Ukraine-EU economic cooperation within Eastern Partnership: 2025 vision

Given the different speed, multi-layers, and ambiguity of the integration aspirations of EaP participants, as well as the clear shift of strategic priorities in the EU budget for 2021-2027, there are two basic scenarios for building economic cooperation between Ukraine and the EU by 2025.

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Tetiana Zosymenko, Economic Diplomacy Program Director at the Foreign Policy Council “Ukrainian Prism”

With respect to economic cooperation between Ukraine and the EU in the framework of the Eastern Partnership (EaP), the vector of support for small and medium-sized businesses stands out. Ukraine remains the largest recipient of EU4Business resources, primarily due to the signing of the Association Agreement.[1] In 2019 alone, supported by the EU, small and medium-sized Ukrainian enterprises created more than 50,000 working positions and generated more than €400 million of additional income, which is one of the highest results among 6 member states of the EaP. The positive synergetic effect of the Ukraine-EU cooperation on SMEs is reflected in the Doing Business indicators and the SME policy index. However, they also demonstrate that in the regulatory environment quality Ukraine lags behind other 5 EaP countries.

EU4Business’ role – stepping up SME Strategy implementation and taking into account the Small Business Act for Europe principles – can’t be overlooked.[2] But recently, a number of measures in Ukraine aimed at strengthening the partnership between government and business on implementing effective regulatory reforms, as well as the support of many government agencies to build their regulatory capacity, did not differ significantly from other member-countries. According to business development services indicators in 2019, Ukraine was among the outsiders. Therefore, the number of SMEs able to use such services in Ukraine was one of the smallest, far behind similar indicators in Georgia and Moldova.[3]

The Ukrainian direction was predominant among the indicators of access to financial resources: in 2019, Ukrainian companies received from the EU more than 160 million euros in loans, taking a third of all EaP borrowed funds. At the same time, Ukraine had the largest effect of redistribution of EU4Business financial instruments in favor of loans in the national currency.[4] However, it is difficult to assess the extent to which such tools helped to improve SMEs’ access to finance, as companies often incur additional costs (such as consulting services) to obtain such funds. Additionally, partner financial institutions in Ukraine do not boast of attractive interest rates and this drives many entrepreneurs away from them.

Activities aimed at solving the most acute problems of the national economy should be noted separately. First of all is the FinancEast program, under which in 2019-2020 micro, small and medium enterprises from the territories of the Luhansk and Donetsk regions controlled by the Ukrainian authorities had already received UAH 123 million out of EUR 9.6 million provided by the EU to resume financing investment projects. In 2020, the EU introduced a number of additional tools to support the business sector in Ukraine during the coronavirus pandemic. The European Investment Bank offered €25 million (out of €55 million allocated for Ukraine, Georgia, and Moldova) for Ukrainian companies’ post-pandemic recovery.[5]

Although the trade turnover between Ukraine and the EU increased significantly compared to 2015, the dynamics have slowed down in recent years. The share of EU partners in Ukrainian exports is being slowly but steadily replaced by other countries. The volume of intra-regional trade among the EaP countries increased by 51% between 2016 and 2018.[6] However, a significant shift in the Ukraine’s trade priorities to other initiative participants was not observed. Their share in Ukrainian trade froze at 6-7%. There was no surge in investment cooperation between partner countries as well. Revenues from  Eastern Partnership countries account for only 0.7% of foreign investment in the Ukrainian economy. Due to the pandemic, the implementation of projects Connecting Companies (increasing trade on a sectoral basis) and Trade Helpdesk (web portal on the specifics of doing business with the Eastern Partnership and EU partners) slowed down.

According to the official statements by the EU and the three leaders and activists of the EaP, namely Ukraine, Moldova, and Georgia, the economy will remain among the priorities for the next 5 years. At the same time, although the Brussels vision meets the interests of the “trio”, it still contains critical conceptual differences. The European Commission’s joint communiqué on the future of the EaP speaks of a steady deepening of economic cooperation with clearly defined sectoral emphases (transport, energy, digitization, the circular economy)[7] rather than a preferential or accelerated integration regime for signatories to the EU agreements. Bolder proposals to create a single economic space between the EU and six EaP countries came from the European Parliament.[8] They mean a deeper level of integration than the conditions of the existing free trade zones allow, as they will open access to the EU’s internal market based on its basic economic freedoms – the free movement of goods, services, capital, and labor. This option is attractive, but difficult to achieve in the short term, given the heterogeneity of integration aspirations, current internal problems, and tense relations between some EaP countries.

