“The agreement is absolutely not on parity”: how Ukrainian industry is developing in the framework of association with the EU

Ukrainian companies may lose access to loans from the European Investment Bank and other international financial organizations if Kiev accepts the amendments to the Law on Procurements introduced in the Parliament aimed at developing and modernizing the industry.

This is stated in a letter from the head of the EU Delegation to Ukraine, Matti Maasikas, to Prime Minister Denis Shmygal and Verkhovna Rada Chairman Dmitry Razumkov, the text of which was published by the Ukrainian publication Our Pennies.

The letter notes that the European Union notes the registration of the bill in the Ukrainian parliament “with significant concern”, as the document introduces localization requirements for a significant list of industrial goods and vehicles for a period of 10 years.

"Serious Concern" of Brussels

Innovations, if adopted, will violate the terms of the agreement of Ukraine with the WTO, as well as the association agreement with the EU. Such a step by the Ukrainian side will undermine the principles of non-discrimination and deprive foreign products of the opportunity to participate in procurement, the representative of the European Union said.

At the same time, the authors of the draft amendments published in the media, among one of the reasons for the fall of Ukrainian industry, called "a general increase in protectionist sentiment and trends in world trade while maintaining liberal access to the domestic market for foreign products in Ukraine." Together with the loss of the Russian market and other factors, this led to "deep stagnation" of the Ukrainian industrial sector.

• Airbus H225s
• © airbus.com

According to the authors of the document, today the share of imports in public procurement of industrial goods in Ukraine reaches 50%, on average, for all public procurements this figure is 38%, while in the USA and the EU the share of imports does not exceed 4-5%.

An example is a contract to supply Ukraine with 110 Airbus helicopters with a total value of more than $ 1 billion, as well as a contract without a tender for the purchase of Hyundai electric trains in the amount of $ 307 million.

“Each such public procurement is another blow to the development potential of industry and the entire economy,” the authors of the explanatory note to the bill emphasize.

As a result, the high-tech sectors of the Ukrainian processing industry are reducing economic activity, and growth is observed only in the low-productive agricultural field.

The second document that provoked the indignation of Brussels is the draft resolution of the Cabinet of Ministers of Ukraine entitled "Some issues of the implementation of a pilot project for the procurement of machinery of the engineering industry with a confirmed degree of localization of production."

According to the government’s plan, localization of production will be introduced into the list of mandatory criteria for evaluating the tender offer.

In the event that, in addition to cost and life cycle, this criterion is mainly evaluated, the level of localization should be 30%. If other criteria are evaluated, the requirements for the degree of localization can be reduced to 15%

“Having read the text of the project, I would like to express our serious concern about its compatibility with Ukraine’s public procurement obligations under the Ukraine-EU Association Agreement and the WTO Public Procurement Agreement,” said Matti Maasikasa in a letter to the Ukrainian authorities, the text of which lead the media.

The diplomat draws attention to the fact that over the past few years Ukraine has "actively and with significant results" reformed its public procurement system. But the introduction of “discriminatory” measures will cast doubt on these achievements, Matti Maasikas is sure.

“It's too late to change something”

Recall that the economic part of the Association Agreement between Ukraine and the EU was signed in June 2014, a few months after the Euromaidan and the coup in Ukraine.

Moreover, negotiations on the conditions of the association were conducted from 2007 to 2011. Initially, it was assumed that between Ukraine and the EU a free trade zone would be created. In 2012, the parties initialed the document, and in November 2013, the Association Agreement with the EU was to be signed, however, this event was postponed at the initiative of the Ukrainian side.

Explaining his decision, Viktor Yanukovych, who was then president of Ukraine, explained that he was ready to return to the issue of association when the Ukrainian economy was ready for this.

• The action of supporters of European integration in Kiev, 2013
• RIA News
• © Petr Zadorozhny

“We will do everything to make Ukraine economically stronger, stronger, do everything so that we live better from year to year, so that the country is competitive. As soon as we reach a level that will be comfortable for us, and when it meets our interests, when we agree on normal conditions, then we will talk about signing, ”the Ukrainian leader said then.

