? 1(5) March 2008
EU – UKRAINE RELATIONS:
In the dimension of energy security
Authors: О. Shnyrkov М. Honchar О. Volovych
In this issue of quarterly publication we present results of monitoring of EU-Ukraine
relations dedicated to energy-related issues and possible options for creation of a free trade zone
between Ukraine and EU. This publication is prepared within the framework of a joint project
“Monitoring of EU-Ukraine Relations” initiated by the Regional Office of Friedrich Ebert Fund in Ukraine and Belarus and the Foreign Policy Institute of the Diplomatic Academy of Ukraine
under the Ministry of Foreign Affairs of Ukraine.
The need for implementation of this project was predetermined by the need to reconsider
the situation in EU-Ukraine relations, as well as the need to elaborate a new model of Ukraine’s
integration strategy into EU in the framework of good neighborhood policy.
Reconsideration of Ukraine’s strategy of pursuing the EU integration course requires the
development of new approaches to implementing the European standards in different areas of
Ukraine’s social life to bring Ukraine closer to meeting EU membership requirements. One of
such approaches is related to the formation of strategic understanding among the political elite
with regard to the European vector of Ukraine’s development. Another area for implementation of European integration aspirations of Ukraine is securing broad public awareness regarding the
status and prospects of Ukraine’s integration into the EU. One more important task is to raise
awareness and understanding of the importance of Ukraine’s European integration by Ukrainian businesses, include them into Ukraine’s strategic thinking, and into the process of adapting Ukraine to the European market and business culture.
Regional aspects of integration tend to be an important segment of implementation of
Ukraine’s EU integration objectives. In this respect the regions should be regularly informed
about major events in the European Union and the EU-Ukraine relations.
To achieve these objectives the above project monitors and analyzes the EU-Ukraine
relations, publishes monitoring results, and mails out findings of monitoring directly to regional
government bodies, foreign diplomatic missions and NGOs.
The views expressed in this publication are those of the authors and do not necessarily The views expressed in this publication are those of the authors and do not necessarily
reflect the views of the Foreign Policy Institute and Friedrich Ebert Fund. reflect the views of the Foreign Policy Institute and Friedrich Ebert Fund.
TABLE OF CONTENTS
1. Oleksandr Shnyrkov. Creation of an extended free trade zone
between Ukraine and EU: prerequisites and consequences ………..4
2. Oleksy Volovych. The State and Prospects of Implementation of Gas Pipeline Project
“GUEU - WHITE STREAM”…………………………………….18 3. Mykhaylo Honchar Ukraine-RF-EU energy relations: challenges for continental
Doctor of Economic Sciences, Professor
Candidate of Economic Sciences, Associate
Institute of International Relations
Taras Shevchenko Kyiv National University
CREATION OF AN EXTENDED FREE TRADE ZONE BETWEEN UKRAINE AND
EUROPEAN UNION: PREREQUISITES AND CONSEQUENCES
EU has fifty years’ experience of free trade development. The Rome Treaty, signed in 1957, was the first instrument to provide for the creation of European Economic Community,
specifically, transition to free movement of goods, services, capital, and labor force. The
Ankara agreement on free trade with Turkey was signed in 1963, agreement with Malta - in
1971, and with Cyprus - in 1973. European economic zone (1992) between EU and European
Free Trade Association (EFTA) is also based on the principles of free movement of goods and
services. The same mechanism was also incorporated in 10 European agreements closed by EU
with Central European states in 1993-1999. Euro-Mediterranean agreements (1995) with 12
countries of this region also stipulate the creation of free trade zone by 2010. In early 2000s’,
the Autonomous trade regimes (which envisage mutual opening of markets) were proposed
within the framework of stabilization and association between EU and Balkan states. Later on,
respective agreements were signed with Bosnia-Herzegovina, Croatia, Macedonia, while
negotiations continued with Albania, Serbia, and Montenegro. It is also worth mentioning
existence of Free Trade Agreements with South Africa (1999), Mexico (2000), and Chile (2003).
EU has included options for creation of Free Trade Zones (FTZ) in Agreements on
Partnership and Cooperation with a number of CIS countries. Expansion of the scope of free
trade principles is also planned within the framework of Agreements on economic partnership.
Respective negotiations are also underway with customs unions – Mercosur, and Cooperation Council of Persian Gulf Countries.
Theoretically, FTZ envisages elimination of customs duties and quantitative limitations for
all goods in mutual trade, as well as liberalization of trade in services. However, as a rule in
practice the parties that create a free trade zone still put in place certain limitations, at least at the
initial stage. The EU is not an exception. EU participation in the formation of free trade zones
makes it possible to discern major specifics of EU policy in this area.
