Brussels Welcomes Lutsenko Release, But Fate of Trade Pact Unclear

April 9, 2013
Ukraine Should Beware of “Europeans” Bearing Gifts
Anthony T. Salvia
Director, American Institute in Ukraine

President Viktor Yanukovich no doubt hopes that in pardoning Yuri Lutsenko he has kept the door to the EU Association Agreement and related free trade pact at least somewhat ajar. Time will tell if he is right.

Following the expulsion of Timoshenko ally Sergei Vlasenko from the VerkhonvaRada last month, and the court verdict on April 4th denying Lutsenko's request for clemency, Europe was confronted with the prospect that Kiev might be preparing to slam the door shut on the agreement.

The Economist recently gave expression to this concern:

“With Russia pressing Ukraine to join the Eurasian Union and the European Union still trying to lure Ukraine into an association and free-trade agreement, MrYanukovich’s choice seems to be to do neither—justifying Ukraine’s name, meaning ‘borderland’.”

The Lutsenko release takes some of the edge off of this analysis, but not entirely as other issues continue to impede the Ukraine-EU relationship: the fate of Mrs. Timoshenko above all, but also the raft of legal, judicial and electoral reforms Brussels demanded at the Ukraine-EU summit last February 25th.

Can Yankovich afford to meet all of Europe’s concerns? Will he? In view of the outpouring of support for Lutsenko, with tens of thousands of Ukrainians flooding Shevchenko Square, he would have to assume scenes of even greater jubilation would greet Mrs. Timoshenko’s release.

Writing in the New York Times before the president pardoned Mr. Lutsenko, former US ambassador to Ukraine, John Herbst, made this observation:

“Mr. Yanukovich does not seem to think that a formal association with the European Union is worth the release from jail of the leading opposition leader Yulia Timoshenko.”

Lutsenko’s release does not invalidate the point. Yanukovich continues to face the same dilemma he has faced for the past year and a half: Is placating “Europe” worth the political turmoil Timoshenko’s release would likely occasion? Beyond the matter of

Timoshenko, in acceding to Europe's demand for sweeping legal, judicial and electoral reforms, the Administration risks, as UNIAN's Anastasia Bereza has pointed out, its own de-stabilization. Do the political benefits of delivering an Association Agreement outweigh the political costs of having Mrs. Timoshenko at liberty in the run-up to the 2015 presidential election?

Yanukovich faces a potentially staggering political price for an agreement that offers few tangible benefits. Mr. Herbst, who supports Ukrainian adoption of the Association Agreement, does not bother to point to a single benefit it is likely to bring in its wake beyond increased trade. But that is a tautology – clearly, the elimination of trade restrictions will increase trade. The story is more complex than that: Europe is economically moribund and is expected to remain so for some time; it will not act as a locomotive to pull Ukraine out of its doldrums, much less help it achieve economic modernization. Moreover, the Association Agreement contains elements positively deleterious to Ukrainian interests:

  • Ukraine will be required to convert 30,000 kilometers of railroad tracks, and rolling stock of some 140,000 cars and 6,000 locomotives to European gauges and standards. No mention is made as to where the money is supposed to come from
  • Ukraine must open its military-industrial complex to tenders from Europe. Now, Ukraine's arms industry no longer exports much, but sells mainly internally to the national security apparatus. With passage of the AA, Ukraine can expect that business to dry up.
  • Ukrainian exporters of electricity, gas and oil will be required to sell these products at prices not higher that those prevailing domestically. This will bid up costs to domestic consumers as outsiders flood the market seeking cheaper energy. That might make the IMF happy, but will not do much for Ukrainian households and businesses.
  • Ukraine now sells Europe 3 million tons of grain; after the conclusion of the agreement, the agreed upon amount will be 1 million tons. Now Ukraine sells Europe 300,000 tons of sugar; after the agreement, 30,000 tons. Moreover, the EU guarantees state support for its domestic producers (the Common Agricultural Program) – but Ukraine under the AA will have no right to offer similar support to its domestic producers.
  • In metallurgy, Ukraine under the WTO is allowed to retain subsidies for some enterprises; under the AA, subsidies have to be cut in half, and eventually eliminated.

Thus, while the release of Mr. Lutsenko has been warmly greeted in Brussels, not least because it would seem to revive prospects for roping Ukraine into a Euro-Atlantic orientation through the expedient of the AA, the EU should not count its chickens before they are hatched.

Bankova must realize that going into the 2015 presidential election with Mrs. Timoshenko at large in the land, and Ukraine saddled with an agreement that may well contain more costs than benefits is not the most obvious path to a second term.

There is evidence the Ukrainian side gets it. Prime Minister Azarov, in a recent interview with TV Mir, questioned the degree to which the EU’s demand for sweeping internal reforms was “objective” and compatible with Ukrainian sovereignty. He has a point. There is certainly an element of hypocrisy in insisting one country adhere to European standards, even as Europe illegally seizes private property (bank deposits), and by-passes parliament to achieve its aims.

Whatever the President decides about Mrs. Timoshenko, he would be well-advised to cast a skeptical eye on European promises.

Who can forget the statement (January 18, 2008) of former president of the European Central Bank Jean-Claude Trichet on Cyprus’s accession to the Eurozone:

"For a small, open economy like Cyprus, Euro adoption provides protection from international financial turmoil." Five years later, Cyprus is engulfed in financial turmoil, and the nation lies in ruins.

Greeks, Bulgarians, Cypriots and a host of others have learned their lesson the hard way: Beware of “Europeans” bearing gifts.

Kiev should proceed with caution. Luckily, Ukraine has the advantage of other geo-political options, and a certain amount of time on its side.