Yalta European Strategy

Ukraine in the European Union: Agenda 2020
Progress report – January 2007

The July Annual Meeting of Yalta European Strategy adopted the “Ukraine in the European Union: Agenda 2020” memorandum which spelt out key steps to be taken in order for Ukraine to become a member of the European Union in 2020. “Ukraine in the European Union: Agenda 2020” is a long-term strategy with recommendations for the different stages of the process. It stresses, however, that the period until Ukraine’s application to join the European Union, suggested for 2011, needs to be particularly intensive on both the internal and external policy front. The YES memorandum spoke about the priorities of the Action Plan, accession to WTO, cooperation in the field of Common Foreign and Security Policy and preparation for negotiations of a new agreement between the EU and Ukraine to replace the existing Partnership and Cooperation Agreement. Six months after the Annual Meeting, there is a new political landscape in Ukraine but also new perspectives when it comes to the maturing relationship with the European Union. The progress report will analyze the latter in the context of the former. It will address the key elements of the EU-Ukraine relationship.

1. Political dialogue.
The European Union and Ukraine have seen a high intensity of political dialogue with meetings at all possible levels, from heads of state and government to political directors and working groups. The political and economic agenda of the new Ukrainian government was discussed at the EU-Ukraine Cooperation Council meeting in Brussels on 14 September. Discussions also covered human rights and rule of law, cooperation on CFSP and regional matters, trade and economic issues, transport and environment.
The 10th EU-Ukraine summit took place on 27 October 2006. The EU was represented by the Finnish Prime Minister Matti Vanhanen, President of the European Commission José Manuel Barroso. It welcomed the progress of political and economic reform in Ukraine and reviewed the implementation of the EU-Ukraine Action Plan. EC-Ukraine agreements on readmission and visa facilitation were initialed at the Summit. The summit put emphasis on the implementation of the Memorandum of Understanding on Energy Cooperation and discussed issues of foreign and security policy, nuclear safety as well as regional issues, including the settlement of the Transnistria conflict, where the participants welcomed the initiatives of President Yushchenko and took note of the effective work of the EU Border Assistance Mission on the border between Ukraine and Moldova. The leaders also welcomed the recent conclusion of the horizontal air services agreement between the European Community and Ukraine. They reaffirmed the importance of cooperation in the area of Justice, Liberty and Security.
On 4 December 2006 the European Commission proposed new ways to strengthen the European Neighbourhood Policy. Commissioner Ferrero-Waldner said of the package: “I believe that that our Neighbourhood Policy is bringing real benefits to Ukraine and today we are offering to the country even more attractive incentives. It will bring the Policy into sharper focus, concentrating on key areas of mutual interest like people to people contacts, deepening trade relations, stronger co operation on energy migration and visa issues as well as financial support. An important contribution will be a new Neighbourhood Investment Fund.” Progress report on Ukraine was presented on the same day and it took stock of progress since the Action Plan was adopted in February 2005.
Regional affairs commissioner Danuta Hübner visited Kiev 4-6 October 2006. There have been numerous meetings of ministers and officials. Ukraine has not suffered from insufficient channels of communication with the EU. All its messages have been listened to in Brussels. Not all may have been heard…

2. Economic reform.
Ukraine’s economy followed the path of strong growth reaching 7.1%   growth in 2006, largely as a result of strong private consumption and accelerated fixed investment. At the same time, it has to be said  that Ukraine has made good progress in some sectors while disappointing in others. The economy remains strongly dependent on the public sector which provides for 60 percent of the country’s employment. The structure of trade remains a challenge. The basic assumption should be made that since Ukraine has no natural resources, it has to rely on an open and internationally competitive economy. Ukraine’s advantage is its well-educated labour force and the geographical proximity to the EU. It has a modern trade structure with Russia while commodities-based trade with the European Union. The latter comes as a result of low FDI flows and lack of integration of Ukrainian companies into the global marketing networks. Therefore the key question which will have to be solved in the context of the new enhanced agreement is the low level of intra-industry trade between the EU and Ukraine.
As far as the efforts of the government are concerned, legal approximation has proceeded smoothly. Implementation has lagged behind but the start has been made, including on environmental standards. Reforms have been undertaken to the set of norms on money-laundering. Ukraine has acceded to the relevant international conventions as far as fight with corruption is concerned. There has been an improvement in the investment climate. The country has launched a one-window shop procedure to make establishing enterprises easier. The banking sector functions more effectively. The government is committed to pension reform. Telecommunications sector has recently been opened to foreign investment.
At the same time, amendments to the procurement law were a major setback which led to the limiting of the disbursement of foreign assistance. It is for that reason that the World Bank has only been able to pay 5-10 percent of the funds it has committed. It is also difficult to see substantial progress in the area of health reform.
More effort will be needed in the weeks to strengthen the independence of regulatory authorities, especially competition authorities, and the quality of corporate governance, including in the area of company law, protection of minority rights, mandatory accounting and audit standards. More progress is also needed as far as the performance of customs services is concerned.
Efforts of the government and the Verkhovna Rada to keep the fiscal deficit low and control inflation will remain crucial. Measures to strengthen the independence of the National Bank of Ukraine will be important as well as inflation-targeted monetary policy. Imposition of grain export quotas and delays in the full adjustment of energy prices are examples of interference in the market economy which should be avoided. Structural reform process should be continued included revision of social spending.
Key reform legislation such as the Joint Stock Company Law is still pending.
Ukraine acquired market status from the European Union late in 2005. This was not a breakthrough but the status nevertheless has helped enterprises in their operations. Anti-dumping duties which the EU imposed on steel would have been different if the market status treatment had not been offered to Ukraine. On 19 January 2007, the European Commission and Ukraine initialed a new bilateral Steel Agreement with a quota for 2007 of 1.32 million tones, up from 1 million tones in 2006. The agreement is expected to enter into force in May 2007.
Ukraine and the European Commission signed a Memorandum of Understanding on agriculture on 18 October which will provide a structured framework for establishing consultation and cooperation on agricultural issues.
"Ukraine is a key partner of the EU in the context of the European Neighbourhood Policy and is also a major producer of agricultural products", said Commissioner Fischer Boel. "Ukraine can benefit from our experience in setting up and implementing agricultural and rural development policies. At the same time, the EU will benefit from an enhanced exchange of information on agricultural production and trade."
In November 2006 the EU launched the Technical Assistance and Information Exchange instrument TAIEX programme in Ukraine. TAIEX provides short-term technical assistance and advice in the field of approximation and harmonization of the European legislation.