(1). While expanding foreign manufacturers’ access to its internal markets, primarily,
those of industrial products, the EU keeps in place substantial limitations for agricultural
While the EU average import duty in 2005 was only 5.4%, its maximum values for
certain livestock products reached 219%, for dairy products – 264%, for fruits, vegetables,
and plants – 199%, for croups – 139%, for sugar and confectionary products – 134%, for
beverages and tobacco products – 208%. It is also worth noting that Central European countries received full access to the internal agricultural commodities market only after they
gained full EU membership. It would be therefore only natural to presume that should Ukraine
transit to the regime of free trade with the EU, its access to the EU internal agricultural market will
be most problematic.
(2). In general, the European Union broadly uses the principles of asymmetry in
mutual opening of markets.
This is especially the case with less developed countries. As a rule, the EU first of all
eliminates the duty on imported industrial products and agrees to gradually eliminate it in
partner states. Normally this process lasts for 5-10 years.
Given the existing difference in the level of economic development and the degree of
customs protection between EU and Ukraine, gradual opening of Ukraine’s domestic market for
EU industrial products can take over 5 years, and on certain products – up to 10 years.
Notwithstanding, the position paper of European Association ?Businesseurope? dedicated to free
trade zone with Ukraine advocates for elimination of customs duties over a short period of time
and on a symmetric basis .
(3). Free trade is being increasingly applied by EU as a more active trade policy format
in inter-regional cooperation. Moreover, the EU requires that the level of regional integration meets three major requirements before negotiations of a free trade zone on inter-regional level
may be started:
? Operational institutional structure which envisages the effective mechanisms for
implementation of regional projects and fulfillment of decisions, including dispute
? Creation of customs union in accordance with Article XXIV of GATT/WTO,
including uniform external tariff, customs administration, and common trade policy;
? Reduction of non-tariff barriers in internal regional trade, specifically in the area of
technical requirements and standards, sanitary and phyto-sanitary aspects, as well as
favorable regional regulatory regimes in the area of services and investments.
(4). EU is very cautious about emergence of customs unions among neighbor states.
Proposals on creation of customs unions among Czech Republic and Slovakia, as well as among
Western Balkan states were welcomed in due time, since the partner states pursued the objective to
get prepared for EU membership. However, the Resolution of the European Parliament dated
November 19, 2003 clearly states that the planned creation of the Common Economic Space (to
include Belarus, Kazakhstan, Russia, and Ukraine) can worsen further cooperation between the
EU and Ukraine. Message of the European Commission dated May 12, 2004 "European Policy
of Neighborhood”, Section "Regional Cooperation", specifies only the following initiatives as
those that can contribute towards trans-border cooperation: European Council, Baltic Council,
Central European Initiative, Organization for Black Sea Economic Cooperation, Stability Pact
jointly with Euroregions. Moreover, the EU does not pursue the goal of creating new structures
and organization, but rather, advocates for the use of opportunities offered by already existing
In September 2003, the European Commission’s General Directorate on Trade Issues prepared the document entitled “Feedback to the Draft Agreement on Formation of Common Economic Space to include Russia, Ukraine, Belarus, and Kazakhstan”. This document stressed the
following: if CES remains at the stage of a free trade zone, there will be no changes in the
EU trade policy towards Ukraine. If CES reaches the stage of customs union, Ukraine will face
the claims to pay compensations to WTO members, including EU, since Ukraine’s obligations
on bilateral access to markets significantly exceed the obligations of the other three countries,
specifically those of Russia. Moreover, the future of negotiations on free trade zone will be
put to doubt. Therefore, political consensus on creation of free trade zone with the EU –
achieved among the branches of Ukrainian power in 2006-2007 – makes Ukraine’s participation in customs unions of CES and Eurasian Economic Community practically impossible.
(5). The depth of free trade zone directly depends on the level of political interaction and
integration between the EU and partner states. The EU offers the deepest free trade zone to its candidate countries, as well as member states of European Free Trade Association. In 2002, the
European Commission proposed to use in the relations with candidate countries the so-called
communitarian (i.e. common for EU member states) rules for regulation of competition instead of
antidumping regulation under WTO rules.
The content of regulatory policy in other sectors of cooperation (intellectual property,
competition, and procurement) is predetermined by the depth of political integration. Since opening
of Ukraine’s markets in these areas can be associated with significant costs (losses), one can expect that the degree of access to the internal markets will also depend on the depth of political integration
with the EU, which, in its turn, could offer certain compensation mechanisms for possible losses
incurred by Ukraine.
