EU Inks Trade Deal with Ukraine, as Russia Ties Remain under Strain

3 July 2014

EU and Ukrainian leaders completed the signature process for their long-awaited trade deal on Friday, following months of uncertainty in the wake of the ongoing crisis in the Eastern European country. The move – completed on the margins of an EU Council summit in Ypres – comes as Brussels also weighs whether to impose new, harder-hitting sanctions on Moscow in the next few days.

Along with signing the economic part of the EU-Ukraine Association Agreement – which includes a trade deal – the EU signed Association Agreements last week with Georgia and Moldova, also former Soviet states. 

Under the terms of the deal, Ukraine and the EU will eliminate 99.1 and 98.1 percent, respectively, of duties in trade value. All three agreements are set to enter provisionally into force, pending ratification both at the EU Parliament and member state level.

“These are not just any other agreements – but milestones in the history of our relations and for Europe as a whole,” European Council President Herman Van Rompuy said on Friday, following the completion of the signature process.

Ukrainian President Petro Poroshenko, who took office just weeks ago, similarly welcomed the agreements. “Over the last months, Ukraine paid the highest possible price to make her European dreams come true,” he said.

Russia pledges economic response

The 28-member EU’s effort at increasing integration with these Eastern European countries has been at the heart of a diplomatic and economic tug-of-war with Russia, which had been hoping to bring these same countries into a Eurasian Economic Union that it has established with Belarus and Kazakhstan. (See Bridges Weekly, 5 June 2014)

The completion of the signature processes on Friday has led Russia to reiterate past promises to take economic actions to counter the impact of these deals.

“The EU prefers to create new dividing lines, openly drawing in our common neighbours into its zone of political and economic influence without taking into account the interests of Russia,” the country’s Deputy Foreign Minister Vasily Nebezya told Izvestia newspaper.

EU officials, for their part, have continued to stress that these new pacts will not necessarily come at Moscow’s expense, with Van Rompuy saying on Friday that the bloc “stands ready to engage with Russia as much as need be, to dispel misunderstandings where they exist.”

Sanctions to come?

Whether to scale up EU sanctions against Russia was another key question at last week’s meeting of European leaders. The group agreed at the time to hold off on additional sanctions through Monday 30 June, at least, pending the results of a series of demands – such as releasing hostages, a return of three border checkpoints to Ukrainian authorities, and agreement on a verification mechanism for a cease-fire and control of the border.

The Council pledged to assess the situation, and “adopt necessary decisions” as required. While the next meeting of the Council is slated for 16 July, leaders have said that they are willing to meet sooner if needed.

Despite the Monday 30 June deadline, the decision on such sanctions has now been delayed until at least next week, in light of reported advances toward these goals.

The prospect of heavier sanctions against Russia – including those that could target sectors of the Russian economy – would be a notable shift by the EU, which has been wary of undertaking such measures given the close ties its own economy has to Moscow. Russia is the EU’s third largest trading partner, and is one of its top energy suppliers, though the European Commission has noted that trade growth between the two sides has slowed as a result of the crisis.

Brussels and Washington have thus been undertaking technical work to determine how best to develop such measures in a way that does not harm the EU.

However, EU leaders did welcome a recent decision by the Commission to prohibit imports of goods from Crimea and Sevastopol that lack a Ukrainian certificate, in light of the bloc’s move to not recognise Russia’s annexation of those two regions.

WTO disputes proceed

Tensions between Russia and the EU have spilled over into other international forums, with the two sides openly challenging each other at the WTO in recent months over whether each side is complying with its respective international trade commitments.

Russia joined the WTO in August 2012, following nearly two decades of negotiations. The support of the US and EU in the final stages was seen as critical toward getting Russia into the now 160-member body, where all new accessions must be approved by existing members.

In the nearly two years since, however, the EU and US have been among the most vocal critics of Russia’s performance so far as a member of the global trade club. While most of these criticisms have been raised in WTO committee meetings – such as the Council for Trade in Goods and the General Council – some of these have escalated into full-blown trade disputes.

Brussels, to date, has filed three disputes against Moscow. Russia, for its part, has filed two against the EU. While the US has not issued any formal WTO complaints of its own, a recent report submitted to Congress by the Office of the US Trade Representative noted that the US will use “all appropriate means… including, as needed, dispute settlement, to ensure that Russia’s and the [Customs Union/Eurasian Economic Union]’s measures conform to Russia WTO obligations.”

Russia, meanwhile, has raised the possibility of formally challenging some of the sanctions that the US has imposed thus far on certain individuals involved in the Ukraine crisis in the form of visa bans and asset freezes. Last month, Prime Minister Dmitry Medvedev told a St. Petersburg forum that such sanctions were likely in violation of WTO rules, namely those dealing with services trade.

“It remains to be seen whose arguments regarding the legality of the sanctions against Russian companies will prevail at the WTO,” the Russian premier said. “But this will be an opportunity for us to see whether this dispute resolution mechanism is impartial and unbiased.”

A formal dispute on the subject has not yet been filed, however, and whether such a complaint would ultimately be successful has been the subject of debate among trade experts, given the possibility that the US could try to defend such sanctions under a national security exemption provided for in WTO rules.

Separately, sources say that the EU is asking for a dispute panel to hear its April complaint over Russian’s ban on imported live pigs, pork, and pork products from the 28-nation bloc, with a special meeting of the WTO’s Dispute Settlement Body scheduled for 10 July to hear the request. Under the organisation’s rules, Moscow can reject the first panel request, if it chooses to do so; however, should Brussels then re-issue the request, a panel would automatically be established. (See Bridges Weekly, 10 April 2014)

ICTSD reporting; “Russia Warns Ukraine of Higher Tariffs as It Attacks EU Accord,” BLOOMBERG, 1 July 2014; “Ukraine crisis: EU sets deadline for Russia to act,” FINANCIAL TIMES, 27 June 2014; “Russia threatens US with WTO action over Crimea sanctions,” FINANCIAL TIMES, 16 April 2014”EU countries delay Russia sanctions despite ultimatum,” EU OBSERVER, 1 July 2014.

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