The group of three countries that signed the Association Agreement may not look like a common economic space at the moment, since Georgia, Moldova and Ukraine prioritize their bilateral relations with the EU
A year ago the Minister of Foreign Affairs of Ukraine Pavel Klimkin initiated the common economic space launching in the frames of the Eastern Partnership. According to him, the countries that signed the Association Agreement should be in the avant-garde of this process. However, this initiative is left without any further development as of now, while the intergovernmental economic cooperation in Georgia, Moldova and Ukraine is based on the rules of the World Trade Organization and such formats as the GUAM Organization for Democracy and Economic Development and the Commonwealth of Independent States (CIS) Free Trade Area.
When evaluating the timing and the importance of the new economic cooperation launching within the frames of the Eastern Partnership, it is rational to take into account the experience these three countries have had within the frames of the Deep and Comprehensive Free Trade Area (DCFTA) based upon the European approach and practice.
The EU-Georgia Association Agreement was provisionally applied since 1 September, 2014 and fully entered into force on 1 July, 2016. However, the Georgia’s developing relations with the EU do not result into any serious improvement or revolutionary changes in its economy.
After the Deep and Comprehensive Free Trade Area entered into force the total structure of the Georgian export changed considerably as the export to the CIS countries significantly dropped. The EU export share in the total Georgian export increased from 20.9% in 2013 to 29% in 2015, while the CIS export share dropped from 55.5% to 38% at the same period due to the extremely difficult economic situations in Ukraine and Russia. In 2016 the EU was the main trade partner for Georgia; its share in the total trade volume of Georgia made up 31% (27% before DCFTA entering into force), including 27% export and 31% import.
Georgia’s national economic policy focusing not so much on the intensifying trade but on attracting the direct foreign investments
The Georgia’s foreign trade turnover made up $12 billion in 2016, which is 20% more against the previous year, with the export going down by 4% throughout the year and making up $2.1 billion, and import going up by 27% to $9,9 billion. Its trade with the EU member states increased by 14% making up $3.6 billion, with the increase mainly thanks to the growing import of the European goods to Georgia, while the Georgian produce export to the EU is still decreasing by 12% to $571 million. The decline was mainly brought about due to the prices changing on four key positions, which make up approximately 60% of the Georgian export: mineral fuel, nuts, fertilizers and mining industry products. The trade with Georgia makes up 0.1% of the EU’s total trade volume. The main European importers from Georgia are Bulgaria, Italy and Germany. As a result of the Free Trade Area kiwi, blueberries, nuts, garlic and wine are exported to the EU, the growth of the copper and petroleum products export can be observed, and honey started to be exported at the end of 2016.
The export dropped in Georgia’s trade with the Commonwealth of Independent States (CIS) countries as well. In 2016 the Georgia’s foreign trade turnover with these countries went down 3% and made up only $2.7 billion, with the export decreasing by 12% to $ 739 million. The CIS share in the Georgia’s foreign trade turnover made up 23% including 35% export and 20% import.
Overall the Georgia’s three largest trade partners have been the same throughout several years. Canada takes the first place ($1.8 billion), Turkey ranks second ($1.5 billion) and Russia comes third ($0.9 billion). However, Russia ranks first in the export volume with Georgia ($206 million), followed by Turkey ($174 million), Azerbaijan ($153 million) and Armenia ($151million).
Yet over the course of time the impact made by the Free Trade Area on the national economy brings about some significant results, to be more precise from January to March 2017 the Georgian export to the EU countries grew by 44%, with the Georgia’s national economic policy focusing not so much on the intensifying trade but on attracting the direct foreign investments. The preconditions for this included the basic reforms in order to simplify the managing business, as well as the institutional and judicial changes made in order to truly use the advantages of the Free Trade Area. As of today the European companies made approximately 50% of all direct investment to Georgia after 2010, which makes the EU the country’s most preferable partner.
The international organizations forecast that it is exactly DCFTA that will determine the further growth for the Georgian economy. The experts from the European Bank for Reconstruction and Development believe that in 2017 the Georgia’s economic growth will reach 3.9%. According to the World Bank, in 2017-2018 the Georgia’s economic growth will be one of the highest among the Eastern Europe and the Central Asia countries. The International Monetary Fund reports that the Georgia’s economic growth will make up 4.5% this year and in 2018 it will increase to 5%. In order to reach the forecasted results Georgia is concentrating its efforts in four main directions: the reforms aimed at creating jobs; the education reform aimed at the economic development; the regional development and infrastructure modernization; and the government reform in order to boost the state institutions efficiency and transparency.
