysis of “20 expected deliverables of the Eastern Partnership by 2020” with the Association Agreement provisions: what is the added value for the Ukraine-EU relations?

[4] Ukraine’s progress in implementing 20 deliverables of the Eastern Partnership by 2020. Monitoring report of the Ukrainian national platform of the Eastern Partnership Civil Society Forum. Section “Economic Development and Market Opportunities”.

[5] Association Agreement between Ukraine, of the one part,  and the European Union, the European Atomic Energy Community, and their Member States, of the other part.

[6] Association Agreement between Ukraine, of the one part, and the European Union, the European Atomic Energy Community and their Member States, of the other part.