The Message of the European Commission “Global Europe: Competing in the World”
specifies major approaches to the creation of new generation of the EU free trade zones. In
this respect, liberalization of trade in the common EU market and expanding access to the
markets of the third countries is considered an important source for enhancing labor
productivity, economic growth, creation of new jobs, and thus increasing the competitiveness
of national economies of the EU member states. The EU determined the following major criteria
for potential free trade agreements .
The first two criteria include the potential of partner’s market (size of national economy
and rate of economic growth) and level of tariff and non-tariff limitations of import from the EU. From this point of view, the EU considers as priority ASEAN countries, Mercosur, and South
Korea since they combine high level protectionism with significant potential of internal markets’
development. In addition, these countries are very active in creating free trade zones with other
centers of global economy. Therefore (in case of preserving high trade barriers with respective
countries and blocks) the EU runs the risk to partially lose respective markets, as it was the case
with Mexican market after the creation of NAFTA.
Another group of priority states includes India, China, Russia, and GCC member states.
Ukraine also gradually becomes one of important trade partners for the EU, since after the EU
expansion Ukraine accounts for nearly 1% of its foreign trade turnover.
The third criterion for the selection of free trade zones is predetermined by access to resources (energy resources, raw materials for agribusiness products, mineral ore, and scrap metal)
along with guarantee of respective supply and economic impact on the EU market. It is worth
noting that access to resources is also considered to be a priority in the EU concept of
The fourth criterion of EU participation in free trade zones covers political aspects, specifically human rights, democratic values, religious impact of states, compliance with key
multilateral instruments of the EU security strategy.
And finally, the fifth criterion is predetermined by the risk of erosion of preferential access to common market of neighbor states and developing countries. From this point of view, the
states that do not have a free trade agreement with the EU will find themselves in a more
discriminatory position compared to the states that enjoy more free access to the EU market.
The Message also specifies the requirements to the content of future EU agreements on free
trade. These agreements must cover liberalization of services’ market, new opportunities for mutual
investment, protection of intellectual property rights, procurement issues, and rules of competition.
Major attention must be paid to non-tariff barriers, where for neighbor states it is proposed to use
the mechanism of regulatory competition based on the EU rules. It is worth noting that in this
document Ukraine is mentioned, first of all, from the standpoint of securing the protection of
intellectual property rights.
Thus, in case of negotiations with the EU, Ukraine – along with key principles related to the development of free trade zones in global economy - must take into account the specifics
of the EU communitarian foreign economic policy.
Under the first criterion, Ukraine has good prospects to be an EU partner for creation of free
economic zone. Ukraine has significant potential for domestic market growth, demonstrated stable and
sufficiently high rate of economic growth in the last years, and already ranks among 25 major trade
partners of the EU.
In 2006, export of goods from Ukraine to the EU totaled $ US 10,869.6 mln, import – $ US
15,614.1 mln. (see Diagram 1). Compared to 2005, export increased by 18.1%, import – by
31.5%. Negative balance totaled $ US 4,744.5 mln. against the negative balance of $ US 2,669.7
mln. in 2005. The ratio of import coverage by export constituted 0.7, in 2005 – 0.8.
EU accounts for 28.3% of Ukraine’s total export volume and 34.7% of Ukraine’s total
import (in 2005 – 26.9% and 32.9% accordingly). Ukraine’s major partners in both export and import of goods are Germany ($ US 1283.8 and 4267.6 mln.), Italy ($ US 2503.4 and 1465.2
mln.) and Poland ($ US 1344.5 and 2109.1 mln.).
Ukraine’s Foreign Trade in Goods Зовнішня торгівля товарами with the EU з країнами ЄС 15614,120000
2005 р.2006 р.
Import of services to Ukraine increased by $ US 582.9 mln. The largest share in the total
volume of Ukrainian export to the EU member states is represented by transport services
(64.3%), various business, professional, and technical services (16.4%). In terms of import, the
largest share falls on financial services (21.1%), transport services (16.8%), construction services
(7.2%), royalty and licensing services (8.1%). Major partners that account for more than half of
export volume are UK, Cyprus, Germany, Belgium, and Hungary. Major import partners include
UK, Cyprus, Germany, and Austria (see Diagram 2).
In 2006, export of Ukraine’s services to the EU member states increased by 28.5% and totaled $ US 2218.5 mln. Import increased by 45.4% and totaled $ US 1867.1 mln. Positive
balance of foreign trade totaled $ US 351.4 mln. (in 2005 – $ US 441.9 mln). The share of
services’ export to the EU in total export volume constituted 29.6 %. In terms of import – 49% (in 2005, accordingly 28.1% and 43.8%). 
Зовнішня торгівля послугами Ukraine’s Foreign Trade in Services
з країнами ЄСwith the EU