Prospects for an upgrade in trade relations with Eastern Partnership countries

At the Vilnius Eastern Partnership (EaP) Summit on 28 and 29 November 2013, the EU hopes to sign an Association Agreement, including a Deep and Comprehensive Free Trade Area (AA-DCFTA) with Ukraine, and initial AA-DCFTAs with Georgia and Moldova. Initialling of a similar agreement with Armenia is however off the table. Trade relations with Azerbaijan and Belarus may be discussed too.

The EU’s hopes of initialling (agreeing on the text of) the AA-DCFTA with Armenia were destroyed on 3 September 2013, when the country’s President Serzh Sargsyan surprisingly announced plans to join a Customs Union (CU) with Russia, Kazakhstan and Belarus. Russia has been putting pressure on Eastern Partnership countries ahead of the EaP Summit in Vilnius to get them to join the CU. So far, Georgia, Moldova, and Ukraine have been able to resist these attempts. Russia is widely seen as the dominant force in the CU, and has plans to develop it into a “Eurasian Union“.

EU Commissioner for the Neighbourhood Policy, Štefan Füle, has said that EaP countries could count on the solidarity of the EU if faced with Russian pressure. CU membership is incompatible with an AA-DCFTA with the EU, because a CU member would lose sovereignty over the areas covered in the trade chapters it had agreed with the EU. This covers technical and sanitary norms, as well as reduced customs tariffs – whereas the CU forces its members to raise tariffs. EaP countries could however, if they enter a DCFTA, cooperate with the CU, “perhaps as observers”.

The Foreign Affairs Council is due to discuss on 21 October 2013 whether Ukraine has met the benchmarks set out in the Council conclusions of 10 December 2012, which would allow the AA-DCFTA to be signed. In particular, Ukraine should free jailed former Prime Minister Yulia Tymoshenko by 18 November, i.e. before the last Foreign Affairs Council meting ahead of the Vilnius Summit.

In summer 2013, Russia started a “trade war” against Ukraine, with verbal threats, temporary increases in customs checks and a ban on imports of certain chocolates. This was despite Ukraine having signed a memorandum on closer cooperation with the Customs Union. After signature and certain procedures on both sides, the DCFTA will be applied provisionally, giving trade advantages to Ukraine. The country is also considering trilateral consultations with the EU and Russia on trade. The head of the Ukrainian Chamber of Commerce and Industry considers the DCFTA to be important for small and medium-sized enterprises, as large corporations already work on the EU market. Adjustment to the EU’s stricter requirements will be hard, but ultimately, Ukrainian products will become more competitive. The country conducts 31% of its trade with the EU and 19.9% with Russia. Its exports are relatively diversified.

President Sargsyan’s move seems to mark the end of Armenia’s balancing act – relying on Russia as a military ally and on the EU as a trade partner. Russia has been supporting Armenia in the Nagorno-Karabakh conflict with Azerbaijan, but recently Russia sold arms to Azerbaijan instead. Füle stressed that the EU would not abandon Armenia and its civil society. Arminfo reports that an alternative to the AA/DCFTA is being prepared. Armenia conducts 27.3% of its trade with the EU, its largest trading partner, and with Russia 21.7%. A DCFTA, projections suggest, would have increased its exports to the EU by around 15%, its imports from the EU by 8%, and its GDP by 2.3%. The textiles and clothing sector in particular would have gained substantially.

Prime Minister Bidzina Ivanishvili recently said that he would also “consider” Russia’s CU, but subsequently gave assurances of Georgia’s European / western orientation. The AA-DCFTA gives Georgia better access to the EU market and leads it towards trade-related reforms, such as hygiene standards for agricultural products, approximating regulations for industrial products, and diversification. Oxford Analytica considers that Georgia still lacks an economic agenda to foster long-term growth, to match the DCFTA. It needs in particular to prepare its wine sector for competition. Georgia could gain 12.5% in exports to the EU, 7.5% in imports, and 4.3% of GDP. The chemicals, rubber and plastics sector stands to profit the most.

Imports of Moldovan wine and brandy were rejected as substandard at Russian borders in September 2013. In response, the Commission announced a proposal to open the internal market completely to Moldovan wine, even before provisional application of the AA-DCFTA, which would be possible from the moment of signature. Despite Russian threats of raising gas prices and complicating efforts to resolve the Transnistria conflict, Moldova appears to be on a firm track to initial and sign the AA. It conducts 53% of its trade with the EU. Moldova mainly exports manufactured articles, machinery and transport equipment, and agricultural goods into the EU.

Azerbaijan mainly exports mineral fuels (99%) to the EU and seems uninterested in political reforms or further trade integration, although the EU is its biggest trading partner (45%). For a DCFTA, it would first have to join the WTO, for which talks are scheduled for early 2014. For the moment, the EU is just negotiating an upgrade of the existing Partnership and Cooperation Agreement with light trade-related provisions. Oxford Analytica nevertheless explains that Azerbaijan, fearing Russian hegemony in the Caucasus, has sought closer relations with the EU and Turkey since the Georgian-Russian war in 2008. The west also relies more on Azerbaijani hydrocarbons than Russia.

Negotiations on an AA have so far been impossible because of the country’s authoritarian regime and its membership of the CU, but not the WTO. Belarusian President Alexander Lukashenka expressed discontent that “they do not want to talk with us at all”.  Belarus might resume its WTO accession process, as Russia would like the entire CU to become an official WTO party. The country is also attempting to improve foreign trade operations. Foreign Minister Vladimir Makei expressed concern about the principle of equality across the EaP and said that the EaP should be made more practical, by enhancing the business dimension and interaction in transport, trade, energy, and border management. Belarus trades more with Russia (47.1%) than with the EU (28.9%).

According to CEPS analysts, DCFTAs with the EU would not prevent EaP countries from concluding a “high-quality” FTA with Russia’s CU. By choosing the CU, Armenia will deprive itself of the possibility of becoming an “open, highly skilled, small economy”. Furthermore, the Commonwealth of Independent States (CIS) free trade agreement already offers an almost fully liberalised market access for goods from most EaP countries.

Latvia’s chief economist notes that Russia, Belarus (and also Azerbaijan) have shown impressive per capita income growth since the 2000s, but have failed to pull Armenia, Georgia, Moldova and Ukraine along. For these countries, the EU thus appears the better trading choice.