Background
Continuing negotiations
Benefits under the agreement
Russia's response
What next?


Background

After months of discussions it is unclear whether the European Union and Ukraine will finally sign a Deep and Comprehensive Free Trade Agreement – part of a broader Association Agreement – on November 28 to 29 2013 during the third Eastern Partnership Summit in Vilnius, Lithuania. Russia, which has eyed closer economic ties with Ukraine as part of its goal to broaden the reach of its Customs Union with Belarus and Kazakhstan, has expressed strong opposition to Ukraine's EU integration. In spite of this opposition, Ukraine seeks to benefit from close ties with the European Union, as well as continued trade with Russia.

Ukraine's trade with the European Union is substantial, accounting for one-third of its external trade. In 2012 Ukrainian exports to the European Union were valued at €14.5 billion – primarily raw materials and agricultural products – while the European Union exported €23.7 billion worth of goods, mostly machinery, chemicals and manufactured products. Ukraine has been an effective user of the European Union's Generalised Scheme of Preferences, with the greatest majority of its exports entering the European Union under this scheme. The European Union has three anti-dumping measures in force against imports of steel products from Ukraine, while Ukraine maintains two anti-dumping measures and a number of safeguard measures affecting EU imports.

Continuing negotiations

To increase economic integration, the European Union and Ukraine began Deep and Comprehensive Free Trade Agreement negotiations in 2008, shortly after Ukraine became a member of the World Trade Organisation (WTO). The negotiations were completed in July 2012. In September 2013 Ukrainian President Viktor Yanukovych indicated in a speech at the United Nations General Assembly in New York that Ukraine would aim to sign the agreement with the European Union at the November summit. The Ukrainian government has approved the signing and is working to make the necessary preparations to ratify the agreement.

The European Union has set certain conditions over signing the agreement on certain reforms being undertaken by Ukraine in relation to trade and economic legislation, as well as electoral law and its justice system. The latter conditions deal especially with selective justice, which the European Union sees in the politicised treatment of ex-Premier Yulia Tymoshenko, who is currently serving a seven-year jail term for abuse of office. The EU commissioner for neighbourhood policy, Štefan Füle, has indicated that full implementation of the 11 criteria under the three conditions need not be attained, but tangible action should take place. In the past year former President of the EU Parliament Pat Cox and former Polish President Aleksander Kwasniewski have been discussing a compromise, allowing the agreement to be signed with Ukrainian authorities. While Yanukovich firmly opposed granting a pardon to Tymoshenko, he agreed in principle to sign any law that would allow her to receive medical treatment abroad. On November 20 2013 the Ukrainian Parliament rejected legislation that would have allowed Tymoshenko to leave Ukraine.

Benefits under the agreement

As with all free trade agreements, the Deep and Comprehensive Free Trade Agreement provides for the liberalisation of trade in goods between the European Union and Ukraine. Once fully implemented, import duties will be eliminated on almost 99% of bilateral trade. The agreement also provides for both the freedom of establishment in the services and non-services sector and the expansion of the internal market for key services as soon as Ukraine has harmonised its legislation with EU law. This approach is unprecedented in the European Union.

The agreement incorporates rules to address non-tariff barriers. The European Union and Ukraine have agreed, in particular, to increase cooperation regarding technical barriers to trade and sanitary and phytosanitary measures and enhance transparency. Over time, Ukraine will progressively adapt its laws, technical regulations and standards to those of the European Union for both goods and services.

The benefits of the agreement are not limited to the traditional liberalisation of trade in goods and services. The agreement also concerns:

  • free movement of capital;
  • the approximation of Ukraine's public procurement legislation;
  • IP rights protection; and
  • the sanctioning of anti-competitive practices.

The Deep and Comprehensive Free Trade Agreement is also the first free trade agreement concluded by the European Union that includes specific rules on trade-related energy issues. The agreement incorporates a bilateral dispute settlement mechanism, largely inspired by the WTO dispute settlement system, and a mediation mechanism.

Russia's response

Ukrainian officials have sought to walk a narrow line between East and West. On October 7 2013 Ukrainian Prime Minister Nikolai Azarov expressed to the Belarusian president that:

"it is very important for us to have a free trade zone with the European Union and it is as important to have normal relations, a free trade zone with the Customs Union, to be part of the integration processes, part of the Single Economic Space."

However, it does not appear that Russia will allow such a situation. Russian First Deputy Prime Minister Igor Shuvalov has reportedly stated that signing a Deep and Comprehensive Free Trade Agreement and joining the Customs Union are legally incompatible, and has suggested that Ukraine must choose between one or the other.

Russia has further threatened a number of responses if Ukraine moves forward with the agreement. It has suggested that Ukraine's exports to Russia will decline by 25% if it proceeds. In 2012 Ukraine exported $18 billion or 25% of its total exports to Russia – including raw materials, food products and nuclear equipment. Russia, on the other hand, exported $27 billion or 5% of its volume of foreign exports to Ukraine (mainly energy).

What next?

The Ukrainian Parliament's rcent decision raises questions regarding the possible signing of the free trade agreement. The council of ministers decided to suspend preparations for the signing but Yanukovych indicated that "Ukraine has been and will continue to pursue the path of European integration".

Despite threats from Russia, Ukraine appears committed to deeper economic integration with the European Union. Ukraine wishes to gain improved access to EU markets and believes that it will benefit from improved regulatory procedures as it harmonises its legislation with that of the European Union. It will also attract more EU investment and the beneficial technology and expertise transfer that comes with it. However, Azarov has also indicated that normalisation of relations with Russia is "issue number one for national policy".

If the agreement is signed and some of the measures threatened by Russia are adopted, Ukraine may decide to fight back at the WTO. If, for example, Russia or the Customs Union between Belarus, Kazakhstan and Russia were to impose anti-dumping measures on Ukrainian goods without following the procedural and substantive requirements of the WTO Anti-dumping Agreement, or to apply unwarranted measures in violation of its international trade obligations, Ukraine could challenge these measures through the WTO dispute settlement system. The signing of the agreement could also result in increased trade tensions between the European Union and Russia – two blocs which also started negotiations on a free trade agreement in 2008, but suspended these in 2010.

For further information on this topic please contact Charles Julien or Jordan Shepherd at King & Spalding LLP by telephone (+41 22 591 0800), fax (+41 22 591 0880) or email (cjulien@kslaw.com or jdshepherd@kslaw.com). The King & Spalding LLP website can be accessed at www.kslaw.com.