Generous Neighbours

Economic News

22 Jul 2010
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Last week the European Union announced plans to increase significantly its financial assistance to Ukraine during the next four years. The funds will go toward economic reforms and carrying out the Ukraine-EU Action Plan. Although the funding will certainly help improve Ukraine's infrastructure and facilitate increased energy cooperation between the two parties, the prospects of EU membership remain distant.

Under the new arrangement, the EU will provide Ukraine with €494m (US$647m) in assistance over the next 4 years. The EU has been one of Ukraine's largest supporters since the country's independence in 1991, having allocated almost €2bn in support.

In addition to allocations for border control and infrastructure, the lion's share of the money will be used to address one of the primary concerns in EU-Ukraine relations - energy. Funding will go toward Ukraine's integration into the European energy market, in line with the implementation of the EU-Ukraine memorandum of understanding on energy, development of oil and gas transporting systems, use of renewable energy resources and enhancement of Ukraine's energy efficiency.

In a draft of the "Energy Policy for Europe" published by the European Commission (EC) in January, concerns were expressed over the "progressive concentration of hydrocarbon reserves in a few hands", and that energy should now "become a central part of all external EU relations." The EU is keen to develop further links to alternative fuel suppliers around the Caspian Sea to help reduce the bloc's dependence on Russian imports.

For its part, Ukraine is a significant gas consumer in its own right, and could use EU support in the energy sector, as memories are still vivid of the January 2006 dispute with Russian-owned Gazprom over the price of gas coming into the country from Russia. Ukraine is a key transit country for oil and gas supplies between the EU and Russia.

Talks last week between Ukrainian President Viktor Yushchenko and EC President Jose Manuel Barroso included possible EU-Ukrainian energy projects in particular in the area of alternative deliveries of oil and gas, as well as export deliveries of energy. The two leaders also agreed to hold an EU-Ukraine summit in Kiev in September.

In the past, EU assistance focused on legal and administrative reform, private sector and economic development, as well as security issues such as nuclear safety and landmines.

But interests between the two blocs have evolved alongside the Ukrainian economy, as EU-Ukraine ties are buoyed not only by energy concerns, but also widespread anticipation that Ukraine will join the World Trade Organization (WTO) later this year.

Igor Mityukov, adviser to the Ukrainian prime minister, told attendees at this week's Ukrainian Investment Summit in London that accession to the WTO was this year's priority for the Ukrainian government, and that negotiations with WTO member countries had almost been completed. Many insiders expect an EU-Ukraine Free Trade agreement to follow in the wake of WTO membership.

Among the leadership, there appears to be emerging broader support for this direction. President Yuschenko's pro-European credentials are well known, and opposition leader Yulia Tymoshenko recently undertook a widely publicized visit to the United States, where she emphasized Ukraine's relations with Western institutions and their role in energy security.

Prime Minister Viktor Yanukovich, who has generally taken a more pro-Russian line, and who has on occasion called Yuschenko a "Euro-romantic", visited Germany's chancellor and current head of the EU Presidency, Angela Merkel, last month in Berlin. During his visit, the prime minister surprised many by underlining Ukraine's desire to eventually join the EU.

However, in spite of the commencement of Action Plan negotiations, that prospect is clearly off the table. The EU is struggling to reorganize following several years of massive expansion and there has been reduced appetite among some member states for further growth. Last month Merkel told Yanukovich that EU membership was not likely for the next decade.

In order for this to be a serious proposition, Ukraine must undergo the difficult process of making the necessary reforms even without the promise of EU membership. While it is likely that €494m will go a long way toward achieving this end, the administration is apparently settling in for a long wait.

Yuschenko indicated in a statement on Thursday that he was prepared to scale back his efforts for membership. "Membership in the European Union remains our ultimate goal, but is not an end in itself," he said.

But he added, "We therefore need to focus on the substance of reform and integration and not become pre-occupied with the end point. If we get the substance right, the rest will take care of itself. This will be the basis for a breakthrough in the Ukraine-EU agenda."

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