September 28, 2007
By Ariel Cohen, Ph.D.
Delivered June 12, 2007
"The heart of Europe is in Ukraine and Europe cannot live without
its heart." These words, spoken by Ukrainian President
Viktor Yushchenko in London in 2005, summarize the relationship
between Ukraine and Europe. Europe and its humanistic
tradition have always been central to Ukrainian
civilization, and Ukraine has been indispensable for Europe.
Again, Yushchenko said it best, during his 2005 inaugural
address, "Our way to the future is the way of a united Europe. We,
along with the people of Europe, belong to one civilization. We
share similar values. Our place is in the European Union. We are no
longer on the edge of Europe. We are situated in the centre of
As the geographical center of Europe, Ukraine has an historic
desire to integrate into the Euro-Atlantic community. Ukraine
was the first post-Soviet state to express the intention of joining
the European Union (EU). Yet not everyone in Ukraine
understands the benefits of such integration. For example,
according to a 2003 survey, of the 93 percent of Ukrainian citizens
who indicated that entering the European Union would be useful for
Ukraine, only half were able to explain what the benefits of such
integration might be.
Integration into the EU
The European Union presents huge market opportunities. Its
450 million consumers together comprise 27 percent of the world's
gross domestic product (GDP). The EU accounts for about 18 percent
of the world's trade in goods, and about 24 percent of its trade in
services. Because of its geographical and cultural proximity,
the EU would be the first market of impact for Ukraine at every
stage of its integration into the Euro-Atlantic community.
Ukraine has already begun to reap the benefits of integration.
Ukraine's total trade with the European Union has steadily grown
since 1998. Following the 2004 enlargement, the EU has become
Ukraine's largest trading partner. In 2005, the EU accounted for
about 32 percent of Ukraine's total trade. In 2005, Ukraine exported
€7.7 billion of goods and services to the 25 countries of the
European Union, and imported €13 billion. By 2006, Ukraine's
total trade with the 27 EU members was €28 billion. These
economic benefits are significant, and they will only grow with
Here is an example of how other Eastern European countries have
integrated into the EU. Chart 1 shows the real GDP, in terms of
cumulative deviations from zero, of Hungary, Poland, and the
Czech Republic, which joined the European Union in 2004. Although
they had been outperforming EU economic growth before
accession, after accession their performance reached much higher
levels. Their integration, by the way, also benefited Ukraine. As a
result of the 2004 enlargement, tariffs on Ukrainian exports
into the EU decreased from 9 percent to 4 percent on average. So
when Central European countries join the Euro-Atlantic community,
Ukraine will benefit from EU integration through two main
mechanisms. First, Ukraine will benefit from joining a single
market. Second, it will benefit from a cohesive customs union.
EU: A Single Market
Let us look at the single-market effect. First, and most
substantially, there are positive trade effects. Abolition of
existing tariffs will reduce final product costs by an estimated 5
percent to 10 percent. This presents a significant advantage.
Lower costs will attract more trade, and the increased trade flow
will more than make up for the loss of domestically captured tariff
revenue, which the government kept for itself in the first
Second, Ukrainian businesses and foreign businesses in Ukraine
will become more efficient and more price competitive. Companies
will be able to choose their workers from a larger and more diverse
workforce, increasing productivity due to economies of scale.
The lowered transaction costs will attract competition into
Ukraine and force Ukrainian firms to improve quality and lower
prices, operating closer to at-cost levels.
Finally, there are economic benefits to having a single business
environment. When manufacturing companies in the 27 EU member
countries produce goods according to the same standards, that means
less red tape, a smaller regulatory burden, and faster consumer
Table 1 shows how other Eastern European countries have gained
from joining the EU single market. These studies estimate
that Eastern European countries have received welfare gains of
anywhere from 3.4 percent to 18.8 percent of GDP.
The latest survey among EU members prior to the 2004 accession
shows that many components of the single market had a positive
effect on business: The elimination of customs documentation
was reported to be the most beneficial (48 percent of respondents
said it had a positive effect on business); followed by the
abolition of border controls (42 percent); the harmonization of
value-added tax procedures for sales within the EU (34 percent);
and the harmonization of European product standards (33 percent).
