The expected impact of the EU-Ukraine Association Agreement

In cooperation with the Transnational Institute

On 6 April 2016, the Dutch electoracte will go to the polls to vote in a referendum on the EU’s Association Agreement with Ukraine. But what is the referendum about and why is it worth campaigning for a No vote? Here we explain why the EU-Ukraine Association Agreement will only benefit a number of Ukraine’s elite at a cost to the majority.

No to a trade deal for the 1%

The projected economic and social costs of the Association Agreement for Ukrainians

• Enriches an oligarchic economy where large sectors of the economy’s wealth are siphoned off into offshore trusts
• Contributes to deindustrialising Ukraine, because its industrial producers will struggle to meet EU standards and lack sufficient capital and technology to compete with EU multinationals
• Reinforces a Ukrainian economy based on agro-exports and raw commodities, with less value-added benefits for the population
• Harms Ukraine’s critical small business sector that constitutes 99.8% of all Ukrainian enterprises and accounts for 67.8% of employment
• New jobs created by EU investments are unlikely to compensate for losses by Ukraine’s domestic business sector and EU investors will exploit Ukraine’s lower and frequently unenforced social and environmental standards
• Contribute to the ongoing brain drain as highly educated workers migrate to the EU. Between one third and one quarter of the Ukrainian work force is currently already working abroad

There are many reasons to be concerned about an Association Agreement with Ukraine, but this report focuses on one area, which is the impact that it will have on the Ukrainian economy and therefore its people at a particularly delicate political moment in the country’s history. We focus on this area as the bulk of the Agreement is made up of a deep and comprehensive trade agreement, even if it is also accompanied with other agreements on foreign and security policy, financial cooperation and so on.

Ukrainian researchers based at the Center for Social and Labor Research (CSLR) in Kiev have provided the original research for this report as part of a more comprehensive study that was drafted last year. The Transnational Institute, who has prepared and finalised this report, shares with The Center for Social and Labor Research and the Brussels Office of the Rosa-Luxemburg-Stiftung a strong concern for democratic, social and labour rights. Since 2013, the CSLR have been documenting growing levels of state repression of peaceful protests by Ukrainians fighting for social, economic and civil rights.

In our collective view, the Association Agreement’s core component, the Deep and Comprehensive Free Trade Area (DCFTA), is premature and problematic and will only benefit a number of Ukraine’s elite at a cost to the majority.

The DCFTA demands almost full abolition of tariffs for trade in goods, extensive liberalisation to allow for enhanced market access for European service providers, and enhanced protection for foreign investors and liberalisation of capital flows. What this means is a complete opening up of Ukraine’s economy to competition from powerful European multinationals, at a time when Ukraine’s domestic economy is in no condition to hold its own.

Many key sectors in Ukraine, notably industrial production, are traditionally oriented towards exporting to Russia and the other states of the Eurasian customs union, based on Russian standards of production. These sectors will struggle to reorient themselves towards exporting to the EU because standards differ widely. The economy as a whole suffers from a crisis in innovative development and requires urgent injections of capital to pay for new technologies and to modernise existing equipment. However, domestic prospect for innovative development remain limited because of cuts to research and development budgets.

While Ukraine’s exports used to mainly comprise of high-tech goods destined for the Russian market, the new orientation towards the EU is already leading to a rise in the export of raw materials and agro- food products. The exports to the EU only partially compensate the loss of exports to the former Soviet states, because of the larger share of lower value added unprocessed goods . Deindustrialisation of the economy looms. The balance of payments is set to worsen, as is Ukraine’s gross external debt, which rose from 88% in 2014 to 155% of GDP in 2016.

Equally, the Association Agreement is likely to harm the small business sector (SME) that constitutes 99.8% of all Ukrainian enterprises and accounts for 67.8% of employment. This sector, which contains many microenterprises that cater solely to local markets, will struggle to compete with the influx of EU imports. Without access to affordable finance, they will be unable to make the transition to adapt to the rules and regulations of the EU. Here too, a foreign takeover of Ukraine’s economy appears imminent.

While European companies’ increased involvement in the Ukrainian economy will create some jobs, it is likely they will also be based on low wages and low social and environmental standards – that are not only below minimum standards in the EU but also frequently unenforced by the Ukrainian government.

The Association Agreement, while talking about promoting core labour standards and endeavouring to improve environmental and labour legislation, at the same time stresses that ‘labour standards should not be used for protectionist trade purposes’ and that the ‘comparative advantage [of the Parties to the agreement] should in no way be called into question’.

At the same time, both the closure of industrial enterprises as well as opening up services markets such as infrastructure, energy, transport, postal services, and other public services, will, in the short and mid- term, lead to mass layoffs that will not immediately be compensated by the creation of new jobs elsewhere. Indeed, a whole generation of older and not easily re- trainable workers may be lost, at a high social cost to society.

It is important to be aware that per capita income in Ukraine is roughly nine times lower than in Greece. Because of the significant difference in wage levels between Ukraine and the EU member states between one third and one quarter of the Ukrainian work force is currently already working abroad. There are concerns in Ukraine that the Association Agreement will increase the outflow of highly educated workers to the EU.

So what looms is a far-reaching foreign takeover of Ukraine’s economy, with European trans- and multinational corporations using Ukraine as a cheap production platform for exports back into Europe, while gaining a firm foothold in a potentially interesting future growth market.

In conclusion, the Association Agreement will benefit the 1% at the expense of the 99%, enriching a small clique of all-powerful oligarchs and a handful of multinational corporations, at the expense of ordinary people. Huge volumes of Ukraine’s wealth are already siphoned off into offshore accounts: offshore capital outflow particularly to Cyprus, is estimated at hundreds of billions of dollars per annum, reaching volumes commensurate with the state budget. The Netherlands issued figures to show that the country is a large investor in Ukraine, with investment flows reaching 5.2 billion euros. However, half (!) of that amount can be traced back to mailbox companies used by one of Ukraine’s biggest oligarchs to evade paying taxes at home.

Not only will the Association Agreement fail to do anything to address the systemic problems of the Ukrainian economy, plagued by dependence on exports of raw materials, high levels of tax evasion and a massive fall in investment and research, it will negatively impact on many Ukrainians who will see their wages fall and their employment becoming more precarious, while the income divide grows.

These effects will be most acutely felt within Ukraine itself, but the EU-Ukraine Association Agreement adds to the cumulative pressures emanating from other controversial trade agreements the EU is concluding around the globe, including with major economic actors such as Canada and the US, that follow an entirely similar logic and have cemented the power of corporations globally.

Neither the EU nor Ukraine needs another neoliberal trade agreement benefiting corporate elites. We need new forms of cooperation that seek to support the building of a socially just and sustainable economy for the benefit of all rather than for a select rich and powerful few.

Alexander Kravchuk, Zakhar Popovych, Roeline Knottnerus, Daniel van Heijningen

Nick Buxton

In collaboration with
Transnational Institute, Center of Social and Labor Research