Which way to choose - European Prosperity or Trade Stability

“Which way to choose - European Prosperity or Trade Stability”

Anastasiya Burma, Alexey Chepenko, Yuliya Karachun, Oksana Kryuchkova, Irina Kurkina, Kate Myndra, Ianina Sotnik

Master`s Level Students, NTU “KhPI”, International Business Course, Autumn-Winter 2013

Introduction

There is an actual question: what choice to make Ukraine? Events that are happening in the country and the choice of Ukraine between Europe and Russia are discussing worldwide. Researches of leading sociological companies shows that people wishing to integrate into the European Union, more than those who want to join to the Customs Union and become closer to Russia. So 46,9% of Ukrainians believe that the country should sign an association agreement with the EU. At the same time, only 28,9% of the citizens of Ukraine's integration options selected entry into the Customs Union.

What choice will make Ukraine? Today, this question can be heard as never often. Choice between the Customs Union and the European Union makes people in the country to weigh the pros and cons and finally decide. Build a future on their own or in alliance with someone to see confidence in the future will help us to Europe or the Customs Union?

http://www.ratinggroup.com.ua/






General macroeconomic indicators

European integration – a key priority, which accumulates in a range of domestic and foreign policy of Ukraine's efforts to align to the European Union (EU) and create the necessary preconditions for accession to the European Union in the future. But in addition to the European integration for Ukraine there is a second option - the Customs Union. In order to determine which vector should take Ukraine it is necessary to analyze the economic, social, technical indicators and compare in what union Ukraine has more prospects for the development and functioning of various industries.

Basic macroeconomic indicators are summarized in the table 1

Table 1– General macroeconomic indicators

EU CU Ukraine Indicator (2012 year)

503,8 169,8 44,6 Population (mln)

16190 2212,8 180,2 GDP, bln $

32 135,77 13 031,80 4 040,36 GDP percapita, $

-0,2 4,47 3 GDP growth, %

15630 2885,6 335,4 GDP at PPP, bln $

0 3,1 7,6 Growth rate of industrial production,%

2,4 26,77* 0,6 Rateofinflation, %

10,6 3,63 7,4 Unemployment, %

2170,00 665,9 69,8 Exportvolume, bln $

2397 421 90,2 Volumeofimports, bln $

Source:http://www.ereport.ru *high average inflation rate in the customs union was caused by 70% inflation in Belarus



The European Union has a greater population density and, consequently, a higher GDP and purchasing power. At the same time, GDP growth has worsened and unemployment is much higher than in the Customs Union.



Ukrainian export to EU

Question of export to EU and Custom Union is essential to be studied. It’s very important to understand what we have now and what we will have after accepting of one of the agreements. Firstly, we analyze the situation with export to EU countries. The EU is among Ukraine's most important commercial partners and accounts for about one third of its external trade. On the graph 1 we can see which products exactly we export to EU countries and what share each product type has. Also table 1 shows us export products in numbers.

Table 2 – Ukrainian export to EU

thsd, $ Product thsd, $ Product Agriculture Metallurgy 157089

3 corn 1569831 Carbon steel

471110 soybeans 1108841 metal 393351 wheat 443994 ferroalloys 670475 rapeseed 229942 cast iron

Food industry Chemistry and petrochemistry

783122 sunflower oil 203764 oil and petroleum products 80296 juice 114120 ammonia

Raw materials 108307 dyes 161342

5 iron ores and concentrates

243909 fertilizers

557041 granite and sandstone engineering 348537 coal 305190 aircraft and space

technology 330418 timber 204367 trains 88975 clay electric power

135328 electric power



Figure 1 –Ukrainian export to EU

More than half of Ukrainian exports to the EU constitute products of metallurgical industry, agriculture, and raw materials: each of these industries

provides about 20% of total exports. In addition, the important role is taken by the food industry (about 6%), chemical and petroleum industry (about 4%) and engineering (approximately 2.5 %).