EU: Customs Effects
If the single market means common regulations, then the Common
Commercial Policy, (CCP), means common defense of those
regulations. The CCP establishes a single set of rules and
regulations, a single tariff against non-EU countries, and a single
set of administrative procedures. This produces further
harmonization, further cost reduction, and a better overall
The impact of Ukrainian integration on Ukrainian-Russian
relations is uncertain. On the one hand, Russia would prefer to
maintain as much control over Ukraine as possible, and therefore
disapproves of any Ukrainian overtures towards the West. On
the other hand, Ukraine may gain a more favorable bargaining
position vis-à-vis Russia if it allies itself more closely
with the West. It will certainly be in the EU's interest to
provide Ukraine with political capital, since Ukraine is the
primary route for Russian gas exports into Europe. Certainly
Russia prefers economic integration, such as Ukraine joining the
EU, over military integration, such as Ukraine joining NATO.
Russian President Vladimir Putin said in 2004 that "Ukraine's
incorporation into the EU would be a more positive factor
than NATO expansion."
Accession to the WTO
Like the Common Commercial Policy of the European Union,
accession to the World Trade Organization (WTO) will bring
protection from unfair and monopolistic competition, including
protection against dumping and against unfair trade barriers such
as those created by cartels. It will also bring the following
economic gains specific to the WTO structure.
Most Favored Nation. First, Ukraine will gain for itself,
and will have to grant others, Most Favored Nation status. This
means Ukraine will abolish all kinds of quantitative restrictions
with its trading partners, specifically with European Union
Customs. Second, import and export procedures will
become easier as Ukraine complies with WTO agreements on customs
valuation, rules of origin, and import licensing. Easier trade
rules mean faster, and ultimately cheaper, transit.
Non-Tariff Barriers. Third, non-tariff barriers will be
removed. These are burdensome technical requirements, sanitary
measures, unnecessary certifications, and more. The economic
impact of non-tariff barriers is always hard to quantify, but these
barriers undoubtedly increase the time and cost of trade and other
National Treatment. Fourth, Ukraine will have to grant
national treatment for commodities and services originating abroad.
This means that any foreign product entering Ukrainian territory
will be treated as though it were a Ukrainian product. This
eliminates any possibility of imposing intra-state (within state)
Quantifying Benefits. Comprehensive research of the
effect of WTO accession--specifically the reduction of import
tariffs, improved access of Ukrainian companies to external
markets, and elimination of subsidies--indicates an increase
in social welfare of 3 percent, and additional GDP growth of 1.9
percent per year. Table 2 shows a summary of empirical
studies that predict the welfare gains to Ukraine and the EU from
the economic liberalization of trade between the two.
Accession to the WTO gives Ukraine a welfare gain of anywhere from
1.1 percent to 1.9 percent of GDP. Establishing a free trade
agreement indicates a welfare gain of 4 percent to 7 percent.
Economic Benefits of Energy
Geopolitical constraints prevent Ukraine from ever achieving
absolute energy independence. However, economic and political
integration into the Euro-Atlantic community promises greater
political leverage in negotiations with major energy exporters,
especially Russia. Three basic facts determine Ukraine's
desire for energy independence.
First, the Ukrainian economy is highly dependent on energy.
Coal and ore mining, chemical refining, and electricity production
constitute 60 percent of GDP. Ukraine consumes on
average 73-75 billion cubic meters of gas a year. Ukrainian
energy consumption is 2.3 times higher than that of countries with
similar GDPs in the region.
Further, Russia is pursuing a strategy to diversify its
supply routes to Europe. Its Blue Stream gas pipeline will
circumvent Ukraine. So will its Nord Stream gas pipeline to
Germany, which will also bypass the Czech Republic, Belarus,
Slovakia, and Poland.
Second, energy costs are rising. As of January 1, 2007, the
average price for gas in Ukraine increased 70 percent. With
transportation fees and shipping fees, the average price for
enterprises and businesses is $160 per 1000 cubic meters.
Energy costs will continue to rise as Russia consolidates its
monopoly on oil and gas and exercises its monopoly power to raise
Third, Ukraine's energy supply is heavily concentrated.
Therefore, Ukraine needs to diversify its energy supply.
Integration into the Euro-Atlantic community will provide
Ukraine with the political muscle to improve its economic
situation. It will be better situated to negotiate with
Russia--as a European country, not a former Soviet puppet.
A good example of possible Ukrainian energy diversification is
the Georgia-Ukraine-European Union gas pipeline project through the
Black Sea. The GUEU project would use the Ukrainian
transit network's spare capacity to deliver Caspian gas to Ukraine,
Poland, and beyond.
Ukrainian integration into the Atlantic and European
community must start at home. Regardless of whether Ukraine
ultimately joins the EU or the WTO, it will benefit from those
extensive domestic reforms, as Turkey has done on its path to
During the period between 1998 and 2004, the EU granted Ukraine
€838 million of technical assistance. Of that,
approximately €500 million was directed for the development of
civil society, economic reforms, regional development,
education, and other priority areas. Monetary assistance is one
way Ukraine gains from economic and political reforms. The outcomes
of the actual reforms present other, more important, gains.
