Source: Russie.NEI.Reports

After serious decline in the 1990s, Ukraine’s economy finally began a process of recovery and systemic reform in the early 2000s. However, while the economy rapidly grew by 2008, its transformation remains unfinished. The current government’s agenda is being driven by the interests of a small group of people. This, along with the electoral cycle, makes the administration disinclined to implement painful and long-awaited structural reforms. The economic crisis of 2008 to 2009 put Ukraine’s only semi-transformed economic model in question. The closed nature of Ukraine’s economy and high dependence on low value-added exports are an unsustainable basis for economic growth. To return to double-digit gross domestic product growth and put the economy on a path of sustainable development, the country has to seek external resources and become more open. However, Ukraine’s poor international ranking, lack of substantial natural resources, and rent-seeking economy do not make it an attractive destination for foreign direct investment.

Ukraine is now at a crossroads. There are three possible roads to take. The first, and least probable, is to stay on its own and continue “business as usual,” i.e. to retain a relatively closed economy controlled by a small group of businessmen, with little competition and limited economic freedom. The second, and currently most feasible, is to sign an Association Agreement (AA) with the EU that includes a Deep and Comprehensive Free Trade Agreement (DCFTA). Negotiations with the EU are now finalized, with the agreement finally initialed at the end of March 2012—not without controversy. However, further steps, such as the signing and ratification of the agreement depend solely on the Ukrainian side. The third, and most controversial choice, is to join the Customs Union with Russia, Belarus, and Kazakhstan and embark on further Moscow-led integration projects.

Ukraine’s choice will not only affect trade flows with its two neighbors. It will also indicate the speed and direction of structural reforms, or lack thereof. Ukraine’s choice will also have an impact on the EU and Russia. Ukraine is a key country within the EU’s Eastern Partnership initiative (EaP). It is first of all the largest country in the EaP region, with a population of forty-six million. It is also the country that initially had the largest number of supporters among the EU member states. Ukraine was the first country to be offered deep economic integration and political association with the EU. Within the Partnership, the EU invested considerable political capital on Ukraine and the EU-Ukraine AA/DCFTA will serve as a model for relations with other EaP countries.

For Russia, striving to rebuild a closely linked economic area within the post-Soviet space, Ukraine plays a key role. Without Ukraine, the post-Soviet space’s second largest economy, the Customs Union and further integration projects may be unsustainable in the long-term.

Over the past months, Ukraine’s leadership has repeatedly confirmed the country’s interest in signing and ratifying the Association Agreement with the EU. Meanwhile, Russia’s invitation to join the Customs Union has been consistently, but politely, declined. However, many Western and Russian observers still question the irreversibility and credibility of this decision. Membership in the Customs Union may bring cheap Russian gas that Kyiv is in dire need of. Ukrainian officials also keep making references to the Customs Union both in public debates and private conversations with EU officials.

Which path to take has yet to be decided, however. When the time comes, it will be made by President Yanukovych alone. Unfortunately for Ukraine, it will not be made based on expertise and calculations of the national interest; rather, it will be informed by the interests of the president and his entourage.

This paper was presented at a conference organized by Ifri in the framework of the Eurasian Trade Task Force (ETTF), 17 October 2011. The ETTF addresses the different commercial and economic integration projects in Eurasia and their impact on domestic and foreign policies of the states concerned.

This article was originally published in Russie.NEI.Reports.