Almost half of Ukrainian agricultural export is corn: in 2012 Europe imported from Ukraine more than 6 million tons of this product. As to the food industry, the basis of

Main export items to EU:

corn iron ores and concentrates carbon steel metal sunflower oil



Ukrainian exports to the EU is sunflower oil: in 2012 Europeans have bought it for $ 780 million. The main raw materials, exported to EU, are iron ore and iron ore concentrate (17 million tons valued at $ 1.6 billion). In addition, Ukraine supplies coal, wood, clay, granite and sandstone, etc.

The supply of Ukrainian goods to Europe for 9 months of 2013 decreased by only 2.4 % - to 12.29 billion dollars, and European import increased by 3.5 % - to 20.55 billion dollars. As a result, the share of exports to Europe increased from 22.4% to 26.6 %, and imports - from 31.9 % to 36.7 %.

Final conclusions about the impact of signing free trade agreements with the

EU according to export: 1. Ukraine is unlikely to gain from the elimination of import duties. For

agricultural and food products Europe has established too low quota for duty-free imports, and as raw materials and metallurgy, duties are absent.

2. Cancelation of export duties on raw materials will facilitate the export of these items from Ukraine, that will cause problems, particularly for metallurgical and food industries.

3. Revenues of the state budget of Ukraine will seriously diminish by the abolition of import and export duties.

Ukrainian export to Russia

Ukrainian exports to Russia in 2012 was 23.0 billion U.S. dollars. Imports from Russia amounted to 28.4 billion U.S. dollars. Negative balance for Ukraine is $ 5.4 billion.

Russia remains the main trading partner of Ukraine - 27.9 % of the whole Ukrainian export of goods and services belongs to Russia. Main group of products that are exported to Russia we can see in the table 3.



Table 3 – Ukrainian export to Russia

Export Groups of goods

mln. U.S. $ % to 2011

2002,4 98,9 Groceries and agricultural

1332,3 41,8 Mineral products

1902,1 111,4 Chemical products

4,6 90,1 Leather and fur

895,3 107,6 Timber and paper products

190,2 107,7 Textiles, textile products and footwear

331,2 110,0 Stone, glass, ceramics products

3760,6 92,13 Metals

6909,6 95,7 Machinery, equipment, vehicles

291,3 109,0 Other products



Figure 2 – Ukrainian export to Russia



Using the figure 2 we can see the shares of each product in the whole export to Russia. Products of Ukrainian engineering make the biggest part of export profit, the second place goes to the metal products. Also the huge part of export is

formed by agriculture, chemistry and mineral production.

According to the State Statistics Service of Ukraine decreasing of Ukrainian export to Russia began in the 2nd quarter of 2012 and lasted for half of a year. The total decrease constituted 4.2 billion dollars. In July-September 2013 year export declined by 576 million, or 13.1%. The main reason is considered to be Ukrainian attempts to sign association agreement with

EU. Export to other countries of the Customs Union also declined during this period: in Kazakhstan - it fell by 8.9%, to 1.73 billion, Belarus - 8.3%, to 1.51 billion dollars.

Final conclusions about the impact of signing trade agreements with the CU

according to export: 1. Keeping the main export market. Russia historically remains the

main Ukrainian trade partner and signing agreement with EU could possibly lower activity between our countries.

2. Continuing rough competition in automobile industry. Russian protection policy in this field regards to introduction of utilization duties, which increased the price of Ukrainian trucks, while native (Russian) producers got a postponement in the duty payment.

3. Lowering of international image. Continuing one-side cooperation (with post-Soviet countries, which forms the CU, and limiting trade with other countries) could be considered as the growing dependence of Ukraine from Russia and thus lower the international image of the country.

Main export items to Russia:

machinery, equipment, vehicles metals groceries and agricultural products chemical products mineral products



Harmonized standards and tariffs

Not less important factors in the decision to join the one union or another remain tariffs and harmonized standards, with which all Ukrainian goods and services will have to comply.

