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Black Sea Economic Forum

Impact of EU-Ukraine free-trade agreement

October 24th-25th 2013

David Dalton© Economist Intelligence Unit

Venezuela: 5 Year USD Credit Default Swap Par Bid Rate (bps)Egypt: 5 Year USD Credit Default Swap Par Bid Rate (bps)

Ukraine: 5 Year USD Credit Default Swap Par Bid Rate (bps)

OCTSEPAUGJULJUN13

MAYAPRMARFEBJANDECNOVOCTSEPAUGJULSources: CMA Datavision /Haver Analytics

1200

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800

600

400

200

1200

1000

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200

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1. Main measures of the DCFTA

• Most trade tariffs & quotas on imports/ exports removed.• Gradual elimination in some "sensitive" segments.

Also: Cut non-tariff barriers. Improve food safety, animal welfare. Simplify trade administration. Develop mechanisms for solving trade disputes.

 

Why deep and comprehensive?• Harmonisation of commercial rules.• Liberal trade regime will apply to new kinds of business.• Gradual incorporation of public procurement.

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2. Impact of the DCFTA: different views

Different takes reflect political agendas. 

For the EU: a bright future• Modernisation of trade & economy.• Boost real GDP.• Raise buying power. • Net gain of €100m/ year from elimination of trade duties.  

For Russia: dire warnings• Poor-quality products > exports fall > external deficit expands• Currency crisis, macroeconomic destabilisation.• Russia might disrupt trade as in August.• Russia might reconsider border treaties. • Political/ social costs: separatism? Collapse of Ukrainian state?• Sergei Glazyev calls step "suicidal"—more like assisted suicide?

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3. Ukraine’s economy now

Economy ailing, vulnerable to shocks. • GDP: fell for 4th qtr in Apr-Jun 2013. • Industry & exports: still falling Jul-

Aug.• Current-account gap widened in Jul-

Aug.  

Some signs• Borrowing costs rise sharply from May• Reserves used to meet debt repayments• Devaluation expectations rise• NBU returns to intervention in currency

markets in Sep.

yryr%<N926NGPC>yryr%<N926IMD>yryr%<N926IXD>

1312111009080706050403Sources: Haver Analytics, The State Committee of Statistics

15.0

7.5

0.0

-7.5

-15.0

-22.5

80

40

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-40

-80

Ukraine: Foreign Reserves: Foreign Exchange

EOP, Mil.USD

131211Source: National Bank of Ukraine /Haver Analytics

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36000

32000

28000

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20000

16000

40000

36000

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16000

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4. The long and the short of it

EU and Russian versions emphasise different time frames.  

EU version: Over the longer term• Specialisation brings trade gains.• Trade gains maximised as EU is large market. • Wider range, better-quality products.• Lower prices and higher living standards. • Ukrainian products more competitive outside EU. • Harmonisation of business rules attracts investment.  

Russian version: In the short run• More economic adjustment as competition diverts

resources to stronger sectors: business closures, job losses in weaker sectors.

• Poland & Croatia: shipyards; Latvia: engineering. • Those who lose out may not be ones to benefit. • Costs: EU trade admin, food and labour safety.

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5. What’s missing?

Against EU's idealised trade liberalisation:Ukraine's political economy• Weak state overcome by business-political groups• Profits sustained by blocking market entry• DCFTA provisions of competition,

procurement, working conditions may face resistance

Important considerations that temper both scenarios.

Against Russia's catastrophism: Ukraine's external gap is large, BUT In large part because of high gas prices. Devaluation should narrow trade gap. Financing could come from IMF, EU.