3. Accession to WTO.
Ukraine’s accession to WTO is now in the concluding stage. WTO membership will help to make the investment climate more attractive and help the quality of legislation. It will also mean that state aid to sectors such as coal production or the steel sector will be targeted rather than arbitrary. Sectors such as metallurgy or chemical industry will benefit strongly but agricultural producers will have to compete more aggressively on the world market. An improvement in access to external markets will make it possible to increase exports by 40 per cent. Russia has exercised pressure on Ukraine to join WTO at the same time which Kiev has resisted. At the same time, the forthcoming Russian entry will mean a stronger framework for Ukraine in which to defend its interests in relation to its bigger neighbour.
Ukraine’s parliament, the Verhovna Rada, approved the last legislative act needed for joining the WTO on 13 December 2006 by voting in favour of a bill bringing Ukrainian scrap metal exports to international standards. The new law reduced export duties on the metal to 30 percent of product value in the first year after entry into force and down to 15 percent by the sixth year. The real cost of Ukrainian scrap metal export duties can currently approach 50 percent of actual value. The earlier legislative bills approved with WTO entry in mind had concerned sectors such as banking, insurance, meat products and legal services.  Completion of the legislative work required for WTO entry was the biggest achievement of Ukraine in the field of implementation of the economic part of the Ukraine-EU Action Plan. Decision by the WTO General Council as regards Ukraine’s accession is expected in the summer of 2007 at the earliest.

4. Cooperation in the field of energy.
Ever since the Russian-Ukrainian gas crisis at the beginning of 2006, energy has gained a different meaning in relations between the EU and Kiev. In addition, concern over energy has had to do with the fact that Ukraine’s economy is highly energy-inefficient. It takes five more energy to produce a tone of steel in Ukraine than it does in the European Union. In September 2006, the EU and Ukraine signed a Memorandum of Understanding on energy cooperation. Options for reform of the Ukrainian gas transit system, adoption by Ukraine of EU legislation on oil stocks, the electricity and gas sectors, the extension of the Odessa-Brody pipeline, the completion of the oil and gas Boyarka metrology centre, work on renewables and energy efficiency are all envisaged under the scope of the Memorandum. The issue was also discussed by the EU-Ukraine summit which put particular emphasis on enhancing security of energy supplies in Ukraine and the gas transit to the EU market. The Joint Statement issued after the summit spoke of “cooperation for identifying options for reform of the Ukrainian gas transit system as well as the adoption by Ukraine of the EU legislation with respect to oil stocks, the electricity and gas sectors, the extension of the Odessa-Brody oil pipeline, the completion of the oil and gas Boyarka metrology centre, energy efficiency and renewable energy sources”. The EU and Ukraine will also undertake joint infrastructural projects and enhance the transparency of cross border energy flows. Ukraine intends to accede to the Energy Community Treaty in the foreseeable future.
On 19 October 2006, the Energy Commissioner Andris Piebalgs met the Energy and Fuel Minister of Ukraine, Yuriy Boiko in Brussels to discuss energy cooperation. Minister Boiko, Commissioner Piebalgs and External Relations and European Neighbourhood Policy Commissioner Benita Ferrero-Waldner signed the first Progress Report on the implementation of the Memorandum of Understanding on energy cooperation.

5. People-to-people contacts.
Significant progress was achieved in this area with the initialing of the visa facilitation and readmission agreements at the EU-Ukraine summit in October. Dialogue on education has been advanced, also in the bilateral format. “Civic Education – Ukraine” project has included 100 pilot schools and focused on the curriculum development, teacher and community development, special needs education, gender and social equity. In December 2006 the Commission launched a new “Erasmus Mundus External Co-operation Window” under which Ukrainian students can also apply. In addition, work has been completed on the new European Neighbourhood instrument which will offer increased opportunities for project financing to Ukrainian partners.