At the present time general number of commodity positions that are subject to tariff for export to Russia is equal to 10691. Moreover, Russia will take countermeasures to protect its market from the supply of European goods from the Ukrainian territory after signing by Ukraine agreement on free trade zone with the European Union and will introduce new import tariffs. This was stated by Advisor to the President of the Russian Federation Sergei Glazyev. It is assumed, that corresponding measures of Russian government will be implemented as soon as all the tariffs between Ukraine and the EU are eliminated.

In additionthere is a greatrisk toUkrainian companies thatthey will have toworkin the Russian market after FTA agreement signing between Ukraine and the EU. Primarily this peril is connected with modern equipmentabsence on a huge number of domestic enterprises that means impossibility European technical regulations realization. As a result – too many Ukrainian goods may proveuncompetitivein the European market.

AsMFN has reported Presidential Aide Sergei Glazyev predicts default in Ukraine in 2-3 months.

Thus, we can see, signing an agreement with the European Union Ukraine automatically loses the Russian market, which has always been and still remains one of the largest sales markets for products of most Ukrainian companies. And even if the ability to export products to Russia will remain, it will become more expensive due to new tariffs that again will reduce the competitiveness of our enterprises and their commodities.

From the other hand in case of entering to the EU 5710 of Ukrainian commodity positions will be exempted from tariffs for export to Eurozone (according to an agreement terms). Also there is an estimate that 63 commodity positions that are exported from Ukraine will be able significantly increase their volumes in nearest 3 years. Although of course no one does not negate the fact that

http://nbnews.com.ua/ru/news/98996/









Ukrainian producers will have to work hard to make their products comply with all required harmonized quality standards.

Today the fund of national standards includes 27 thousand documents, of which 7074 - national standards harmonized with international and EU, representing 15% of the total number of international and European standards. Also 1340 national standards among all accepted and harmonized with international and European are the standards, voluntary use of which is considered as a proof of conformity with the technical regulations developed on the basis of the EU directives . The development of such national standards has a greatest priority for our country.

Besides, according to Minister of Economic Development and Trade of Ukraine Igor Prassolov at different stages of development there are still 386 drafts of national standards harmonized with international and EU under the EU Directive. It is important thing that funding the work on harmonization of national standards implemented in the framework of the budget programs of public authorities, and by business entities.

Thus there is no simple answer, both agreements give Ukraine stupendous potential for development and growth opportunities. The question is how to use all this options and where find enough investment to realize them in the most effective way.

http://partyofregions.ua/news/52455a1cc4ca42cd580000a8?print=1





Branches that are highly depend on Russia Observing consequences of entry in these unions, we should put our

attention at the “opportunity cost” of such interaction. The main threat at this area is sanction that Russian Federation and other countries that participate in Custom Union, can put on goods, exported from Ukraine.

There is a necessity to observe branches that are highly depend on Russian market by huge volume of exported production. Amount of exported goods exceeds $ 100 million, the share of export to Russia more than 50%.

Table 3 – Observing branches that are highly depend on Russian market [1]

Sum exported to Russia ($ mln)

Share of export to Russia (%) Branch

1 782 154 61 Wagons for the transport of goods by waterway, not self-propelled

603 296 64 Turbojet engines , gas turbines

562 648 94 Artificial corundum, alumina, aluminum hydroxide

554 376 72 Railway parts of locomotives or tramway

521 590 63 Angles, shapes and sections of carbon steel

412 966 65 Chocolate

341 882 72 Transformers, inductors and throttle

307 783 86 Cheeses

289 967 93 Pebbles, gravel, crushed

274 731 98 Other rail locomotives , locomotive tenders

264 182 77 Wallpaper and wall coverings , window transparencies

208 772 98 Motor cars and other motor vehicles for the transport of passengers

192 236 76 Pumps for liquids , the mechanisms for maintaining liquids

185 236 85 Paper, cardboard, wool , thick coated



Continuation of table 3 - Observing branches that are highly depend on Russian market

Sum exported to Russia ($ mln)

Share of export to Russia (%) Branch

170 736 56 Flat-rolled products

164 309 53 Air or vacuum pumps , air compressors or fans , hoods or cabinets with fan

163 293 69 Metal structures and parts

156 200 87 Motors and Generators

144 373 100 Radioactive chemical elements and isotopes

135 925 84 Other articles of plastics

135 008 91 Polymer chloride

116 721 83 Flat-rolled carbon steel * we highlight industries which dependence is biggest **based on the State Customs Service of Ukraine data

As we can see from this table there are lot of branches, which dependence on

Russian market exceeds 90%. It can easily predict huge losses that company will get.



