Meeting Russia’s challenge to EU’s Eastern Partnership

Thorvaldur Gylfason, Per Wijkman

The EU’s Eastern Partnership is currently in turmoil. Armenia and Ukraine – two of the four partner countries (which also include Moldova and Georgia) did not initial association agreements. This column discusses the role of Russia in discouraging such negotiations. The soft power of the EU was apparently no match for the hard power of Russia in the cases of Armenia and Ukraine. A successful partnership would require peaceful international relations between the four partners, and solving their conflicts with Russia.

EU’s Eastern Partnership is in turmoil after its Summit in Vilnius on 29 November 2013. Only Georgia and Moldova of the four partner countries that had successfully negotiated Association agreements with the EU, including Deep and Comprehensive Free Trade Agreements (DCFTAs), initialed them at the Summit.1 In September, President Sargsyan, motivated by the threatened loss of Russia’s security guarantee vis-à-vis Azerbaijan, had informed the EU that Armenia would not initial its Association agreement but instead join Russia’s proposed Eurasian Customs Union. After much to and fro, President Yanukovich of Ukraine declined at the last minute to sign the Association Agreement that had taken five years of difficult negotiations to initial. This led to sustained demonstrations in Kiev, exceeding those of the Orange Revolution of 2004.

Soft versus hard power

Two misjudgements contributed to this unexpected outcome.

First, Russia initially underestimated the soft power of the EU.

President Putin’s primary objective is to maintain Russia’s hegemony over its ‘near abroad’ (Izotov 2013). The financial crisis, the euro crisis, differences in the EU vis-à-vis the Eastern partners, prolonged discussions with Ukraine and Georgia, and the EU’s political conditions for Ukraine to sign the agreement, led Russia to consider implementation of the agreements unlikely. The opening of formal negotiations with Georgia, Moldova, and Armenia in early 2012, and their rapid conclusion by July 2013, took Putin by surprise. Russia, therefore, took hasty measures to protect its hegemonic interests. Wyplosz (2013) points out that Russia’s extension of loans to Ukraine will soon pose problems for Russia if Ukraine proves unable to service its extensive debts.

Second, the EU overestimated the effectiveness of its soft power.

When push came to shove, Armenia found the soft power of the EU to be no match for the hard power of Russia and the ruling oligarchs in Ukraine preferred quick money in their pockets to slow modernisation of the Ukraine economy and the rule of law. While Georgia and Moldova chose to initial their agreements, they have frozen conflicts with Russia (South Ossetia, Abkhasia, Transnistria) for which the EU’s soft power alone is insufficient protection. As Raik (2013, p. 22) notes: “The Eastern Partnership reflects the general tendency of the EU to play down issues of hard security and geopolitics and pursue economic integration as an instrument for enhancing stability and peace.”

Thus, hard power trumped soft power at the Vilnius Summit. As a result, the Eastern Partnership, a key programme of the EU, lost out in the contest of “geopolitics versus economic modernisation” (Raik 2013, p. 19). This loss of credibility will affect the EU’s Euro-Mediterranean partnership as well. Hence, the EU must alter its mix of soft and hard power.

Sustain the Ukrainian people’s hope

The strong popular support expressed by Ukrainians for closer ties to Europe puts the EU in a quandary. Shall it allow the hopes for a more democratic society of many, if not most, Ukrainians to be betrayed by their own government? The EU has limited possibilities to act since the current Ukrainian government is no longer an effective interlocutor, having lost whatever negotiating credibility it once had.2 The EU must communicate primarily with the people of Ukraine. High Representative Ashton and Commissioner Füle have stated that the door to Europe remains open. To prove that this is more than a figure of speech requires concrete measures that directly benefit people: more entry visas to the EU for business people and students, more grants for Ukrainians to study in the EU at institutions of higher education, more opportunities to study first-hand public administration and how market economies and civil societies function. The EU can foster people-to-people contacts until a new government is prepared to sign the already initialed Association Agreement, hopefully before 2015.

The chart shows that the EU has become Ukraine’s largest trading partner, exceeding the proposed Eurasian Customs Union.

Figure 1. Ukraine's foreign trade 2012

Source: European Commission.

Rapid implementation of the agreements initialed by Georgia and Moldova

The EU can speed up signature of the Association Agreements with Georgia and Moldova. Time is of essence. Elections to the European Parliament are in May 2014, and the EP must sign the agreement before that time. The Commission must also sign the Association agreements. A new Commission will be appointed in the fall and this slows down decision-making as the current commissioners become lame ducks. Since Georgia and Moldova can be expected to be subject to continued strong pressure from Russia, they need to see the Association agreements signed by the current Commission.

The Deep and Comprehensive Free Trade Agreements require Georgia and Moldova to set up institutions to administer customs, to ensure efficient competition and public procurement, to enforce intellectual property rights, technical regulations and sanitary and phytosanitary standards. The importance of institutions has been stressed by Campos and Corricelli (2002) who point out that the Eastern Partners suffered from an “institutional vacuum” following the collapse of the Soviet Union. Campos (2013), Raik (2013) and Wijkman (2011) refer to strong institutions as a “motor of modernization” for these formerly planned economies. Messerlin et al. (2011) and Wijkman (2011) argue that this ambition is too costly for small countries unless accompanied by appropriate transition periods, asymmetric concessions, proper sequencing, and assistance. Given these conditions, it is better to modernise sooner rather than later. EU’s new principle of ‘more for more’ suggests that Georgia and Moldova now deserve significant assistance from the EU’s comprehensive institution-building programme.