The Free Trade Area with the EU started to fully function in Moldova in July. 2016, even though the association agreement was already signed in June 2014, accompanied by the constant pressure coming from the Russian Federation.
The EU is the Moldova’s biggest trade partner with a total foreign trade turnover of $3.3 billion according to 2016 results, with trade volume increasing by 1.5% against 2015. Yet the trade tendencies still have different directions — in 2016 the export to the EU grew by 7.7% to $1.2 billion while the import dropped by 2% to $2 billion, providing for a deficit of $800 million. About 65% of the Moldova’s export comes to the EU, mostly agricultural products, textile and machines. The Moldova’s share in the EU foreign trade turnover, just the same as the Georgia’s share, makes up only 0.1%. After signing the association agreement several groups of goods in the Moldova’s EU export structure (mostly the export to Romania, Italy, Germany and Great Britain) are seeing an increase, namely sunflower seeds, nuts, grapes, dried fruits, wheat, barley, sugar, paper, clothes and bedding.
When evaluating the DCFTA impact on the Moldovan economy, it is best to take into consideration that in 2008-2015 there was an asymmetrical trade regime between Moldova and the EU, in the frames of which the Moldovan goods were not liable to customs duties when exported to the EU, while the European goods were liable to duties when imported to Moldova.
Despite the Russian sanctions after Moldova signed the Association Agreement the trade relations between the countries are still on a rather high level
Despite the Russian sanctions after Moldova signed the Association Agreement, namely introducing customs duties and banning imports on some goods, the trade relations between the countries are still on a rather high level. The Russia’s share in the Moldovan export makes up to 12% (only Romania has more). Overcoming the economic aftermath of the Russian sanctions is rather difficult for Moldova since the limitations were introduced to the goods manufactured in the sectors providing a high number of jobs for its citizens, such as agriculture, beverage, textile and optical equipment manufacturing.
The cooperation between Moldova and the EU is not limited by trade only. The European countries (first and foremost the Netherlands, Cyprus, France and Spain) are the main investors in the Moldovan economy, ensuring more than a half of all direct foreign investment (53.4%).
Official Chisinau expects that in the short-term perspective of 2020 the Deep and Comprehensive Free Trade Area will provide for a 5.4% GDP growth, intensify its trade with the EU — 16% export and 8% import growth, as well as the annul customs duties on 99% of goods. According to the World Bank forecast, the Moldova’s 2017-2018 economy growth will make up 2.8% and 3.3% respectively. In its turn, the IMF increased its 2017 economic growth forecast from 3% to 4.5%. Its 2018 the forecast remained almost the same — 3.7% instead of 3.8%.
The Ukraine’s history with the Deep and Comprehensive Free Trade Area agreement is anything but simple. The trade part of the EU-Ukraine association agreement was partially implemented only after 1 January, 2016, and it is expected to be fully implemented starting from 1 September, 2017. Moreover, the European side liberalized its customs regime already in 2014, cancelling 95% of the customs duties on the manufactured goods and 84% on the agricultural goods. On 1 January, 2016 Ukraine cancelled its import duties on about 70% of goods coming from the EU, and there are transitional periods for the rest of the goods.
During the DCFTA period the European Union became the Ukraine’s main trade partner, even though its share in the EU’s foreign trade does not exceed 1%. In 2016 the Ukraine’s export to the EU started to increase after two years when the Ukraine’s foreign trade volume dropped because of the Russian aggression, the worldwide raw material price dropping and the economic recession and made up $16.4 billion, while the import made up $19,5 billion. As a result, the EU became the Ukraine’s biggest trade partner — its share in the Ukraine’s export made up 35.8% and 43.7% in the import. There is a positive dynamics in the first DCFTA year: when the export went up by 7.6% while the import increased by 8.5%. The total trade volume between Ukraine and the EU increased by 8.1% in 2016. The tendency of the intensifying cooperation is getting stronger, and in 5 months of 2017 the export to the EU made up $6.8 billion, that is 25.2% more against the same period of the previous year.
