The last week has seen a hardening of the positions of Russia, the EU and the U.S.: While Russia has continued with the annexation of Crimea, the EU and the U.S. have instituted visa bans on and frozen the assets of several Russian and Crimean individuals. Arguably, the EU's response could have been more decisive, including instituting visa bans on all Russian MPs who ratified Crimea's annexation and imposing economic sanctions on Russia. To date, several EU member states have shied away from these options in order to avoid disrupting their economic ties with Russia and their ability to negotiate with the Kremlin. Last week, however, the EU decided on measures that could have much greater political implications than many people realize at the moment.
First, rather than wait for Ukraine's upcoming presidential and parliamentary elections, the EU signed the Association Agreement with Ukraine on Friday -- the same agreement that was rejected in November by former President Viktor Yanukovych and triggered the Maidan protests. The agreement commits both sides to "a close and lasting relationship that is based on common values," including the respect for democratic principles, the rule of law, good governance, human rights and fundamental freedoms and principles of a free market economy. The agreement explicitly refers to the rights and the non-discrimination of persons belonging to national minorities, particularly salient to the concerns of ethnic Russians and Russian-speaking citizens in Ukraine. In addition, in signing the agreement, the EU has committed itself to promoting the independence, sovereignty, territorial integrity and inviolability of borders. The agreement thus excludes the possibility of the EU tacitly accepting Russia's actions with respect to annexing Crimea in the future.
Second, besides the Association Agreement, the EU decided to cut customs on nearly all Ukrainian imports to the EU. According to estimation by the European Commission, this measure will deliver savings of around 500 million Euros a year for Ukrainian exporters who do business in the EU's Single Market. In doing so, the EU will begin implementing parts of the so-called Deep and Comprehensive Free Trade Area (DCFTA) with Ukraine. Through such actions, the EU sidesteps the agreement it made with the Russian government back at the EU-Russia summit in January to consult with it before creating a free trade area with Ukraine. Clearly, the EU does not feel bound to this agreement, given how the Russian government has not demonstrated willingness to compromise with the EU in the past weeks.
The decision to fully implement the DCFTA will be made later. From a cost-benefit perspective, Friday's decision to cut customs gives more to Ukraine than to the EU. This "solidarity" can be explained by looking at the developments of the past months: Prior to the Eastern Partnership summit in Vilnius in November 2013, the EU had only agreed to sign a "package deal" with Ukraine, i.e. an association agreement that also included the establishment of a Deep and Comprehensive Free Trade Area (DCFTA) between the EU and Ukraine. This second component of the deal was especially controversial among business actors in Ukraine, many of whom rejected the trade area out of concerns that their companies would not be able to compete with EU producers.
In signing the DCFTA, the Ukrainian government would also commit itself to aligning its legislation to EU norms and standards over the course of the next years -- a move that would result in "compliance costs" and should therefore not be underestimated. These costs are related to reforms that Ukraine has to implement in order to comply for example with EU sanitary standards, which would also involve the modernization of key economic sectors in Ukraine, including steel and agricultural production. Shortly before the Vilnius summit, ousted President Yanukovych argued that important Ukrainian businessmen asked him not sign the EU agreement.
The EU's decision to cut customs for Ukrainian imports while allowing Ukraine to maintain current customs on EU imports might temporarily alleviate fears of domestic producers that unrestricted EU exports would overflow the Ukrainian market. Among those that are likely to profit from the EU's concessions are the oligarchs, many of whom had strong relations with the former government. Although these business circles have lost political influence in the past months, the new government in Kyiv will have to cooperate with them in the coming months -- in part to ensure they do not join forces with Russia.
Third, the developments since November have once again brought to the fore discussions among European politicians the question of a "European prospect" for Ukraine. Whereas many member states have rejected such a perspective prior to the Vilnius summit, they seem to have become more flexible on the issue in the past months. The Congress of the European People's Party, held two weeks ago in Dublin, adopted an "Emergency Resolution on Ukraine" which referred to Article 49 of the Treaty on the European Union, which stipulates that all European States, including Ukraine, have a European perspective and may apply to become a Member of the Union. Also in the recently signed Association Agreement, the EU has appeared more conducive to Ukraine's aspirations to join the Union through welcoming "its European choice". Although a "membership prospect" is not clearly indicated, the EU heads of governments have suggested there is room for such possibilities in the future. The discussions on a potential EU membership prospect for Ukraine will inevitably increase in the coming months and are likely to lead to tensions between those member states that oppose this perspective (such as France) and those that are in favor of it (for example Poland). At the same time, it will certainly lead to further tensions between Brussels and Moscow.
By signing the Association Agreement, the Ukrainian government also committed itself to implementing reforms that align with the principles of the agreement. The EU will therefore expect an ambitious reform agenda in Ukraine that will include measures to fight corruption, to overcome shortcomings in the judiciary, and economic and financial reforms. Other measures that the new government might consider are in the constitutional area, for example the election of regional governors and the strengthening of local self-government.
The association agreement has the potential to lead to significant political, economic, and social reforms in Ukraine. If the current government in Kyiv chooses to take these reforms seriously, it can count on the continuous support of the EU, the U.S. and likely that of the IMF in the years to come.