Cablegate: Ukraine's Next Step Toward the Eu: A "Deep" Free

DE RUEHKV #1875/01 2661237
P 221237Z SEP 08




E.O.: 12958: N/A

REFS: A) KYIV 1860
B) KYIV 1330
C) KYIV 915
D) 2007 KYIV 1862

1. (SBU) Summary: Ukraine and the EU have launched
negotiations on a Free Trade Agreement (FTA), which would
slash bilateral tariffs and reduce a range of other non-
tariff trade barriers. Ukraine's chief negotiator told us
that the talks are not true "negotiations," as they are
focused on how Ukraine can best adapt its economy to
existing EU norms. Many on the EU side see the FTA as a
way to bring Ukraine as close to Europe as possible without
EU membership, which is not on the EU agenda at the moment
because of "enlargement fatigue." Once completed, the FTA
should significantly increase EU-Ukraine trade and boost
Ukrainian economic growth. The GOU strongly supports the
FTA negotiations, although warns that a few areas, such as
environmental issues and government procurement, could
prove difficult to resolve. The influential Party of
Regions also supports an FTA, but less vigorously. A few
large Ukrainian businesses publicly support the FTA, but
there is a lack of knowledge more broadly among the
business community, and some companies are worried the FTA
could hurt trade with Russia. Post believes that an EU-
Ukraine FTA is strongly in the U.S. national interest, as
it is a further step anchoring Ukraine in Euro-Atlantic
institutions. We recommend that the USG support the EU-
Ukraine negotiations in every appropriate manner. End

FTA Talks Launched

2. (U) Ukraine and the European Union (EU) officially
launched negotiations on a Free Trade Agreement (FTA) with
much fanfare on February 18, shortly after members of the
World Trade Organization (WTO) agreed to the terms of
Ukraine's accession to the WTO. Substantive discussions
began in April, with follow-on meetings occurring every two
or three months. The last round of negotiations took place
July 7-11 in Kyiv, with the next round expected in October.

3. (U) An FTA was long viewed both by Kyiv and Brussels as
the logical next-step in their trade relationship after WTO
accession, which occurred on May 16 (ref C). (Note: Post
continues to work on a handful of WTO accession commitments
that remain outstanding (ref B and previous). End note.)
The FTA will serve as a central pillar of a New Enhanced
Agreement between the EU and Ukraine. Some experts point
to macroeconomic models showing that trade flows between
Ukraine and the EU could double as a result of the
agreement, and GDP could grow by an additional four or five
percent in the medium term.

"Deep" FTA - Not Just Tariffs

4. (SBU) The most palpable feature of the future FTA will
be a drastic reduction in tariffs between the EU and
Ukraine. Luis Portero-Sanchez, head of the Trade Section
at the EU Commission's office in Kyiv, told a meeting of
the European Business Association in May that the EU hoped
to eliminate tariffs for almost all goods, although a few -
- ideally less than five percent of all tariff lines --
would likely be left outside the agreement. Portero-
Sanchez noted that no sector would be excluded a priori.
(Comment: We would expect agricultural products to lead the
list of goods not included under the FTA. End Comment.)
Portero-Sanchez said that the EU wanted maximum
liberalization immediately upon signing the agreement, but
will be open to transition periods for lowered tariffs,
likely of up to five years, on particularly sensitive
goods. Olga Shumylo, responsible for FTA negotiations
within Deputy Prime Minister Hryhoriy Nemyrya's office,
told Econoff on August 27 that the EU had already agreed to
allow transition periods for reductions of some Ukrainian
import tariffs.

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5. (U) Although lowered tariffs will perhaps be the most
visible element of the FTA, there is also widespread
agreement that it must be a "deep" FTA (or "FTA Plus"),
that is, an agreement that not only lowers tariffs but also
reduces a myriad of non-tariff barriers. In the words of
an official EU Commission statement, "the FTA will build on
the liberalisation undertaken as part of WTO membership and
work towards 'deep convergence' - not just cutting tariffs
but addressing red tape for exporters by aiming for similar
regulatory standards and norms in both economies."