The agricultural export growth to the EU was helpful for the partial compensation for the loss the Ukraine’s agriculture manufacturers suffered on the Russian market
The driving power behind the growth is agriculture and food manufacturing. According to the 2016 results, their share in the export growth made up more than 80%. The consumer goods manufacturing (with more than 80% of the produce being exported to the EU) along with the timber and wood processing industry and the engineering sector (with over 50% of the produce exported to the EU) can be found in an advantageous position.
. The export range is getting wider thanks to the produce with a high degree of processing and added value, and therefore, the share of the processed produce, which reached 44% in 2016, is getting bigger. The biggest impact in the export growth to the EU is made by such goods as sunflower oil, car spare parts, electrical equipment, wooden goods, wires, electric water heaters and furniture.
The negotiations with the EU regarding the additional trade preferences continued in 2017. The Council of the European Union approved a wider range of a tax-free import for the Ukrainian goods within the three years time limit, while Ukraine introduced some protective measures contradicting with the association agreement, to be more precise, the lumber export ban and the scrap metal export duties. These actions brought about the EU’s negative reaction and have already resulted in the second tranche of a macro-financial aid being postponed.
Overall, despite the fact that DCFRA has a positive impact on the economic relations between the EU and Ukraine, the foreign trade balance with the EU is still negative, and the most goods supplied to the European market аre the raw materials and the semi-manufactured goods. And it is highly unlikely that this tendency can be changed now without higher competitiveness of the Ukrainian goods and more export coming from the basic sectors of the Ukrainian industry.
The Ukraine’s stronger European aspirations, as forecasted, have chilled its relations with Russia both politically and economically. It resulted in a lower goods turnover, some contradictions in energy, trade and economy, as well as in introducing sanctions on the both sides. Russia suspended its free-trade deal with Ukraine on 1 January, 2016 due to the Ukraine’s DCFRA agreement with the EU. The total export volume from Ukraine to Russia continued to go down and according to 2016 results made up $3.6 billion (25.6% less against 2015), while the import decreased by 31.3% to $5.1 billion. The Ukraine’s negative balance made up $1.5 billion.
Despite this dramatic fall, Russia remains the Ukraine’s largest trade partner, and its 2016 share reaches 10% of the foreign trade turnover (12.7% in 2015 and 18.2% in 2014). At the beginning of 2017 there was a significant growth of export as a result of the Ukrainian metal and engineering produce selling, which confirms that there are difficulties when it comes to the Ukrainian manufacturers of the high-tech goods with high added value repositioning on the European markets.
Unfortunately, the situation with the European investments attracting and their volume increasing remained the same and despite expectations, the level of the foreign investments is still quite low. The lack of the structural changes in the investment climate improvement, the promised and expected advantages for the European business in Ukraine after the implementation of the DCFTA are still not seen.
The given reality can be characterized as a slow but positive dynamics instigated by the Deep and Comprehensive Free Trade Area impact on the economies of Georgia, Moldova and Ukraine, first and foremost its impact on the development of the bilateral foreign trade ties of all three countries with the EU. The experience of the first years DCFTA’s implementation confirms the difficulty to adapt both the legal regulations and the business environment to the new conditions on one hand, and the EU readiness to make some certain indulgences providing, for instance, the additional autonomous trade preferences, on the other hand.
The transition to the European standards of doing business is going rather slowly and without many benefits in a short-term period. Simultaneously, more signs of a long-term EU standards adaptation are seen. Bringing national legislation into the compliance with the European norms faces a lot of challenges. Sometimes the provoking contradictory decisions that give preferences to the EU-negotiations rather than to the internal economic reforms.
All three EU partner countries have a univocal trend of the national business repositioning from being Russia-oriented towards the European market, even though the Russian Federation is still playing a significant role in the economic lives of the countries. When implementing the DCFTA, all three countries faced the aggressive Russian counteractions against their integration into the European economic space with further foreign trade connections reduced. However, the DCFTA with the EU does not allow to substitute all the losses from the closed Russian market.
As a result, the following recommendations remain relevant while having three key points:
- to the EU authorities: to consider new opportunities for the better integration to the economic sector of the three countries that signed the association agreement;
- to the Ukrainian, Moldovan and Georgian authorities: to concentrate their efforts on bringing national legislations into the compliance with the European norms within the time frames set by the association agreement, as well as to intensify the cooperation between themselves in order to provide constant coordination;
- to the business of the three respective countries: to react faster on the opened opportunities and use the existing mechanisms for the better adaptation to the changing conditions and for the better entrance to the European market.