Source: Eurostat (migr_imm1ctz) and (migr_pop1ctz)

Migration trends comparison

European Union During 2011 there was estimated 1.7 million immigrants1 to the EU from

the outside countries. In addition, 1.3 million people who were living on the territory of some EU country migrated to another Member State.

Thus, about 3.2 million people immigrated to one of the EU countries, when at the same time at least 2.3 mln emigrants have left EU countries. It has to be

emphasized that given numbers do not represent the migration flows to or from the EU as a whole, because they also take into account flows between different EU countries.

The largest number of immigrants in The United Kingdom (566 044) was observed in 2011, next greatest countries were Germany (489 422), Spain (457 649) and Italy (385 793); these four countries together amounted for 60.3 % of all immigrants to European Union.

The greatest number of emigrants was observed in Spain in 2011 (507 742), the United Kingdom (350 703), Germany (249 045) and France (213 367). 16 countries of EU reported the higher rate of immigration than emigration in 2011, but in Bulgaria, the Czech Republic, Ireland, Greece, Spain, Poland, Romania and the threeBaltic countriesamount of emigrants exceeded number of immigrants.

Depending on the size of the population of the country, Luxembourg amounted the highest number of immigrants in 2011 (38 immigrants per 1000 persons), followed by Cyprus (26) and Malta (13).

The highest rates of emigration in 2011were observed for Ireland (19 emigrants per 1 000 persons) and Lithuania (18 emigrants per 1000 persons). 1 http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Migration_and_migrant_population_statistics

http://ec.europa.eu/eurostat/product?code=migr_imm1ctz&language=en&mode=view

http://ec.europa.eu/eurostat/product?code=migr_pop1ctz&language=en&mode=view

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:Immigrant

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:Baltic_Member_States



Source: Eurostat (migr_imm1ctz)

Source: Eurostat(migr_imm1ctz)

Observing the methods of the analysis of the migration problems we can consider the EUROSTAT principle of the categorization of the migrants according to the level of development of the country of their citizenship. This method of analysis is based on the considering human development index (HDI) calculated by

the United Nations. So, EUROSTAT proposes next figures. The largest share (52.4 % of all immigrants to the EU) constitutes the citizens from medium HDI countries and 34.6 % are from high HDI (but non-EU)

countries. Low HDI countries (6.3 %),EFTA countries (3.6 %) and candidate countries to the EU (3.1 %) amounted relatively low shares of total immigration to the EU in 2011.

In 2011, the relative share of returning nationals in total number of immigrants was highest in Lithuania (89.3 % of all immigrants), Portugal (63.6

%), Croatia (55,3 %), Estonia (54.8 %) and Greece (54.5 %). Moreover, the EU countries evaluated the returning migration level higher than 50 %. Opposite situation is observed in Luxembourg, Austria, Italy, Cyprus and Spain which reported



http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:Human_development_index_%28HDI%29

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:United_Nations_%28UN%29

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:European_Free_Trade_Association_%28EFTA%29

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:Candidate_countries

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:Candidate_countries



about relatively low shares of return migration in 2011 accounted for less than 10 % of immigrants.

Looking on the gender distribution of immigrants in 2011, there was observed highest share of men than women (52.1 % compared to 47.9 %). The country with the highest share of male immigrants was Slovakia (62.4 %); on the other hand, the highest share of female immigrants was reported in Cyprus (55.2 %).



Source: http://iom.org.ua



Ukraine

Current political and economical situation in Ukraine has provoked substantial changes in the population migration level. Last year tendencies showed us growing level of emigration of the Ukrainian citizens to the EU countries and countries of North America and Russia. So, let us consider main statistics, proposed by Ukrstat, connected with the Ukrainian migration trends.

