Pipelines, Politics, and Prowess as Touchstones for Regional Integration

Gas pipeline
Ukraine : Pipelines, Politics, and Prowess as Touchstones for Regional Integration - Tine Carmeliet

The world has watched the development of the political protests in Ukraine over the past few weeks with great trepidation. These protests illuminate the core dilemma with which Ukraine is faced today. Geographically situated between the European Union (EU) and Russia, Ukraine finds itself between the devil and the deep sea in choosing to which regional integration project to adhere. Indeed, while Ukraine was on the verge of signing a Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU, Russia has not made a secret of its desire to attract Ukraine to the Russian-led customs union. It is often argued that, mainly due to the atrocious communist years, Russia is losing its grip and influence on the countries in the region. However, the December 17th Russian-Ukrainian agreement – which provides multiple financial incentives to Ukraine – indicates that there are several reasons why a Russian-led customs union is a (more) attractive option for Ukraine today, rather than strengthening its relationship with the EU.  

The most compelling argument for Ukraine to join the customs union is one of an economic nature. First, it would save Ukraine from the permanent trade conflicts with its eastern neighbors and help the Ukrainian goods win the Russian and Kazakh growing markets. In addition, a transition to the customs union is expected to go smoothly, since the technical standards of the member-states of the customs union are similar to those of Ukraine. Within the customs union, tax-free conditions apply to energy and raw materials, through which the production costs of the Ukrainian goods will decrease, and the goods become more competitive in the global market. This is particularly beneficial for the Ukrainian chemical and metal industries, which depend to a large extent on the supply of gas. Finally, it is very likely that Ukraine will benefit from this tax-free union much faster when it accedes to the customs union than when it would conclude the DCFTA with the EU. Indeed, within the European market, the risk even exists that the more competitive European manufacturers will drive their Ukrainian peers out of business, similar to what happened with the engineering and shipbuilding businesses in Latvia and Poland.

The economic arguments aside, joining the customs union is also a much more pragmatic and politically feasible option. Indeed, the EU’s only incentive to engage with Ukraine seems to be that a prosperous Ukraine, with functioning institutions and a modern economy, is a much more attractive neighbor than anything likely to emerge if it is left to its own devices. EU membership is nonetheless not on offer these days, and it is not clear whether it ever will be. In order to become a member of the EU, Ukraine will have to swallow the whole acquis communautaire, which will profoundly affect and change the organization and functioning of the Ukrainian state. In particular, compliance with these European standards implies modernizing its economy, installing a market economy, enacting democratic institutions, and – last but not least – upholding the rule of law. Just to name one example, the EU requires Ukraine to change its competition laws, which requires the break-up of several cartels and monopolies, thereby upsetting some of Ukraine’s most powerful oligarchs. While such policy measures are highly needed in order to get the Ukrainian economy back on the rails, they are clearly not the perfect recipe for domestic political popularity. It is true that the Ukrainian masses have clearly expressed their dissatisfaction with a possible turn to Russia, but the Ukrainian oligarchs, who dominate domestic politics, do not seem to care for the people’s wishes. In this respect, mindful of the fact that the Ukrainian leadership needs the political support of the oligarch-apparatus, the demanding standards imposed upon Ukraine by the EU are a politically less feasible option than joining the customs union. Indeed, the latter does not require any changes to the Ukrainian domestic political and institutional organization, which is highly attractive for a country with a bleak economic outlook. 

The question of whether Ukraine will ever be able to uphold the EU’s standards adds another attractive element to Russia’s customs union. Whereas the European integration project nowadays suffers from a severe legitimacy crisis, the customs union is conceived as a mechanism meant solely to enhance economic cooperation between the member states. As such, the founding members initially in no way considered the customs union as a supranational entity that takes decisions in non-economic affairs and limits national sovereignty. For a country like Ukraine that considers national sovereignty of paramount importance, such a minimalistic approach is highly attractive. Be that as it may, it is true indeed that the EU also started as a customs union and evolved into a fully-fledged integration project. However, even if the customs union would one day develop into a supranational entity, being endowed with the legal competences to decide on non-economic matters as well, there are reasons to believe that Ukraine’s participation would make more sense there than it would in the EU. Contrary to the EU, Ukraine has a shared history with the other post-communist countries, and its societal organization and values fit in much more than with those of the EU.

When President Yushchenko vigorously stated in 2005 that the heart of Europe is in Ukraine and Europe cannot live without its heart, he clearly underestimated Russia’s coercive political and economic prowess, which has lead his whole country into a major political disarray. While a Free Trade Agreement with the EU might be advantageous in the long term, it requires painful adjustment measures today, which damage the political popularity of Ukraine’s leaders. Only time will tell whether Ukraine will be able to undertake the much needed reforms, or in the other event, will give in to the Russian pressure.