Elusive Membership

Economic News

22 Jul 2010
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Now that a new government has been formed and all the vacancies have been filled, the Ukrainian government's immediate agenda looks to be a full one. The privatisation of the giant steel plant Kryvorizhstal is likely to dominate the headlines in upcoming weeks, yet the main government target, analysts say, is likely to be Ukraine's accession to the World Trade Organisation (WTO).

Although Ukraine has been seeking membership of the global trading organisation for over a decade, it continues to be elusive. The announcement on October 17 by Director General of the WTO Pascal Lami that Ukraine had no chance to join the WTO in 2005 is a setback for President Viktor Yushchenko, who was meeting the UK Prime Minister early this week to shore up European support for Ukraine's entry.

The new government was expected to speed up this stalled process following the Orange revolution, as WTO membership is widely seen as a way to reach the ultimate goal of European Union integration.

Indeed, after coming out strongly in favour of the Orange revolution, the EU has insisted on the conclusion of the WTO process before it can start negotiating a free-trade agreement.

Yet as well as representing a stepping stone towards the EU, WTO membership holds other benefits for Ukraine, analysts say. Membership can used as a shield against anti-dumping charges, should help to consolidate economic reforms and improve the business environment.

Unlike EU accession, the WTO process is a lot less demanding of governments in terms of institutional reforms. There are also in theory no universal membership criteria, with each new member negotiating a specific accession protocol.

Nevertheless, the WTO forces members to respect market based rules such as transparency, predictability and non-discrimination. Moreover, analysts say, WTO accession would be something President Viktor Yushchenko could trumpet during the upcoming election campaign, somewhat counterbalancing the failure to get accession talks with the EU. Membership would also improve Ukraine's image in the eyes of many foreign investors, analysts add.

Yet, while the new government has been quite upbeat about its chances of joining the trading organisation this year, most observers are now sceptical about its ability to push the necessary legislation through parliament and complete all the bi-lateral negotiations by year-end.

Parliament has yet to adopt the 14 legal amendments that are necessary to complete the membership qualification process. Further delays are expected in approving these, risking derailment of the accession timetable.

While Ukraine's legislative body, Verkhovna Rada, is poised to consider five bills required for WTO entry, the declaration on October 14 by Viktor Yanukovich that his party would vote against WTO legislation seemed to dash hopes of any political consensus until after the March elections next year.

According to one diplomatic source interviewed by OBG this week, "it is not in the interest of Yanukovich, who opposed Yushchenko in last year's election, to see the government succeed in this area. Moreover, there are genuine business interests stacked against the WTO."

Even before the political crisis, some bills got stuck in parliament, with a number of political factions opposed to opening Ukraine's markets to greater foreign competition in vulnerable areas such as agriculture.

At the moment, farmers, pharmacists, alcohol traders, producers of machinery, chemicals and metallurgists are protected by high import tariffs and have strong lobbying links in the legislative chamber. In particular, sceptics cite the issue of restrictions on exports to the EU of scrap metal and leather materials and on the import of raw sugar as the stickiest points, over which WTO accession could be derailed.

Another thorny issue is trade relations with Russia. Highlighting this, former Minister Serhi Teriokhin has accused the government of delaying the process. Speaking at a press conference in mid-October, Teriokhin criticised the government for the lack of a coherent line on this all-important issue and questioned its decision to synchronise Ukraine's accession with Russia's WTO negotiations.

However, Anotoli Kinakh, the new Secretary of the National Security and Defence Council, defended the government's line when he told the local media in mid-October that "Intensified mutually beneficial co-operation with Russia does not contradict Ukraine's intention to join the WTO before the end of 2005."

Kinakh told the local press that Ukraine and Russia must coordinate their actions and should not impede each other's work while joining the WTO and should try to avoid artificial customs.

The Russian factor, according to analysts, is quite crucial in Ukraine's WTO talks, given that Russia continues to be Ukraine's biggest trading partner, with 18% of exports and 41% if imports last year.

In light of Ukraine's already strained relationship with its significant neighbour, and rising energy prices, analyst say it is import to ensure that the WTO process does not harm this vital trade relationship any further.

Russian policy makers have expressed a concern that a more lenient tariff regime negotiated between Ukraine and other WTO members would result in high volumes of re-imported commodities throughout Ukraine into Russia. Amounting perhaps to $5bn per annum, these re-imports of commodities such as alcohol, timber and metals would jeopardise the creation of a customs union with Russia.

While a recent rapprochement between the Ukrainian Prime Minister Yuriy Yekhanurov and Russian President Vladimir Putin may help to defuse the tension between the two countries, it is clearly not in Russia's interest, observers say, to clear the way for Ukraine's WTO accession, which is ultimately designed to get it closer to the EU.

More importantly, Russia, which is also on the WTO accession track, would ideally like to join before Ukraine to impose its own trade conditions for entering the coveted trade club. Ukraine, analysts say, must at all cost try to avoid this scenario.

As Ukraine started WTO accession much earlier than Russia, it stood a good chance of entering ahead of it - most believed it would enter in 2005. Now the consensus is that time has run out, unless a high level political decision is made on an international level to speed up the accession process. For now, all odds seem to be stacked against it.

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