It was Viktor Yanukovych’s refusal that caused mass protests, which over the course of several months turned into riots and culminated in a coup and a change of power in the country.

However, in practice, trade cooperation with the EU was not as profitable as the supporters of European integration imagined.

Although the volume of Ukrainian exports to European countries has indeed grown in recent years, this could not compensate for the damage that was caused as a result of weakening economic ties with Russia.

If in 2013 Ukraine exported goods worth $ 63.3 billion, then in 2018 - already by $ 47.3 billion. Of this volume, the EU accounted for 42.6%, and Russia - only 7.6%. 

At the same time, the European Union is in no hurry to expand the purchase of Ukrainian goods: products are supplied to the European market at fairly strict quotas. 

Ukrainian political scientist and economist Alexander Dudchak is convinced that such consequences for the economy were originally laid down in the conditions of association with the EU.

“All this was clear back in 2013, when the text of the agreement appeared, it became clear that this was a sentence of Ukrainian industry. And now Kiev cannot even support its own mechanical engineering, because it is not beneficial for the EU. Ukraine should become an agrarian country. Zelensky took this inheritance from Poroshenko, now it’s too late to change something, ”Dudchak said in an interview with RT.

As the head of the Ukrainian Center for Political and Economic Analysis, Alexander Kava , explained in an interview with RT , when he signed the association agreement, Ukraine is fullyopened for European manufacturers, while the European market for the republic remained mostly closed.

“I do not think that Ukraine will finally become an agrarian country, but now the government should make every effort to protect producers, primarily in the domestic market. We need to build more pragmatic relations with the EU so that this is not a “one-goal game,” the expert emphasized.

“The government has no argument”

In May 2020, Deputy Prime Minister of Ukraine Vadim Pristayko announced the need to adjust the terms of economic association with the EU.

“We went through the stage of first contacts. Now most of the quotas that have been set do not suit us. We must review the conditions, our manufacturers are waiting for this, ”he said in an interview with Deutsche Welle.

As Alexander Kava reminded, that the agreement with the EU needs correction was clear from the very beginning, Petro Poroshenko spoke about this. However, the European Union rejected such initiatives of Kiev.

“Although it is obvious that the current agreement is absolutely not parity. Unfortunately, in recent years, Ukraine has often made unprofitable steps and concessions without receiving anything in return, ”the expert added.

• Factory in Ukraine
• Reuters
• © Valentyn Ogirenko

At the same time, the implementation of the government’s localization initiative and the adoption of amendments to the Law on Procurement could really help the industry, said RT source in the Ministry of Economy of Ukraine.

“This is the right step, but it is disadvantageous to Europe. Ukraine is a poor country and it is not profitable to place production here because of several tenders in order to comply with the required level of localization. This means that European companies may lose government orders in Ukraine, which often pay for the money that the European Union gives on credit, ”explained the source RT.

At the same time, experts doubt that Kiev will go against Brussels and adopt these regulations.

“The Ukrainian government has no arguments to introduce new rules for public procurement. First, the country will have to explain to the WTO and the EU. Secondly, Europe will simply stop giving loans to Ukraine and this will end the state procurements, ”the RT source in the European Solidarity party believes.

A similar point of view is shared by Alexander Dudchak. In his opinion, Vladimir Zelensky will not be able to oppose the EU.

“He has already been hinted that this should not be done. So it is unlikely that these initiatives will be implemented. Unfortunately, it was necessary to build profitable relations with Brussels earlier. In 2013, Ukraine tried to find such a compromise, sitting down on the "splits" between East and West. Kiev could speak on equal terms with the EU, if it were stronger, which is possible only with cooperation with Russia. So, cutting off its path to the East, Ukraine has regained its position in relations with the West, ”the expert summed up.