The EU can also state that as European States these countries qualify for EU membership in due course. Providing ‘light at the end of the tunnel’ has been a highly effective incentive in the past (Gylfason and Hochreiter 2008). The countries of Central and Eastern Europe were motivated by the prospect of membership, as were the countries of the Western Balkans– Croatia joined in 2013 after negotiations started in 2005. The Stability and Association Agreements, similar to the DCFTAs, concluded with the Balkan countries were important stations on the accession track (Gylfason and Wijkman 2011).

Long-run resolution of conflicts in which Russia is involved

Gylfason and Wijkman (2014) point out that Russia, while a party to many of its conflicts (Transnistria, Nagorno Karabahk, South Ossetia and Abkhasia), is not itself a member of the Eastern Partnership. At Russia’s explicit request, its relations with the EU are governed by a separate agreement. This makes it difficult to negotiate a settlement of conflicts to which Russia is a third party in the framework of the Eastern Partnership. The EU could offer to negotiate a DCFTA with Russia. Equal treatment by the EU of qualified countries and Russia could ease Russian sensitivities by not upsetting the existing geopolitical balance. It would also allow qualified Eastern partnership countries to have free trade with both the EU and with Russia.3

It is, however, highly unlikely that Russia is able to make the institutional adjustments required for a DCFTA. Nor does Russia currently appear willing to accept such an offer since it is unwilling to negotiate even a shallow free trade agreement with the EU.

The EU can offer Russia to speed up current negotiations on a free trade agreement and to create a strategic relation. Any free trade agreement to be negotiated with Russia, or possibly with the Eurasian Customs Union, will be much less deep and comprehensive than the free trade agreements that the EU has already negotiated with the four Eastern Partners. Thus, if Ukraine and Armenia opt for the proposed Eurasian Customs Union, they will have significantly worse market access to the EU than the Association agreements they have negotiated provide.

Increase EU’s hard power

The EU’s goal is a positive partnership both with Russia and with the sovereign Eastern partners. This requires these partners to have peaceful international relations not only with each other but also with Russia. It is hoped that Russia will respond positively to an overture from the EU.4 If not, the EU must be prepared to use both carrots and sticks and adjust its mix of soft and hard power as indicated at the European Council on common security and defence policy 19-20 December 2013. One thing is clear. The Eastern Partnership is doomed if it is perceived as a policy conducted by a lame duck leading a paper tiger.

References

Åslund, Anders (2013), Payback time for the “Yanukovych Family”, The Peterson Institute for International Economics, 11 December.

Campos, Nauro and Fabrizio Corricelli (2002), “Growth in Transition: What we know, what we don’t and what we should.” Journal of Economic Literature, XL, 793-836.

Campos, Nauro (2013) “What drives protests in the Ukraine? This time it is institutions”, VoxEU.org, 22 December.

Gylfason, Thorvaldur and Eduard Hochreiter (2008) ”Governance and growth: Why does Georgia lag behind Estonia?” VoxEU.org, 2 August.

Gylfason Thorvaldur and P M Wijkman (2014), “Which Conflicts can the European Neighbourhood Policy help Resolve?” in Christensen, Bent Jesper and Carsten Kowalczyk (eds.), Globalization: Strategies and Effects, Springer Verlag, forthcoming.

Gylfason, Thorvaldur and P M Wijkman (2011), “Economic Integration as a Balkan Peace Project”, VoxEU.org, 1 January.

Hoekman Bernard, Jesper Jensen and David Tarr, (2013), ”Ukraine’s Trade Policy”, VoxEU.org, 29 November.

Izotov, Alexander (2013) “Russia and the EU`s Eastern Partnership in the Context of the EU-Russia Relations” in The Post-Vilnius Challenges of the Eastern Partnership, The Eastern Partnership Review No. 15, December.

Kowalczyk, C. (2000), “Welfare and Integration,” International Economic Review 41, 2, 483-494.

Messerlin, Patrick, Michael Emerson, Gia Jandieri, and Alexandre Le Vernoy (2011), An Appraisal of the EU’s Trade Policy towards its Eastern Neighbours: The Case of Georgia, Center for Economic Policy Studies, Brussels.

Raik, Kristi (2013). “Eastern Partnership as Differentiated Integration: The challenges of EaP Association Agreements.” The Post-Vilnius Challenges of the Eastern Partnership in The Eastern Partnership Review No. 15, December.

Sekarev, Alexei (2013), “The EU Eastern Partners: Post-Vilnius Domestic and Foreign Policy Challenges.” The Post-Vilnius Challenges of the Eastern Partnership, The Eastern Partnershlp Review No. 15, December.

Wijkman, Per Magnus (2011), “Fostering Deep and Comprehensive Free Trade Agreements for the Eastern Partners,” The Eastern Partnership Review No 8, December.

Wijkman, Per Magnus (2009), Frihandel för fred: Exemplet Balkan, SNS, Stockholm.

Wyplosz, Charles (2013), “The Ukraine-Russia Deal,” VoxEU.org, 24 December.

Belarus and Azerbaijan do not fulfill the political conditions and are not WTO members.

2 According to Åslund (2013), Deputy PM Arbuzov claimed that Ukraine needed $10 billion per year to cover the costs of the Association Agreement, whereas the EU offered only €610 million. President Yanukovich claimed that Ukraine needs €40 billion per year until 2017. Åslund estimates that “three sources of embezzlement and corruption alone have generated $8 billion to $10 billion a year to the “Yanukovitch family” during the last three years”. This is well known to the IMF. After failing to get additional funding from the EU, Ukraine turned to Russia as a “lender of last resort.” Ukraine currently has a deficit on current account of $11 billion.

3 Kowalczyk (2000) has noted that membership in several large free trade areas can be an ideal policy for a small country.

4 However, Izotov (2013, p. 8) notes that “… the most part of the Russian political elite see the great power concept …[in nineteenth century terms when] … hard power and coercion played more important role than attraction and soft power approaches.”