6. Other forms of cooperation.
It is often underestimated that the EU and Ukraine cooperate closely in a number of policy fields. Ukraine has aligned itself with the EU common positions on all issues except for Kosovo. Kiev’s commitment to participate in the mission in Bosnia-Herzegovina is set to continue. The country is also the EU’s third main partner after China and Israel on Galileo. The EU has valued highly Ukraine’s position on the monitoring of the frontier with Moldova. Border guard services and customs services of Moldova and Ukraine carried out a joint operation between 1 and 16 October which was encouraged and facilitated by the European Union Border Assistance Mission Headquarters in Odessa. The objective was to improve co-operation and complementarity between national agencies.  Tighter control systems have resulted in an increase of the number of people refused entry at the border crossing points, an increase in the number of potential illegal immigrants stopped from crossing the border, decrease in the illegal movement of goods and cargo and large-scale smuggling detections.

7. Preparations for the negotiations of an enhanced agreement between the EU and Ukraine.
On 13 September 2006, the European Commission presented draft negotiating directives and invited the Council to agree a mandate for the EU to negotiate an enhanced agreement with Ukraine to replace the existing Partnership and Cooperation Agreement.  This agreement will entail a significant degree of political and economic integration with Ukraine including  Free Trade Area. Kiev will be able to gradually participate in the shaping of EU policies and programmes. The new agreement has been described as comprehensive,  biding and evolutionary. All three of these characteristics are important. Comprehensive character means that the agreement will be go beyond a free trade zone to include also provision concerning foreign policy and justice and home affairs. The binding character of the agreement will distinguish it from the Action Plan which is a political agreement. Finally, evolutionary scope will allow for extending the framework of the partnership without the need to negotiate a new legal basis. In terms of the type of the new agreement, it will carry features of an association agreement based on Article 310 of the Treaty establishing the European Community and reflected in the jurisprudence of the European Court of Justice (Demirel case)
The new economic package would establish a Free Trade Area (FTA) and  deep free trade, envisaging zero tariffs for goods, services, capital and labour with transition periods for the more sensitive areas; removing non-tariff barriers and harmonization of Ukraine’s regulatory regime with that of the EU, especially in the area of competition and company law. Harmonisation of regulation and removing barriers to trade will attract new investment and improve conditions for cross-border trade. Obviously, Ukraine would be able to count on the EU’s assistance in the process. Comprehensive FTA would extend to the sensitive agricultural, steel and textile products. Reduction of non-tariff barriers would lead to the gradual participation of Ukraine in the internal market. The new agreement would also enhance cooperation in different policy fields including the environment, energy, transport and education.
There will be non-community elements of cooperation in the areas of external relations as well as freedom, security and justice, thus making the agreement a cross-pillar one, based on a combination of Article 300 TEC and Article 24 TEU. This could complicate the adoption of the agreement from the procedural point of view given that it would have to involve the European Community, the European Union and the Member States.
Undoubtedly, Ukraine will have to carry out a detailed impact assessment analysis to determine the extent and the pace of market opening and regulatory alignment which it would like to see as a result of the negotiations. The lesson learned from the process of EU enlargement to include Central European new Members is that the heavy costs of compliance need to be identified at an early stage and adequately addressed. It can be assumed that Ukraine would ask for transitional arrangements on short-term capital movements which would be legitimate given the stage of development of the country’s financial sector as well as its exchange rate. Substantial efforts will be needed to achieve compliance with standards for industrial production and phyto-sanitary requirements. Linking the energy grid would require costly compliance and price adjustment. Regulations concerning safety in the workplace will have to be implemented as well.
The institutional aspects of the new agreement will be very important. The stronger the institutions, the more recourse Ukraine will be able to make to them. The new arrangement will require an institution with a fully-fledged decision-making power and ability to adopt binding decisions. Turkey, for example, has relied heavily on the Association Council on issues relating to the movement of persons.

Conclusions
In spite of the political troubled period that Ukraine has been going through in the past months, good degree of progress has been achieved as far as the fulfillment of the objectives of the YES memorandum is concerned “Ukraine in the EU: Agenda 2020”.
Ukraine has advanced its accession process to join WTO. It initialed the visa facilitation/readmission package in October. Most importantly, the European Commission proposed in early September negotiating directives for the new enhanced agreement with Ukraine while the Council approved its mandate for the Commission on 22 January. The new agreement will be of the most advanced type ever concluded by the European Union with a third country.
What it means is that now Ukraine has to mobilize all its efforts  to make the negotiations a success. It needs to prepare a sound and balanced set of negotiating instructions. It has to improve the coordination of national policy-making and work closely with the European Commission and the Member States. The quality of the new enhanced agreement will be crucial for determining Ukraine’s chances of accession to the EU in 2020. It is worth investing all the efforts in making it a success.