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Cablegate: Eu-Ukraine Fta: Still a Ways Off

VZCZCXRO6094
RR RUEHIK
DE RUEHKV #1834/01 2941458
ZNR UUUUU ZZH
R 211458Z OCT 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8633
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHEHAAA/NSC WASHDC
RUEHRC/USDA FAS WASHDC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/USDA WASHDC

UNCLAS SECTION 01 OF 05 KYIV 001834

SENSITIVE
SIPDIS

STATE FOR EUR/UMB AND EEB
USTR FOR PAUL BURKHEAD
DOC FOR ITA/USCS/OIO/EUR/RMILLER/MCOSTA
AND
ITA/MAC/EEUR/JBROUGHER/CLUCYK

E.O. 12958: N/A
TAGS: ETRD EAGR PREL USTR UP
SUBJECT: EU-UKRAINE FTA: STILL A WAYS OFF

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SENSITIVE BUT UNCLASSIFIED

1. (U) Summary. President Yuschenko's recent statements
indicating that the EU and Ukraine could complete
negotiations on a Free Trade Agreement (FTA) in the next few
months are at odds with the assessments of both the EU and
Ukrainian negotiators. Furthermore, the president's
suggestion that Ukraine could sign an Association Agreement
with the EU in advance of finalizing details of an FTA seem
unrealistic, and contrary to stated EU positions.
Nonetheless, Ukraine is pushing ahead, with its new Foreign
Minister in the lead, looking to make as much progress as
possible by the end of the year to bind Ukraine closer to the
European Union. This cable reports on the FTA negotiations
and specific problem areas in the negotiations. End Summary.

----------
Background
----------

2. (U) In an effort to further integrate Ukraine into the
economic networks of Europe, the European Union (EU) is
negotiating a Free Trade Agreement (FTA) with Ukraine. This
is the most ambitious trade agreement the EU has ever entered
into with a non-member state, going beyond the system of
preferences worked out with other non-member trading
partners. The FTA envisions a harmonization of Ukraine,s
trade laws, product safety standards, and inspection regime
with those of the EU, as well as the elimination of all
defensive trade barriers. The creation of the FTA will not
be an easily realized goal. The negotiations are already
behind schedule, and Ukraine lacks the funds to implement the
full range of changes required by EU trade laws and safety
regulations. Moreover, GOU negotiators have doubts that a
truly unrestricted trade agreement would have enough
political support to be ratified.

3. (U) Further political and economic integration of Ukraine
and the European Union is a priority for President Yuschenko,
and he regards the signing of a Free Trade Agreement with the
EU as a fundamental step towards that goal. To get a better
picture of the progress being made towards adoption of an
EU-Ukraine FTA, Emboffs spoke with Valeriy Piatnytskiy, First
Deputy Minister of Economy and European Integration at the
Ministry of Economy, Pavlo Klimkin, Director of the EU
Department at the Ministry of Foreign Affairs, and Ulrike
Hauer, Head of the Trade and Economic Section of the
Delegation of the European Commission to Ukraine.

--------
Timeline
--------

4. (SBU) The original target date for the signing of the FTA
was December 2009, but this has slipped to mid-2010. Deputy
Piatnytskiy stated that his focus was on getting an agreement
that could be ratified by the Verkhovna Rada, Ukraine's
parliament, even if that meant taking additional time. He
did not expect completion by the end of the year. Director
Klimkin said that the timeline is up in the air, due to the
difficulties in working out conceptual differences. He
stated that the Verkhovna Rada is not ready to give
concessions in key areas. From the EU viewpoint, however, if
the GOU cannot come to agreement on the FTA by a mid-2010
deadline, then Ukraine,s seriousness about its intentions
will come into question.

5. (U) On October 13th, President Yuschenko restated his
hopes that Ukraine would conclude an Association Agreement
with the European Union by December 2009, in time for the
Ukraine-EU Summit. Possibly recognizing the difficulties of
concluding an FTA with the EU in such a short time frame,
President Yuschenko further stated that the Ukraine-EU FTA
negotiations should be completed a few months later,
effectively splitting the two. However, the EU's longstanding
policy position is that the FTA is an integral part of the
Association Agreement and a pre-requisite to the Association
Agreement. Media reports indicated that the Ministry of
Foreign Affairs was taken by surprise by Yuschenko,s
announcement of a December target date for signing of the

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Association Agreement. Some speculated that this may be a
move by Yuschenko to discredit the new Foreign Minister,
Pyotr Poroshenko, purportedly a current ally of Prime
Minister Tymoshenko (despite earlier close ties to
Yuschenko), by giving him an impossible deadline.

-----
Scope
-----

6. (U) Representatives of the GOU see the FTA as a means to
remove barriers to the free movement of goods, services,
capital, investment and persons between Ukraine and the EU.
For its part, the EU is focusing on the elimination of
defensive trade measures and bringing Ukrainian product
safety standards up to EU levels.

