The Reality of Ukraine’s Economy And Its Relations With EU

Abstract

Ukraine after gaining independence in 1991 suffered the longest economic recession among the former Soviet Republics. Its long-waited economic boom in 2000’s was interrupted by the global economic crisis of 2008, followed by an only small recovery and ensuing stagnation. Its poor performance could be explained by, along with other causes, outdated and inefficient industries, notably ferrous metallurgy. This led to a worsening of its balance of payments in 2010’s, forcing the ruling Party of Regions headed by Viktor Yanukovich to postpone the signing of the Association Agreement with the European Union (EU) in November 2013. Most Ukrainian citizens, however, said ‘no’ not only to this decision but also to the corrupt Yanukovich administration itself, which ended up with a collapse of the regime in February 2014.

Ukraine has two traditional trade partners, Russia and the EU, with the amounts of trade turnover with them roughly equal. Ukraine tends to export low value-added commodities to markets outside Commonwealth of Independent States (CIS), e.g. to the EU, on the one hand and relatively high value-added items, such as machinery and processed foodstuffs, to Russia and other CIS countries on the other hand. Ukraine, having chosen a pro-EU orientation, risks losing markets of Russia, whose government threatens to impose custom duties on imports from Ukraine.

Ukraine’s new administration led by Petro Poroshenko finally signed the Association Agreement with the EU in June 2014. The new administration strives to overcome today’s turmoil by virtue of eurointegration. The immediate effects, however, of creation of a free trade area with the EU, widely proclaimed as a core of the Agreement, on Ukrainian economy should not be overestimated because margins of import duties reduction are rather modest. Structural reforms and adjustments to the EU standards, another aspect of the Agreement with the EU, will be more crucial to Ukraine’s future.