Emigrationof Ukraine can be characterized by following factors: ● Cumulative number of emigrants: 6.5 million ● The total number of emigrants in the percentage of the population: to 14.4%. ● Most popular destination countries: Russian Federation, Germany, the USA, Israel, Czech Republic, Hungary, Poland. Looking on the graph we can see that bigger part of the Ukrainian migrants amounted to the 67% of men versus 33% of women. At the same time, we can recognize main employment branches of Ukrainian emigrants, the biggest of which constitutes construction – 54%, homecare – 17%, agriculture – 9%, retail – 9%.



Imigrationto Ukraine mainly occur because of its benefitial geographical position. It means that Ukraine somehow represents the linkage between Asia, Africa and Europe. So, immigration to Ukraine can be characterized by following indicators: ● The total number of immigrants: 198 325 (the number of immigrants registered by Ministry of International Affairs, 2010 - UKRSTAT), 5.3 mln (residents of Ukraine, according to the 2001 census were not born in its territory - UKRSTAT). ● The main countries of citizenship of immigrants: Russian Federation, Moldova, Uzbekistan, Belarus, Georgia, Armenia, Azerbaijan.

Сustoms union

Today, Russia represents the most attractive destination for labour

migrants from the Customs Union (CU) countries and Central Asian countries. Its labor market requires migrants with high and low qualifications for employment and given the imperfection of migration legislation, the overwhelming majority of unskilled migrants work in Russia irregularly. So, let us consider main trends of this region’s emigration and immigration.

● Emigration:Depending on the country of migration destination

Eurostat accounts at least 1 out of 2 Russian migrants living in the European Union, with Germany which amounting the greatest number, followed by Estonia and Latvia. Other countries, which are always chosen by Russian migrants as a destination, are Ukraine, Israel, and the US. However, there exist some differences between such countries.

Overall, Russian migrants have an intermediate skill profile with 70.0%2 persons with a medium-high level of education (2006) with no significant differences according to destinations. In OECD countries, a huge mismatch between educational and occupational level is observed: 2 out of 3 (65.9%) of Russian migrants were indeed employed in low-skilled jobs, such as ‘service, shop,

2 http://www.migrationpolicycentre.eu/docs/migration_profiles/Russia.pdf



craft and related trade workers’ as well as ‘plant and machine operators or assemblers’ or simply in ‘elementary occupations’

Russian refugees by country of asylum, 2000-2011 Country of

asylum 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Germany 0 0 44,284 45,568 45,030 41.732 25,347 30,424 35,505 37,642 39,460 39,816

Austria 201 186 150 911 4,152 6,438 8,723 11,571 14,122 15,828 17,229 18,473

Poland 37 244 469 674 1,671 3,785 6,024 8.987 12,034 14,510 14,730 14.897

France 499 718 1,794 2,613 3,991 5,292 5,945 6,613 7,615 8,942 9,858 10,882

USA 11,916 16,294 18,499 18,964 15,891 18,812 86,914 7,915 7,652 7,434 7,043 6,863

Norway 104 245 457 1,204 2,249 2.694 3,034 3,552 3,790 3.969 4.104 4,056

Belgium 35 107 112 168 1,081 3,899 5,425 5,150 3.981 3,428 2.964 2.894

Canada 1,694 2,196 1,990 1,994 2,118 2,073 1,916 2,960 2,770 2,612 2,311 1,931

Sweden 1,490 996 978 1,017 1,078 1,178 1,493 1.488 1,583 1,705 1,739 1,786

Others 24,334 24,170 22,878 23,307 30,839 17,134 14,561 14.196 14.009 13,385 12,510 8,187

Total 40,310 45,156 91,611 96,420 108,100 103,037 159,382 92,856 103,061 109,455 111,948 109,785 Source: http://www.migrationpolicycentre.eu

From the table we can see that three main destination countries of Russian

labor emigrants are Germany, Austria and Poland. It is also important to say that amount of labor emigrants beginning from the 2000th was growing and for 2011 amounted to almost 110 thds people.