Turkey is a perfect model for the benefits of the political
reforms required to join the European Union. Thus far, Turkey has
adopted a new, better criminal code, allowed for greater freedom of
speech, and increased the rights of its Kurdish minority.
Further, Turkey's economic benefits from recent market reforms
include "a GDP growth rate exceeding 8 percent and low
In summary, on whatever other issues the Ukrainian people
find themselves divided, they must stand united on the issue of
integration into the Euro-Atlantic community. The economic benefits
of such integration are obvious: The closer Ukraine moves towards
the West, the better off its citizens will be. Even the road
towards integration--political and economic
reforms--strengthens the country and its welfare.
For a long time now, Ukraine has wavered between a Western
and an Eastern orientation. But Ukraine's true home lies in the
West, in Europe. And Ukraine must come home.
Ariel Cohen, Ph.D., is
Senior Research Fellow in Russian and Eurasian Studies and
International Energy Security at the Douglas and Sarah Allison
Center for Foreign Policy Studies, a division of the Kathryn and
Shelby Cullom Davis Institute for International Studies at The
Heritage Foundation. These remarks were delivered at the
Conference on Ukraine's Euro-Atlantic Future at the Diplomatic
Academy, Kiev. Michael Belinsky, a Heritage Foundation intern,
contributed to the production of this paper.
Show references in this report
"Yushchenko: 'The Heart of Europe Is in
Ukraine,'" Pravda, October 17, 2005, at http://newsfromrussia.com/world/2005/10/17/65426.html
(June 1, 2007).
Askold Krushelnycky, "Yushchenko Puts Ukraine
at the Heart of Europe as He Takes Presidential Oath," The
Independent (London), January 24, 2005, at http://findarticles.com/p/articles/mi_qn4158/is_20050124/ai_n9697494 (June
Ministry of Foreign Affairs of Ukraine,
"Ukraine Info," at www.mfa.gov.ua/main/en/29.htm (May 31,
Kataryna Wolczuk, "Integration Without
Europeanization: Ukraine and Its Policy Towards the European
Union," European University Institute Working Papers, RSCAS
No. 2004/15 (October 2004), at www.eui.eu/RSCAS/WP-Texts/04_15.pdf (May
Ibid., p. 9.
European Commission, "EU-Ukraine Relations," at
European Commission's Delegation to Ukraine,
"The EU's Relations with Ukraine--Present State and Future
Prospects," at www.delukr.ec.europa.eu/page36474.html (June
Ibid., p. 6.
Magorzata Jakubiak and Anna Kolesnichenko,
eds., "Prospects for EU-Ukraine Economic Relations," Center for
Social and Economic Research, Report No. 66 (2006), p. 67.
The EU-15 are Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, Spain, Sweden, and the United Kingdom.
Jakubiak and Kolesnichenko, "Prospects for
EU-Ukraine Economic Relations," p. 73.
"Russia Welcomes Ukraine's EU Membership:
Ukraine's Incorporation Into the European Union To Be a Positive
Factor," Pravda, December 16, 2004, www.cdi.org/russia/335-7.cfm (June 1,
Jakubiak and Kolesnichenko, "Prospects for
EU-Ukraine Economic Relations," p. 73.
"Ukraine's Economic Rise," Carnegie Endowment
for International Peace, January 31, 2007, www.carnegieendowment.org/events/index.cfm?fa=eventDetail&id=968&&prog=zru
(May 31, 2007).
Vladimir Socor, "Trans-Black Sea Pipeline Can
Bring Caspian Gas to Europe," Eurasia Daily Monitor,
December 7, 2006, www.jamestown.org/edm/article.php?article_id=2371712 (June
See Jakubiak and Kolesnichenko.
Esther Pan, "Turkey's EU Bid," Council on
Foreign Relations, September 30, 2005, at www.cfr.org/publication/8939/turkeys_eu_bid.html#6 (June
"Connecting Regions--Creating New
Opportunities," World Economic Forum in Turkey, November 2006, at
Europe and its humanistic tradition have always been central toUkrainian civilization, and Ukraine has been indispensable forEurope. Regardless of whether Ukraine ultimately joins the EuropeanUnion or the WTO, it will benefit from those extensive domesticreforms, as Turkey has done on its path to European integration.
Ariel Cohen, Ph.D.
Visiting Fellow in Russian and Eurasian Studies and International Energy Policy in the Douglas and Sarah Allison Center for Foreign and National Security Policy, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation
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