The European Parliament’s approach to further building relations with EaP countries,  in contrast with the European Commission‘s approach, is based on the principle of “more for more” and provides special formats and roadmaps for the development of EU relations with the most ambitious member states. The vision of the European Parliament is in line with the common position expressed by the Foreign Ministers of Ukraine, Georgia, and Moldova. The Ukrainian-Moldovan-Georgian trio is currently demonstrating coherence and willingness to jointly lobby for economic interests at the forthcoming EaP Summit. The priorities voiced by Ukrainian officials  include: expanding the EU’s economic recovery programs to the EaP region; relocation of supply chains closer to EU borders, in particular, to Ukraine; involving Ukraine, which has strong transit potential, in projects within the framework of the EU Euro-Asian connectivity strategy[9]; gaining access to the Single Euro Payments Area (SEPA); signing of an Agreement on Conformity Assessment and Acceptance of Industrial Goods (ACAA).[10]

Given the different speed, multi-layers, and ambiguity of the integration aspirations of EaP participants, as well as the clear shift of strategic priorities in the EU budget for 2021-2027, there are two basic scenarios for building economic cooperation between Ukraine and the EU by 2025:

  1. a) “Ukraine is a flagship and a core of win-win EaP projects”. Relevant Ukrainian ministries, supported by independent experts, will identify and justify the ability of the domestic economy to generate value added in areas that meet EU priorities (climate neutral energy, circular economy, digitization of markets, and related security issues). Ukraine will also initiate platforms to discuss the possibility of joint initiatives with other EaP countries, primarily Moldova and Georgia. This will persuade Brussels to focus on funding of the new Neighborhood, Development and International Cooperation Instrument on relevant EaP projects that will bring benefits both to the EU and member states, transforming them from recipients of funds into equal partners. The new dimension of cooperation will also have a positive impact on achieving such desirable goals for Ukraine as signing an “industrial visa waiver”, updating the DCFTA, opening access to the COSME financial instrument, joining the EU common transit system.
  2. b) “Adaptation to the new requirements of economic cooperation with the EU against the background of previously set inertia.” If the status quo on the strategic orientations of the Ukrainian-Moldovan-Georgian trio is maintained as a result of the EaP Summit, frustrations with unjustified European integration expectations will serve as disincentives for the continuation of initiated economic reforms. The latter will take place within the framework of the obligations under the Association Agreement, without significant updates. The implementation of the provisions of the EU Green Course in trade (in particular, the Carbon Adjustment Mechanism at the border, stricter requirements for agricultural and food products) will be a test of strength for many Ukrainian exporters. Some business will begin to shift to less demanding third countries markets, reducing the volume and share of exports to the EU.

The most realistic situation is if the elements of the first scenario will be partially interspersed with the background of the second one. Shifts in the thematic content of the EU projects for Ukraine and other EaP countries (clean energy, construction and renovation, sustainable industry, sustainable agricultural policy) and changes in domestic legislation aimed at creating a favorable environment for entrepreneurship in these areas can then be taken as positive signals. In the longer term, we can see the growth of business activity, which corresponds to the green concept of economic modernization, the corresponding changes in the dynamics and structure of trade and investment in favor of services and more technologically advanced industries. However, to achieve this, the authority tandem of Ukraine should play ahead, in particular:

– while preparing for the EaP Summit, to elaborate their own proposals for possible joint projects within the participants’ strengths (as well as joint ones with Georgian and Moldovan partners) that meet EU development guidelines under the Green Course, Hydrogen Strategy, and Strategy for Energy System Integration and, at the same time, add to  export-oriented manufactures adaptation to the new environmental requirements;

– to initiate consideration of combining trade opportunities provided by GUAM  (the free trade area and transport corridor, first of all) and the EaP (provisions of the Regional Convention on pan-Euro-Mediterranean preferential rules of origin) to launch subregional value chains and increase intra-regional trade;

– to lobby for the Ukrainian ICT sector integration with the EaP and EU countries in the EU4Digital initiative framework, which will allow to implement  ambitious infrastructure projects in the region and beyond it (for example, in the Three Seas Initiative);

– to focus on attracting all possible EaP and EU resources to address the problematic issues of the business climate in Ukraine and provide greater support for Ukraine’s business infrastructure for SMEs, which can partially offset the “failures of the state.”

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