-----------------
Expected Benefits
-----------------

7. (U) In an ideal world, the EU would expect to: gain broad
market access to Ukraine; eliminate excessive business
registration requirements for EU members doing business in
Ukraine; ensure that EU members operating in Ukraine have the
protection of a transparent legal system; and gain
competitive access to the GOU's public procurement market.
While these goals will be negotiated into the treaty,
interlocutors all note that full implementation will be a
long-term project.

8. (U) For its part, Ukraine views the FTA as a means to
develop its economy by gaining access to European markets,
but also by forcing upgrades to its business environment,
which will eventually allow for increasing foreign
investment. The main objective of Ukrainian agribusinesses
is to get into the supply chains of the major European
supermarkets. In the short term, Ukraine foresees benefits
for specific product exports, such as grain, sunflower oil,
and poultry, which command higher prices on the EU markets
than domestically.

9. (SBU) Post notes, however, that increased exports in the
specified categories are unlikely to result from an FTA.
Ukraine,s sunflower oil is already exported to the EU in
large quantities without an FTA, and it has little
competition due to GOU-imposed price controls that make it
artificially undervalued. The same is true for grain, which
is also heavily traded to the EU without an FTA. Meat is a
different story. Ukraine,s poultry industry failed an EU
inspection earlier this year, and without substantial
improvements, Ukraine would not be able to export to the EU
even under an FTA. The beef industry is presently being
inspected, but given dwindling herd sizes and Ukraine,s
present status as a beef importer, it is difficult to
envision Ukrainian meat reaching EU markets in significant
quantities until production levels increase substantially.

------------------
Negotiation Points
------------------

10. (U) The EU seeks to secure equal access to compete for
GOU contracts. However, GOU representatives believe the Rada
would not ratify the FTA if it included strong government
procurement provisions, which would threaten entrenched
interests.
11. (U) The EU's environmental protection regime is far more
stringent than Ukraine's, and GOU representatives state that
harmonizing Ukraine's legal code and enforcement capabilities
will place a severe fiscal burden on the budget, making this
an area of difficulty in the negotiations. Interlocutors
note the need to train inspectors and business interests, for
example, as a major undertaking that has not yet begun.

12. (U) The EU is inclined to push Ukraine as far as possible
on the issue of intellectual property rights protection, and
wants to harmonize Ukrainian law with EU legislation. The EU
considers the negotiations to be at an advanced stage, though
the GOU indicates that there are still technical difficulties

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to be worked out, mostly concerning the effort to bring
Ukraine,s legal code and IPR enforcement regime into
alignment with EU standards.

13. (U) As part of the FTA, the EU wants geographical
indicators held by EU members to be respected by Ukrainian
manufacturers. This may negatively impact several Ukrainian
wineries by denying them the right to make certain types of
wine claimed as the exclusive property of EU member-state
wine-making districts. Klimkin, for example, pointed out
that every Ukrainian household pops a bottle of &Soviet
Champagne8 on New Year,s Eve. This is also seen as a
difficulty by the GOU because there are very few
internationally recognized Ukrainian products with
geographical indicators.

14. (SBU) Implementation of EU-style Sanitary and
Phyto-Sanitary (SPS) regulations will be difficult for the
GOU. The GOU recognizes that it needs to make changes to
conform to EU standards, but the funds required to do so are
lacking. Director Klimkin estimates that to implement all
SPS requirements in the more than two thousand EU laws and
regulations that touch on SPS would cost Ukraine EUR 1
billion (USD 1.467 billion), based on the costs borne by
Poland when they joined the EU as a full member. Bringing
the inspection regime up to European standards would require
training thousands of personnel, establishing testing
laboratories in every village, and restructuring the whole
system of veterinary control of food products. Overlapping
authorities of various control agencies will need to be
rectified. For example, the State Standards Committee is not
a regulatory body, but it duplicates the regulatory functions
of other government food control agencies. Before
undertaking the effort to reform and upgrade their SPS
system, the GOU wants guarantees of market access, clear
guidance from the EU on what needs to be done, and assistance
from the EU on making the reforms.

15. (SBU) EU representatives view the SPS negotiations as one
of the more difficult sections of the FTA. Conformity in
standards is the goal ) bringing Ukrainian safety standards
up to EU levels. The EU has developed a number of analytical
tools for use in this field, but the GOU complains that they
lack the funds to make use of these instruments.

16. (SBU) A recent letter written from the European
Commission to Economic Minister of Ukraine Danylyshyn warns
Ukraine that current commitments on trade are already being
ignored. The text of the letter admonishes the Ministry and
expresses the opinion that Ukraine,s Veterinary Service
Order 149, a meat and animal products measure notified to the
WTO, but not yet in force, contradicts provisions already
accepted in the SPS chapter of the FTA. In the letter, the
Minister is advised that Ukraine,s adoption of such a
measure would send a clear signal that Ukraine is unwilling
to comply with its commitments.

17. (U) The EU would like to eliminate all defensive trade
measures as part of the FTA. Since becoming a member of the
WTO, Ukraine has submitted notification of 17 measures that
qualify as technical barriers to trade (regulations and
certification requirements for goods that serve as effective
barriers to market entry).

18. (U) Ukraine would like to align itself with the
Euro-Mediterranean approach on the Rules of Origin issue,
which holds that only products that contain 80% or more of
components originating in Ukraine will benefit for the FTA,
restricting third-party countries from using Ukraine as a
conduit into the EU market.

