Ukraine's unfair trade

It is hard to believe that anyone would take to the barricades over a free trade agreement, even one deemed by the European Union to be “deep and comprehensive”. But that is what appears to be happening in Kiev.

Vast crowds continued to occupy the centre of Ukraine’s capital yesterday in noisy, colourful and sometimes confrontational defiance of the government, which is clearly rattled. The scenes are reminiscent of the Orange Revolution of 2004, when weeks of tumultuous protest forced the re-staging of an election that had been unfairly won by the pro-Moscow Viktor Yanukovych.

“This has all the signs of a coup,” said Mykola Azarov, the prime minister, as thousands laid siege to the government headquarters. “It is serious.”

Nine years later, a seemingly more bland provocation than a stolen election has filled the streets. This time Yanukovych – in power again – has incurred the public’s wrath by refusing to sign an “association agreement” with the EU.

The accord would have brought about “extensive harmonisation of laws, norms and regulations in various trade-related sectors”, all contained in 15 chapters, 14 annexes and three protocols of dense Brussels bureaucratic speak. Once ratified, the deal would have reduced tariffs on 98 per cent of products traded with the EU. But it was not a promise to begin talks on Ukraine’s EU membership, nor even a pledge to offer Ukrainian labourers greater access to the wealthier economies of the West.

It was very much more than that: it was a question of the country’s orientation and destiny. For Ukraine is a country torn between Europe and Russia, as it has been for much of its history.

Its western and central regions – once dominated by Poland and then Austria – tend to look west. The south and east – a landscape of coal mines and steel mills – tend to look east to Moscow, and are home to most of the country’s native Russian speakers, who form 30 per cent of the population. There is an element of class war here, too: the demonstrators in Kiev and Lviv are dominated by the students and the educated or semi-skilled middle classes, for whom “Europe” implies genuine democracy, trustworthy policing and proper respect for human rights.

No matter how dull the language of the trade deal, and how limited its scope, it offered a vision that a majority of Ukrainians support, but which Yanukovych has now frustratingly put out of reach. What he has offered instead is a vision of Ukraine’s sub-standard present extended into the future: suspect elections, selective justice and corruption so rampant that the country is commonly ranked as the worst on the European continent. In other words, a vision of Ukraine as the post-Soviet satellite it is today.

“People want to be independent, to be sovereign,” says Valeriy Chaly, deputy director of the Razumkov Centre, a think tank in Kiev. “They want to be confident in the ability of their president to take his own decisions. People are angry because they were told that he would sign and lead them to European integration, but he changed his mind. That is why we feel it is such an important time for Ukraine.”

Although Yanukovych’s cabinet agreed to accept the association agreement back in September, as the deadline approached to put pen to paper at a summit in Vilnius last week, he buckled under Russian pressure. Moscow cajoled, threatened and bribed Ukraine into submission. Russian customs officers were ordered to search every Ukrainian truck arriving at the border and hold it for 72 hours – meaning exporters lost orders or saw perishable products go to waste. Imports of Ukrainian chocolate – which is considered the best in the region – were banned by Moscow for several weeks.

With Yanukovych still wavering, President Vladimir Putin reportedly produced his trump card – an offer to reduce the price of gas sold to dependent Ukraine. Hard-nosed hydro-carbon diplomacy is an old trick – Russia has twice threatened to cut off the supply to Ukraine – but it appears to have worked again. Yanukovych, a native Russian speaker from the eastern coal and steel city of Donetsk, looked at his short-term options and stuck with what he knew – his old friends in Moscow.

The EU simply couldn’t match Putin’s sticks, or his carrots. Other Eastern European leaders have said that association agreements take years to show results, which is too slow an arc for Yanukovych, who is anxious about an election in early 2015.

EU leaders said the trade pact would bolster the Ukrainian economy by some 6 per cent and save Ukrainian businesses €500 million a year in import duties. Financial assistance of €610 million was dangled, which Yanukovych dismissed as “candy in a pretty wrapper”.

“This deal in the long run would have been good for Ukraine, but in the short term Russia’s offer was better and it’s the short term that matters for a president considering re-election,” says Charles Robertson, chief economist at Renaissance Capital, an investment bank. Russia remains Ukraine’s biggest export market: “The fact that exports were likely to get difficult would hurt Ukraine more quickly than any benefits from the EU deal would arrive,” he says.

Russia’s actions may smack of desperation; strong-arming neighbours is not in the long term a viable foreign policy. Kremlin watchers have said the country is still trying to find its place in the world after the downfall of the Soviet empire, with the consequence being a good deal of punitive petulance against former Soviet republics.

But for Moscow, the strategic stakes are high, as the EU is luring others. Its “Eastern Partnership” project is designed to improve trade and political relations with five other former Soviet states – Armenia, Azerbaijan, Belarus, Georgia and Moldova – all caught in that awkward space between the European Union and Russia.

Georgia and Moldova did sign association agreements last week, but Armenia has succumbed to trade pressure. Ukraine, with a population of 46 million, is the biggest country in the group and hence the biggest prize.

The Russians also knew the strong-armed approach would carry more clout because the Ukrainian economy is so weak. Kiev has for several years been running budget and current account deficits. Yanukovych has desperately been resisting pressure to devalue the hryvnia.

It is all a far cry from the elation and optimism of 2004. Back then it was assumed the Orange Revolution would see Ukraine progress in the same way as other new-generation EU states on its western border – Poland, Slovakia, Romania and Hungary – have done. Blessed with ample natural resources – apart from steel and coal, there are the vast swaths of wheat fields that made Ukraine the bread basket of the USSR – its workforce is well-educated and diligent.

But its leaders sadly have betrayed this promise. Cronyism and incompetence have characterised a political ruling class that has largely lost the public’s faith. Yanukovych’s great rival Yulia Tymoshenko, the jailed, flaxen-haired former prime minister, may cut a convincing figure as a victim but Western officials discussing her case do not loudly proclaim her innocence. Their objection is more that her seven-year sentence for fraud and embezzlement was designed to remove her as a rival in 2015.

“The West’s problem was that the good guys were not as good as they hoped,” says Mr Robertson. “But they felt it was better to be offering something rather than nothing.”

There is a new good guy now – the former world heavyweight boxing champion Vitali Klitschko, who is regarded as beyond reproach and has revelled in taking to the streets and calling for the Yanukovych government to step down. He has been boosted by large numbers of Ukrainians who have rediscovered the belief that protest could bring meaningful change, even if a large minority of their compatriots prefer the pro-Russian status quo.

Yanukovych has been hesitant in his reaction. Even as parliament discussed holding a no-confidence vote, the president confirmed that he would proceed with a four-day state visit to China today, where trade will naturally be high on the agenda. He already knows that trade can be a perilous issue. It may be a trip he comes to regret.

Alex Spillius is Diplomatic Correspondent for the Daily Telegraph, based in London.

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