6. (SBU) Deputy Minister of Economy Valeriy Pyatnytskiy,
who was Ukraine's lead trade negotiator for much of the WTO
accession process and is continuing in that role for the
FTA negotiations, noted to Econoffs in July that talks with
the EU would not be "normal" negotiations. Instead, the
vast majority of issues would require Ukraine to bring its
domestic practices into alignment with EU rules. Ukraine
would have little room to negotiate, said Pyatnytskiy.

Battling Ukraine's Oppressive Bureaucracy

7. (SBU) As we saw with Ukraine's tortuous 14-year WTO
accession process, the greatest obstacles to concluding an
FTA will likely be reform of Ukrainian institutions and
elimination of non-tariff barriers. Portero-Sanchez
identified the following areas as priorities for the EU:
reform of Customs procedures; elimination of technical
barriers to trade (TBT), especially modernizing standards
and testing procedures; reform of sanitary and
phytosanitary (SPS) measures; improved enforcement of
intellectual property rights; and fairness in government
procurement. Portero-Sanchez recognized that the GOU would
likely seek concessions on the free movement of people
(i.e. visa-free travel to the EU for Ukrainians), but he
said the EU would resist any significant movement in this
area and did not want the FTA to become a migration
agreement. Portero-Sanchez also noted that EU negotiators
would seek some commitments from Ukraine on trade-related
aspects in the energy sector -- primarily energy transit --
as they did during WTO accession.

8. (SBU) Pyatnytskiy argued that, while the agreement
should benefit Ukraine's economy overall, some industries
would suffer. He specifically pointed to the environmental
chapter of the FTA as one that would involve real costs for
Ukrainian industry and said a detailed cost/benefit
analysis was still needed. Shumylo said the GOU would seek
to avoid signing up for much of the environment chapter of
the EU acquis communautaire.

9. (SBU) Vyacheslav Tsymbal, a member of Ukraine's
negotiating team at the Ministry of Economy, told Econoff
on August 21 that he expected the chapter on government
procurement to be particularly difficult to negotiate.
Ukraine's government procurement process was still very
chaotic (ref D), said Tsymbal, and reform to meet EU
standards would likely prove difficult. Elena Scherbakova,
who takes the lead on FTA negotiations at the State
Department of Intellectual Property, Ukraine's IPR
coordinating body, told Econoff on September 11 that she
expected geographical indications (GIs) to be another major
sticking point.

Setting the Stage for EU Accession?

10. (SBU) Supporters of Ukraine's European integration
ambitions look to the FTA as a step towards eventual EU
accession. Pyatnytskiy commented that he believed the FTA
was being used as a kind of pre-accession instrument for
Ukraine, given that "enlargement fatigue" among EU members
currently prevented any more formal steps toward accession.
The FTA would be a tool to push significant changes within
Ukraine and prepare the country for EU membership, said

11. (U) Former Polish President Aleksandr Kwasniewski has

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been among the most visible outside supporters of the FTA,
visiting Kyiv several times to push the idea and identify
it as a key step to EU accession for Ukraine.

GOU Enthusiastic, Party of Regions Less So

12. (SBU) Prime Minister Yulia Tymoshenko and President
Victor Yushchenko have made several public statements
strongly supporting the FTA negotiations. Deputy Prime
Minister Hryhoriy Nemyrya has taken the role of main
advocate and coordinator of the FTA within the government.
Shumylo told Econoff that DPM Nemyrya was forced to abandon
plans to create a separate European Integration Agency in
the face of strong resistance from several Ministries, but
instead established a bureau under his leadership within
the Cabinet of Ministers to coordinate the government's
European integration policy. (Comment: Establishing a
coordinator at the DPM level should help overcome
bureaucratic resistance within the GOU to some elements of
the FTA, and marks an improvement from WTO accession
negotiations. End Comment.)

13. (U) Shumylo also told Econoff that the GOU was actively
preparing an analysis of specific areas where Ukraine
needed help in negotiating/implementing an FTA, and trying
to identify potential donors. The World Bank and the
Swedish aid agency SIDA already expressed a willingness to
provide some technical assistance, said Shumylo, and the
GOU would welcome any potential U.S. assistance.

