Ukraine-EU: Difficult Relations

The association agreement Ukraine signed with the European Union in September won’t accelerate Ukraine’s integration into European political and economic institutions, for the simple reason that Ukraine has nothing to integrate.

The country is collapsing in on itself, territorially and economically. The question is not how Ukraine can integrate into Europe, but who will pay to sustain it and how?

EU officials have said repeatedly, up to and including this year, that Europe had not yet chosen the form of Ukraine’s integration, let alone decided about the possibility of membership. Ukraine could follow in the footsteps of Turkey, which is integrating with the EU on paper but not in practice, but high-ranking EU officials and politicians say that membership could be discussed no sooner than in 20 years. Will the EU still be here in 20 years? No one knows, so it makes little sense to talk about Ukraine’s integration simply because it has signed an association agreement.

These are tough times for the EU. It had its problems even before introducing sanctions against Russia, which has responded in kind. The poor southern member-states of the EU are in economic free fall. In fact, there are only two relatively strong EU economies – Britain and Germany. And the UK plans to hold a referendum on whether to remain in the EU no later than December 2017. There are reasons to believe that the UK will vote to leave. As for Germany, it has been trying to preserve the EU as a latter-day German empire and market for its goods. Germany needs the EU more than other member-states, because it keeps the German economy running.

The sanctions and the ensuing multibillion losses have seriously weakened the EU and heightened political disagreements. In short, the EU might fall apart. And even if it does survive, it’s unclear in what form.

If Ukraine opts for the EU, there is no guarantee the choice will be reciprocated. As for the EU’s effect on the Ukrainian economy, it will be minimal for now, because there is no economy to speak of in Ukraine. It has torpedoed its own economy, and no agreement can revive it. There is nothing left to ruin, so the question is: Can the Ukrainian economy, or part of it, rise from ashes?

Will the EU finance the recovery of Ukraine’s economy? The EU clearly indicated that it would not when it refused to issue loans to Ukraine or to provide financing in the future. The IMF has done the same. So, both the EU and the United States, which control the IMF, are wondering if they should continue to finance Ukraine. In my opinion, they are not sure that Ukraine will survive for long as a sovereign state, and they are hesitant to pour money down the drain.

The EU will not cover the losses of the Ukrainian economy. Moreover, it has taken Russia’s side in gas talks, where Ukraine demanded that Russia sell its gas at $350 per cubic meter, while Russia insisted that Ukraine repay the over $3 billion it owes for past deliveries and pay in advance for Russian gas. The EU supported Russia, although it knows that Ukraine has no money to pay for gas. If the EU won’t finance Ukraine’s gas debts, it certainly won’t provide long-term loans to Ukraine for economic recovery.

The EU cannot tell Kiev how to spend money or restructure the government for two reasons.

First, EU member-countries have problems with their own budgets. None of them will be able to achieve the 3% budget deficit target. France recently refused to comply with this requirement.

Second, Ukraine has no budget revenues. Its budget consists entirely of foreign loans. Why would the EU make recommendations on how Ukraine should spend money if there is nothing to spend?

Initially, the Maidan riots were planned for 2015, in the hope that Ukraine’s economic collapse following the signing of the association agreement in 2013 would result in the overthrow of Yanukovych in 2015. But Yanukovych postponed the signing in the fall of 2013 and was overthrown in February 2014.  

The Yatsenyuk government also pushed back the date several times, and while Ukraine has at long last signed the agreement, it has not yet become effective.

In 2013, Yanukovych explained why he decided to postpone. He said that Ukraine needed $15 billion in loans to ease the economy’s transition to EU standards, which he and then-Prime Minister Azarov said they expected to last for five years.

This was a modest request compared to the $40 billion a year Yatsenyuk and Turchynov have asked for. The EU promised to lend them $17 billion for three years. They are still waiting for the money.

But the EU refused to give Yanukovych the $15 billion, betting that the association agreement and the subsequent economic collapse would lead to his overthrow in 2015. But Yanukovych postponed the deal and took a loan from Russia, hoping that his ability to come to an agreement with Moscow would convince the EU to give him the $15 billion. Instead, he got a slap in the face.

The association agreement will not strengthen Ukraine’s energy position, because it depends entirely on Russian imports. Meanwhile, the share of Russian energy on the European market has gradually risen to over 35% despite efforts to keep it below 30% and claims by the majority of European politicians that Russian energy imports could be reduced to 20%-25% of market demand.

If the powerful EU economy, which imports energy from Norway and the Gulf countries, cannot do without Russian gas, what can Ukraine hope to achieve if it has no other suppliers?

Kiev can only end its dependence on Russian gas by reducing consumption to the 20 billion cubic meters it produces domestically. But that would require getting rid of two-thirds of its population.

Since Ukraine gained independence 23 years ago, Ukrainian politicians have been talking about energy diversification as the key economic and foreign policy priority. But they have not diversified by even a single cubic meter of gas or barrel of oil. Ukraine still relies on Russia to meet its energy needs. The reason is very simple: Ukraine has no money for diversification. Theoretically, it could buy gas from anywhere on the free market, but that would cost more than it pays Russia, and Ukraine isn’t even prepared to pay the discounted price Russia currently provides. 

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.