It is hard to understand the Ukrainian elite’s insistence on having a free-trade agreement with the EU, which accounts for only one-fourth of Ukraine’s total exports.

       On June 27 Ukraine and the EU signed the association agreement. The estimate made by Ukrainian Union of Industrialists and Entrepreneurs that "it would take about 10 years and 170-180 billion euros of direct investment to adapt to the conditions of Ukraine's associate membership", looks quite realistic. The need for investment in infrastructure is particularly important. But the country has to be ready to absorb such an amount of investment, and we have strong doubts about its current ability to do so. The Ukrainian financial system must be completely revamped. The public governance structures as well as the governance of private enterprises need to be dramatically improved. This can undoubtedly be done, but there is a cost to doing so. Moreover, Ukraine has to improve its labor productivity, which would involve heavy investment and also some reform in enterprise management. In the end, Ukraine could become competitive enough to be part of the free-trade zone with the EU, but this would require considerable efforts.

       At present, Ukraine is mostly trading with three blocs of countries: the CIS, Europe (including Norway, which is not an EU member) and Asia. In the last year, when the economy held steady, or in 2012, the percentage of Ukrainian exports to the CIS was 37.7%, to the EU – 25.1% and to Asia – 25.4%. From these figures, we can see that the CIS (and mostly Russia) gets the lion’s share of Ukrainian exports and that Europe and Asia are in a roughly similar situation.

       Then, from a purely economic point of view, it is hard to understand the Ukrainian elite’s insistence on having a free-trade agreement with the EU, which accounts for only one-fourth of Ukraine’s total exports.

       Of course, the best option for Ukraine is to have it both ways and to develop free-trade agreement with both the EU and the CIS. But then, there is a strong risk of rebranding EU products as “Ukrainian” for the Eurasian integration zone. On this point, Russia's fears that an influx of cheap European goods under the guise of Ukrainian products will enter the Customs Union after trade barriers are quite real. Now, we also have to consider other Eurasian countries. Their own interests could be quite different, but their trade with Ukraine is also pretty limited, at least officially (there is quite strong unrecorded trade with Belarus). In the end, I think that Russia will prevail on this point.

       As of now, part of the bilateral trade between Russia and Ukraine, excluding energy, is intra-industry trade. The main issue is how Russian producers will react. They have used Ukrainian imports to lower costs because labor costs and wages have risen much more in Russia than in Ukraine. It is true, too, that labor productivity has increased much faster in Russia than in Ukraine since 2004.

       Nevertheless, for some very basic products, Ukraine had a price advantage in 2012. But with the ruble depreciation since January 2014, it is possible that this kind of delocalization will no longer be needed. However, this implies a strong reduction of trade. Actually, Ukrainian exports to Russia and the CIS have increased tremendously since 2008. A strong drop here would be extremely harmful for Ukraine.

       On the prospects for Ukraine’s membership in the EU. Unfortunately, the Ukrainian elite has been toying with the idea of EU membership when it has been clear from the beginning that such membership would not happen for at least 10 years or probably more like 20, if ever. All the leaders of the EU – Mr. Barroso, and also Mrs. Merkel and Mr. Hollande – have repeatedly said that the EU could not integrate Ukraine for several years. The main reason is first, such a membership requires considerable funding from the EU at a time when the EU budget is shrinking and second, this membership involves a redistribution of funds through the EU, something that would be opposed by countries now benefitting from structural funds like Poland, Romania, Bulgaria, Hungary and Slovakia.

       Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.