19. (U) As part of the FTA negotiations, the GOU expects to
obtain EU cooperation in upgrading its energy and
transportation infrastructure to facilitate the movement of
freight and fuel between the two parties.

20. (SBU) GOU representatives told Emboffs that the current
EU agriculture proposal is not acceptable for Ukraine, as
Ukraine,s export opportunities to EU member states would
still be governed by quotas similar to those on neighboring

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Belarus. The GOU wants its agribusinesses to export meat,
poultry and eggs to the EU without restriction, or at least
with higher quotas than non-FTA members.
21. (U) The EU and GOU are just beginning their negotiations
on tariff reduction. Their eventual goal is to reduce all
tariffs on trade goods to zero. One part of the negotiations
will involve determining a schedule for the gradual
elimination of the tariffs. The presence of government
subsidies makes this process more complicated, due to the
need to add counterbalancing surcharges.

22. (U) Details also remain to be worked out on how to
monitor implementation and settle disputes under the Free
Trade Agreement.

-----------------------
EU Technical Assistance
-----------------------

23. (SBU) Director Klimkin told Emboffs that the current
level of technical assistance being provided by the European
Union is not enough, and that for proper implementation of
the FTA, it will need to be increased five or six times, to
the same level of sustainable assistance received by the
Baltic states. He stated that future assistance from the EU
should be revised to be more effective and better
coordinated. At present, technical assistance is provided on
an ad hoc basis by individual EU members, and, while the GOU
appreciates the efforts, Klimkin feels that EU technical
assistance would be more effective if EU member-states pooled
their money and coordinated their programs through a central
agency.

24. (U) The EU has 60 people in Ukraine working on technical
assistance in support of the FTA. They are working with the
GOU to harmonize Ukraine,s regulations with those of the EU
in the areas of technical standards, food safety, trade
barriers, competition policy, and intellectual property
rights.

--------------------------
Barriers to Implementation
--------------------------

25. (SBU) Administratively, implementation of an
EU-harmonized safety inspection regime would require close
coordination between the Ministry of Health, Ministry of
Agrarian Policy, the State Veterinary Service of Ukraine and
other ministries. This presents a problem for the GOU,
according to Klimkin, as its bureaucracy is only slightly
upgraded from the legacy structure it inherited from the
Soviet Union.
26. (U) As a precondition for access to the markets of the
European Union via the Free Trade Agreement, Ukraine,s
parliament would have to enact a large number of reforms.
Given the sharp divides in Ukraine,s legislative assembly,
passage of all required laws in a timely fashion will be a
considerable challenge.

27. (SBU) Klimkin sees enforcement of EU-level regulations in
Ukraine as a big problem. Not only does the GOU have to pass
new laws, but judges and law enforcement agencies must
enforce them at all levels. The GOU will need to take steps
to ensure that the decisions made by Ukrainian courts are
based on EU legislation ) not just European Council
directives but edicts of the EU Court of Justice as well.
This has the potential to cause constitutional problems in
the area of jurisdiction. Klimkin says that he hopes to make
use of the EU,s judicial training programs to aid Ukraine,s
judges in making proper decisions.

-------------------------------
Effect on Relations with Russia
-------------------------------

28. (SBU) Klimkin told Emboffs that the FTA with the EU will
not impact Ukraine,s political relationship with Russia,
which is presently governed by systematic points of conflict.
Ukraine,s economic relationship with Russia remains strong,
and there may be future joint projects towards further

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integration, depending on the outcome of Russia,s efforts to
create a single economic space in the region. He added that
diversification in trading partners is a good thing for
Ukraine, and that the FTA is likely to divert Ukrainian trade
from Russia to the EU, and attract more EU investors to
Ukrainian opportunities, displacing Russians seeking
acquisitions.

----------------
Public Sentiment
----------------

29. (SBU) Klimkin says that the Free Trade Agreement is not a
high profile issue for Ukraine at present. The man on the
street wants a visa, but doesn,t particularly care about
trade with the EU. Ukraine,s business community is aware of
the FTA and supports its implementation. Despite requiring
significant political decision-making, the FTA has not
received much attention from Ukraine,s political leaders.
Klimkin opined that this was a good thing, since the
negotiations could become much more difficult if the FTA were
to become an issue in the presidential campaign.

30. (SBU) From the EU,s point of view, the low profile of
the FTA in Ukraine is a problem. When the time comes to
actually implement the political reforms mandated by the
agreement, there will need to be a high level of public
support for their enactment. This may prove to be an
insurmountable problem for the GOU.

-------
Comment
-------

31. (SBU) Comment. While the FTA would be of immense benefit
to Ukraine in the long term, it is still unclear whether the
GOU will be able to muster the political will to implement
the necessary upgrades to their infrastructure and reforms to
their economic system. The EU is willing to provide some
financial support and technical assistance, but their
patience appears to be waning. If the GOU doesn,t make
measurable progress in the near future, the prospects for the
signing of the FTA may be in doubt. End comment.
PETTIT

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