14. (U) Iryna Akimova, Shadow Minister of Economy while the
Party of Regions has been in opposition, made clear at a
public forum in April that her party supported the FTA and
European integration process. But Akimova also used the
issue to criticize what she called the government's
"populism," arguing that an FTA could not and should not be
finalized until necessary domestic reforms were made, a
task that Regions did not find the Tymoshenko government up
to. Akimova also made some ambiguous comments on the need
for "preconditions" for an FTA, such as macroeconomic
stability (an attack on the government over inflation), a
balanced budget (an attack on the government's social
spending), and improvements in the investment climate (an
attack on the government's tax policies), thereby softening
Regions' support for an FTA. (Comment: It is not clear how
GOU policy might change if Regions were to join
Tymoshenko's bloc to form a new ruling coalition (ref A).
End Comment.)

Support Among Ukrainian Businesses?

15. (U) The Yalta European Strategy (YES), a think thank
founded by steel and pipe oligarch Victor Pinchuk, has held
a series of public events meant to garner support for the
FTA, and for European integration more broadly. Another
Ukrainian think tank, the International Centre for Policy
Studies (ICPS), has reported that Ukrainian businesses
participating in public forums organized throughout the
country are largely supportive of an FTA, citing greater
market access in the EU as the primary reason. A common
concern among businesses, however, was how an EU FTA would
affect trade with Russia.

16. (U) Shumylo noted that a few large Ukrainian companies,
usually major exporters poised to benefit from improved
access to EU markets, have already come out in favor of the
FTA. For example, Jock Mendoza-Wilson, Director of
International and Investor Relations for System Capital
Management (SCM), the major financial and industrial group
owned by super oligarch Rinat Akhmetov, told Econoff in May
that SCM intended to be active in and supportive of the FTA
negotiations. SCM was anxious to secure more favorable
market access in the EU for its steel exports and viewed
deeper integration with Europe as positive for its business
plans, as SCM had already acquired a number of large assets
in EU countries. Mendoza-Wilson also said that SCM hoped
to use the FTA to tap into the EU's internal carbon trading

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system. (Note: He was likely referring specifically to the
EU's Greenhouse Gas Emission Trading Scheme (EU ETS). End

17. (SBU) Shumylo commented, however, that there was a real
lack of understanding of the FTA process among smaller
businesses. The GOU needed to significantly step up its
information campaign, said Shumylo, and planned to ramp up
consultations with businesses ahead of the next round of
FTA negotiations.

Comment: A U.S. Foreign Policy Priority

18. (SBU) The conclusion of an EU-Ukraine FTA is strongly
in the national interest of the United States. The FTA
should serve to improve Ukraine's investment climate,
having a positive impact on our bilateral trade and
investment relationship. And, most importantly, even
though the economic impact on the U.S. economy is likely to
be negligible, an EU-Ukraine FTA will be a further step
towards integrating Ukraine into Euro-Atlantic
institutions. An FTA will help increase economic ties
between the EU and Ukraine -- the EU currently accounts for
about 30% of Ukraine's total trade, compared to 39% for the
CIS and 24% for Russia alone -- and, more critically, force
Ukraine to begin meeting EU accession requirements in
earnest. The failure of FTA negotiations would cast doubt
on Ukraine's future within Europe and could push Ukraine to
look eastward in further developing economic ties.

19. (SBU) Although we are not a party to this agreement,
the United States should look for every appropriate
opportunity to support the EU-Ukraine FTA negotiations.
Our support could come in the form of public statements or
behind-the-scenes pressure on one or both sides should
negotiations stall. We should also consider providing
advice or technical assistance to help Ukraine expand its
trade negotiation capabilities and its ability to implement
trade agreement commitments. Such technical assistance
could be modeled after that used successfully during WTO
accession, when we provided expert advisers to the GOU.
U.S. technical assistance would not involve actual
negotiation but would help guide the GOU on how to reform
domestic institutions and policies in line with EU
requirements. We would want to coordinate with the World
Bank and other donors working in this area. Post also
requests that the EU-Ukraine FTA remain on the list of
issues we raise in our regular dialogue with the EU. End


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