By signature of the AA/DCFTA, Ukraine’s European course has been set. 

 Analysis & Commentary, Timothy Ash, Standard Bank, London, UK, Fri, June 27, 2014

LONDON. This is a landmark agreement for Ukraine, and will be transformational. Poroshenko has indicated that Ukraine aims for EU membership, but this is a long run goal - likely 10-15 years away, if then. Ukraine is realistic, and understanding of the changing politics in the EU, against further enlargement, as nationalism builds in EU member states.

But as with Turkey, arguably, the EU integration/accession process is more important than the end result. The process will transform Ukraine by providing a key anchor for reform across the various acquis - it will enable Ukraine to adapt to key European core values, including rule of law, democracy, and market economy. This is what the Maydan demonstrations were all about.                                                  
Many people (surprisingly even in the West) would argue that the EU was wrong in making Ukraine decide between east and west and is responsible for subsequent developments (violence) in Ukraine.

SIMPLY NAIVE

They would also argue that Ukraine would benefit by being placed between east and west, as a conduit for trade between the two. I could not disagree more, this is simply naive:                                                                                       

FIRST: Ukraine has held this position – a bridge between east and west - for the past 23 years of independence, and it has totally and utterly failed. This was not a ‘bridge’ but in reality a ‘no mans land’ between East and West, where the rule of law had no writ and shady oligarchic interests ripped the population off of national wealth. This resulted in the events on Maydan, and not the EU's efforts to make Ukraine choose.

By late last year the population had simply had enough, and answered to the European calling. Evidence of the failure of this no-mans land scenario is the fact that per capita GDP in Poland - which chose the EU course - is around  

USD14,000 at present, while in Russia – which chose the power vertical/sovereign democracy – is around a similar level, but for Ukraine it is currently only around USD3,000, less than one quarter. And note that at the outset of transition in 1991, per capita GDPs of the three were very similar.    
                                              
Simply put the status quo for Ukraine was not working for the many, but only the very few.                                                           

SECOND, Ukraine has been a sovereign, independent country for 23 years, and it should have the right to self determination. Opinion polls suggest that two thirds of the population now favour European integration over an Eastern orientation through membership in the CIS CU/Eurasian Union. If this is Ukraine’s choice, it should surely have the right to decide, and not be subject to blocking efforts from Russia, and as proven the case – direct cross border incursions by Russia.  
                                            
Signing the AA/DCFTA should bring significant long run benefits to Ukraine in terms of trade access and development, and social, political and institutional transformation.  In the short term though there will be undeniable costs, likely as Russia has indicated it could well apply countermeasures in the field of trade -  it has also announced a programme of import substitution away from imports supplied by Ukraine, and the West. With around one-third of exports from Ukraine directed to the Russian market, this could be very disruptive – particularly in SE Ukraine which has the greatest trade orientation to Russia.

However, similar challenges were faced by Georgia after the Russo-Georgian war in 2008, and indeed when Georgia faced a full blown trade blockade between 2008 and 2013 – and it survived and even prospered.

Indeed, Russian actions rallied the Georgian nation behind a far reaching reform agenda which brought transformation changes which survived the ousting of former President Saakashvili – particularly a successful fight to rein in endemic corruption.

Technically, many aspects of the AA/DCFTA already apply after the agreement was signed in a provisional format earlier in the year – this agreement lapses in November, so it will be important that before this date various administrative/legal hurdles are jumped.                                        

FIRST, after signing the AA/DCFTA has to be ratified by the Verkovna Rada – Poroshenko is promising its speedy ratification, albeit this will still be a key test of enduring parliament support for the ruling coalition, and perhaps a chance for the former Regions opposition to regroup. However, given the changing national mood in the country, any such actions to now stall European integration could be the death knell for Regions as a political movement;       

SECOND, the instruments of ratification have to be deposited at the Council of Ministers in Brussels;                                                            

THIRD, notification by the EU of the completion of its procedures to apply the AA/DCFTA provisionally – seemingly a simple administrative step – and prior to formal ratification by the parliaments of the 28 EU member states and the European parliament;                                                             

FOURTH, provisional application of the AA/DCFTA (the effective date the agreement comes into force) will be the first day of the second month following the date of receipt by the Depository of the documents mentioned above.

In order to avoid a legal miss-step, the date of the provisional application must be on or before November 1, 2014, as this is the date by which the Autonomous Trade Measures (agreed early in the year) run out.  In effect this means that the above steps have to be completed by the end of September.           

The focus on the near term will hence be on the Verkovna Rada and its need to ratify the AA/DCFTA – and this suggests that parliament would be advised to ratify the agreement before it goes into summer recess in July.

Also note that ratification of the AA/DCFTA should likely happen before the Verkovna Rada goes into recess for early parliamentary elections – assuming the aim still that these should be held by October. The Poroshenko administration will hence likely want to get the AA/DCFTA ratified over the next month.                     

Ratification by the parliaments of EU member states, and the EP, could take two years, but note that the bulk of the provisions of the AA/DCFTA can apply before then on a provisional basis after signature – this follows the decision of Member States and the European Parliament back in September/October 2013, just before the Vilnius summit.

Not all the AA will be applied on a provisional basis – as some, e.g. in the area of Justice require full ratification by member state parliaments. The DCFTA will be fully applied, except in the area of intellectual property rights.                  

UKRAINE'S EUROPEAN COURSE HAS BEEN SET

In effect, there seems to be little way back now in terms of the AA/DCFTA, even if Russia tries to use leverage to stall ratification in the parliaments of EU member states, and perhaps in the newly composed European Parliament – the bulk of the terms of the AA/DCFTA will go into effect. By signature of the AA/DCFTA, Ukraine’s European course has been set.

Disclaimer: This material is non-independent research. Non-independent research is a "marketing communication". The above commentary represents a personal view, is not investment advice or Standard Bank research, but may contain extracts from published research.   

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