Analysis of the causes of the disintegration of Ukraine and Russia and the Association of Ukraine with the European Union. Reducing trade barriers, reform and the involvement of Ukraine in the international network by attracting foreign investment.
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The Association Agreement between Ukraine and the EU (AA) [European Atomic Energy Community, European Union, The Member States, Ukraine: 2014] aimed at enlarging the area, where Ukrainian exporters can trade with minimal barriers and at implementing best-practice standards of the EU economic regulation in Ukraine. Economic and political reaction of Russia turned out to be excessively hard relatively the potential risks of the AA for its economy. Havlik stated that if Russia used trade measures against Ukraine, the most sensitive industry would be machine building mostly located in the Eastern Ukraine [Havlik: 2014]. L. V. Russia declared about several economic risks of the AA for its economy: • importing goods from the EU, which could formally be considered as Ukrainian; The hybrid economic war of Russia aiming at retarding reforms and deepening social and economic crisis in Ukraine includes the following components: • more than 40 trade wars and 4 gas wars against Ukraine in 2004-16;Under better geopolitical scenarios they could integrate with each other or at least benefit from open bloc trade creation effect instead of trade diversion and disintegration. We considered structural difference of exports, incomplete preferential treatment, possibility to protect Russian producers with more civilized measures, and potential benefits for Russia from growing market in Ukraine under better geopolitical scenario. But Russia had several times more export losses from its own actions against Ukraine and several dozens more losses caused by sanctions of Western countries, falling oil and gas prices, investments in import substitutions, high military expenditure and cost of supporting occupied territories. Devaluation of hryvnia and decreased wages in Ukraine have more negative effect on Russian exports than preferential treatment under the AA, although in the middle-term period. On average countries lost 4 times more from shrinking of the Russian market than of the Ukrainian one (but disproportionally much more in the Ukrainian market considering asymmetry in size of Ukrainian and Russian economies).
Вывод
The fundamental reason for political and economic confrontation in the West- Ukraine-Russia triangle is the existence of two main integration attractors in Europe: Western Europe / the EU and Russia / the EAEU. Despite competition between them, they also have some complementary features. Under better geopolitical scenarios they could integrate with each other or at least benefit from open bloc trade creation effect instead of trade diversion and disintegration.
AA is only a minor challenge for Russian economy despite the fears expressed by Russian government. We considered structural difference of exports, incomplete preferential treatment, possibility to protect Russian producers with more civilized measures, and potential benefits for Russia from growing market in Ukraine under better geopolitical scenario.
But Russia had several times more export losses from its own actions against Ukraine and several dozens more losses caused by sanctions of Western countries, falling oil and gas prices, investments in import substitutions, high military expenditure and cost of supporting occupied territories. The largest damage was inflicted on energy sector, financial sector and defense industry. Devaluation of hryvnia and decreased wages in Ukraine have more negative effect on Russian exports than preferential treatment under the AA, although in the middle-term period. Worsening image of Russia is another negative effect for it, which is related to decreasing economic links of Russia and the rest of the world.
In the West-Ukraine-Russia triangle Ukraine suffered from the largest relative losses (especially for exports of agricultural products, metals and machines to Russia). Uncontrolled territories as the smallest economies are especially vulnerable. Thus benefits of better access to the EU market, its financial aid and new export destinations has not been able to offset the massive pressure of Russia.
Russia, China and Germany had the largest absolute losses from shrinking of the Ukrainian market; Belarus, Lithuania and Hungary - relatively their GDP. Germany, China and Ukraine had the largest absolute losses from shrinking of the Russian market; Belarus, Lithuania and Ukraine - relatively their GDP. The U.S. had the lowest losses among the large economies. Bulgaria and Romania had more losses form shrinking of the Ukrainian market than of the Russian one. On average countries lost 4 times more from shrinking of the Russian market than of the Ukrainian one (but disproportionally much more in the Ukrainian market considering asymmetry in size of Ukrainian and Russian economies). Shrinking of the Russian market inflicted damage mainly on small economies. In the Ukrainian market the difference between the effects on small and large economies was insignificant.
Ukraine suffered much more (relatively GDP) from bilateral disintegration than Russia, however the absolute export losses are larger in Russia. But Russias relative losses from disintegration with its main trade partners are larger than losses of Ukraine in the Russian market. Relatively GDP Russia faced 3 times more damage than the U.S. and 13.5 times more than the EU, despite that the EU had the largest losses among the Western countries.
Revival of investment activity of domestic and foreign enterprises is a crucial factor of restoration of economic growth in Ukraine under development of integration and disintegration processes. The AA should be treated as an important instrument of Ukraines integration into international production networks, because tariff liberalization only will not provide large positive effect for the national economy. Investors should be provided with the guarantee of territorial integrity, sovereignty and security of Ukraine. Unless it is guaranteed, there are serious risks for participation of Ukrainian enterprises in international production networks, and thus efficient implementation of the AA and DCFTA in particular can be questioned.
Settling the issue of territorial integrity of Ukraine and return to a non-confrontation in international economic relations could provide benefits for all the affected countries thanks to easing tension in international relations, decreasing trade diversion and better integration prospects. But it largely depends on the position of Russian Federation on supporting or de-escalation of the conflict.
It is important for Ukraine to have a cross-membership in FTA with its main trade partners including the EU and the CIS. In ideal scenario the EU-Ukraine AA could be a link between the EU and the EAEU as a pilot project on the way to their cooperation and integration. In particular a moderately deep FTA between the EU and EAEU could decrease stakes in geopolitical and geoeconomic struggle for Ukraine.
Integration is also about values and institutions. There are two main models of social and economic development in the region: European and Eurasian ones, and Ukraine had to make a choice between them. By signing and implementing the AA instead of classical FTA Ukraine made also a choice in favor of the European development model.
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