Stocks of Russian refugees continues to be one of the largest in the European Union. In 2011 there were 109,785 refugees in the area with almost one half based in German speaking countries.

● Immigration: Beginning from 1991 Russian Federation has become one of the greatestmigrants’ amount host countries in the world, with the biggest part of neighbor countries’ migrants.

In 2002, the population census recorded almost 12 mln3 individuals born abroad and around 1 mln of foreign citizens in Russia (8.3% and 0.7% of the total resident population, respectively). In both cases, the the biggest part is originating in other CIS states (94.0% and 88.4% respectively) confirming the exceptional importance of Russia within the CIS migratory area for cultural, historical and

3 http://www.gks.ru/



language affinities as well as its scarce attractiveness with respect to the rest of the world.

Immigrants stocks in Russia according to different criteria 2002-2010 Country of citizenship/

Country of birth 2002

(birth) 2002

(citizenship) 2010

(citizenship) CIS countries 11.284.511 906,314 686.993 of which Ukraine 3,559,975 230,568 93.39

Kazakhstan 2,564,955 69,472 28.06 Belarus 935,782 40,330 27.668 Uzbekistan 918,037 70,871 131,062 Azerbaijan 846,104 154,911 67.947 Georga 628,973 52,918 (a) Armenia 481,328 136,841 59,351 Kyrgyzstan 463,521 28,843 44 611 Tajikistan 383,057 64,165 87.123 Moldova 277.527 50988 33 884 Turkmenistan 175,252 6,417 5.575

Other countries 722.311 119,099 106,245 Stateless - 429,891 178,245 Total 11,976,822 1,456,304 971,483 % of the total population 8.3 1 0.6

By comparing the size and origins of the foreign population in 2002 and

2010 (columns 2 and 3), there are several important issues to be emphasized. First, rapid decreases in immigration were seen in nearly all countries,

except for most central Asian countries (Kyrgyzstan, Tajikistan and Uzbekistan). For example, in 2002, 22.5% of migrants were from Ukraine, which has fallen to 13.6% in 2010. In the same time period the share of Uzbekistani’s increased from 6.9% to 19.1%. Hence immigration stocks in Russia have seen significant changes in 8 years a relatively short period of time4.

4 Source: http://www.migrationpolicycentre.eu, http://www.gks.ru/

Source: http://www.migrationpolicycentre.eu



CONCLUSION

So, returning to the main point of this article, we can conclude consequences of 3 main scenarios of Ukraine ascension to EU, CU or remaining independent.

First scenario is signing the FTA Association Agreement and in future joining to the European Union. The main factor, that should be positively assumed, is reciprocal lifting of customs duties between Ukraine and EU countries. This will lead to growing export on 10%, when import will probably rise by 15%. Main macroeconomic indicators are relatively increased in EU.

But on the other hand the GDP growth of these countries is decreasing in comparison with previous years. Other difficulties can appear from harmonization of standards viewpoint. 85% of all standards have to be agreed with EU one. Furthermore this scenario will obviously lead to decreasing trade turnover between CES countries and Ukraine by approximately 2.5%.Ukrainian GDP dynamic will lower, because of diminution in export volumes to CES countries and growth in import volume from EU countries. One more important factor that should be taken into account is dependence of some branches on the Russian market. “Custom war” will lead to huge losses in machine-building, chemical, confectionary industry.

Second scenario is joining Custom Union. Positive side is expansion of inter-country trade, increasing of industrial cooperation between countries, stimulating technological convergence.

But on the other hand such interaction will not lead to strategic long-run changes in organizational and productive spheres. And formation of unified currency system can lead to reduction of export from Ukraine and growth in import. Such decision will strengthen political and economic dependence of Ukraine on Russia.

Remaining independent is one more scenario. But in a world, where struggle between blocs of countries is constantly intensifying, Ukraine will not be able to maintain full independence.

Thus there is no simple answer, both agreements give Ukraine stupendous potential for development and growth opportunities from one side and terrified



losses from another. The question is how to use all this options and where find enough investment to realize them in the most effective way.