Zsuzsa Ludvig senior research fellow, Ph. D. Institute for World Economics of the

1. The ENP versus Russian integration ideas within the CIS(NIS)-space with focus on Ukraine and the SES4 Zsuzsa Ludvig senior research fellow, Ph. D. Institute for World Economics of the Hungarian Academy of Sciences Moscow, 12-13 October, 2007.

2. Economic integration - a theoretical approach • 1. Free trade area - eliminating customs tariffs and quotas • 2. Customs union - commonly established customs tariffs towards third parties, converging foreign trade policies • 3. Common market - free movement of capital and labour (four freedoms) • 4. Economic union - harmonisation of economic policies • 5. Political union - creation of supranational power (based on Béla Balassa) • in practice: economic integration groupings combine the above mentioned elements, see for example Single market (EU)

3. Economic integration ideas and initiatives are spreading all over Europe • West-East integration initiatives - • strategical partnership with Russia - idea of 4 common spaces including CES • ENP goals - FTA-s with target countries (“Free Trade+” or „deep and comprehensive FTA”) • West-South integrations • East-East integrations - within the CIS(NIS)-space (Union state of Russia and Belarus; EurAsEC6; SES4 - Single Economic Space of Russia, Belarus, Kazakhstan and Ukraine - inour focus)

4. Theoretical possibility to create a large pan-European „economic integration” at first step as a large Free Trade Area or „Free Trade+” Zone • From economic point of view it seems possible to link East-East ideas to West-East initiatives (SES4 to “FTA+”-s) • circle of affected countries is partly identical (EU, Russia, Ukraine, ???in the future: Belarus, ??? Kazakhstan) • both ideas incorporate similar economic elements (FTA and economic policy harmonisation measures = “FTA+”; focus on the energy issue ) • EU encourages the creation of regional integration groupings (Non-paper 2007, based on ideas of the Communication (2006) 726 final of 4 December 2006

5. Dilemmas • many of them are linked to the participation of Ukraine • why is Ukraine so important in both integration ideas? • second large CIS economy • its strategic transit position • may serve as an example for other countries (f. e. GUAM-members) • the most developed “FTA+” concept on EU-side - model building (1. in Spring 2006, EU and Ukrainian experts together - CEPS+ Institute from Kiel+ICPS; 2. 2007- Ukrainian experts of ICPS - “impact assessment”, others) • Why is the focus on SES4 from among CIS groupings? • European point of view • economic potential of the 4 countries (competitive or complementary intents?) • a new “modern” type of integration initiative in the CIS-space (focus on processes not on institutions!)

6. MTA VILÁGGAZDASÁGI KUTATÓINTÉZET INSTITUTE FOR WORLD ECONOMICS OF THE HUNGARIAN ACADEMY OF SCIENCES 1. Dilemmas in EU-Ukraine „FTA+” concept • The depth of “regulatory convergence” in a sectoral approach ??? • Free trade in agricultural products? (EU papers say in principle:Yes, Ukrainian experts doubt it…) • The elaboration of potential East-East regional integration groupings, to be supported, is missing in the EU documents • Time horizont ??? (medium to long term for “FTA+”) • inner political division (Is it possible to reach consensus in sectoral level on the very important details ? EU intention is to have “binding commitments” in the “FTA+”-s!) • one-sided approaches (f. e: the ICPS suggestion for Ukraine to join the Pan-Euro-Mediterranean Cumulation System may create new relative disadvantages for those Ukrainian companies buying raw materials from Russia leading to new conflicts in Ukrainian-Russian, EU-Russian relations as well.) many of them are linked to the participation of Ukraine

7. MTA VILÁGGAZDASÁGI KUTATÓINTÉZET INSTITUTE FOR WORLD ECONOMICS OF THE HUNGARIAN ACADEMY OF SCIENCES 2. Dilemmas related to Ukraine in the SES4-concept • What stage of economic integration? • Ukrainian interest and readiness: only FTA but without exceptions??? • Russian interests (the essence of SES4 concept): to go further, to create in a short run a customs union, common market, and later on a kind of economic union (in line with theory) • Customs union needs supranational organs! • The final goals of SES4 idea mean an immense task of economic policy harmonisation, but Ukraine already committed itself to harmonisation and liberalisation process with EU legislation (“regulatory convergence”) • BUT: the “either …or” option as regards the direction of trade liberalisation -harmonisation process is not a good solution for Ukraine (strong economic links in both directions)

8. EXPORTS Russia 22.5 SES (3) 27.9 CIS 33.0 EU25 28,3 Turkey 6.2 USA 3.2 India 2.2 IMPORTS Russia 30.6 SES (3) 35.5 CIS 44.8 EU25 34.7 China 5.1 Korean Rep. 2.1 USA 2.0 Ukraine’s major trade partners in 2006

9. Structure of Ukrainian exports to the EU and Russia (%)

10. 3. Dilemmas in EU-Russian „FTA+” ideas • Interests in FTA on Russian side are limited due to the specific Russian export structure (the bulk is energy facing no restrictions )- no hurry • There is no sense to put FTA into the centre of bilateral economic relations • Special features of „FTA+” are still to be elaborated for Russia (takes much time - time lag in comparison with Ukraine, national interests may prevail) • The necessity of the harmonisation element (with EU legislation) is questioned in Russia (acceptance for a “regulatory convergence” is higher in multilateral framework -WTO) • the focus is on energetic co-operation, but harmonisation in this field seems to be very problematic

11. 4. Dilemmas regarding other affected countries of SES4 • There is no EU FTA offer towards Belarus and Kazakhstan (there might be a fear on EU-side to get into one FT zone with countries outside the set of the ENP-offer) • But, a potential EU-offer in the future • Belarus - hindered by the political foundation, but after a democratic turn the EU-offer may be expected • Kazakhstan - there are no significant economic arguments on EU-side against a FTA with Kazakhstan based on present trade structure (except a few products) • Kazakhstan may be a looser in liberalisation (proper timing, assymetry?) • “FTA+ “ - the two countries committed themselves to harmonisation within SES (and EurAs AC6) - they are ready to do it, and will have to do it in WTO-accession process as well. • Until the potential EU-offer comes rules of origin and more their implementation are expected to cause problems in trade relations!

12. MTA VILÁGGAZDASÁGI KUTATÓINTÉZET INSTITUTE FOR WORLD ECONOMICS OF THE HUNGARIAN ACADEMY OF SCIENCES 5. Dilemmas related to future WTO-memberships • Ukraine - advanced WTO-negotiations - a major reason not to be a member of SES customs union, main obstacle in further process with SES idea - no hope to change, BUT “regulatory convergence” within the multilateral framework may pave the way towards harmonisation with EU legislation • Russia - may be the second, BUT harmonisation process started also in multilateral framework • Kazakhstan, Belarus - lagging behind, but hopes for better WTO negotiating positions as members of the then existing customs union with Russia

13. Conclusions • Linking East-East integration ideas (SES!) to West-East ones is a possibility from theoretical and economic point of view (but serious problems have to be dealt) • it is not problem that two EU-frameworks (common spaces; ENP) exist since the EU has already introduced into them “stealthily” very similar contents • Is linking of the ideas also a necessity? Yes, for all interested partners (Ukraine, Russia, the EU) • Sound expert opinions on all sides are for it • What is missing? - political will and consensus (inside and between all affected parties!)

14. MTA VILÁGGAZDASÁGI KUTATÓINTÉZET INSTITUTE FOR WORLD ECONOMICS OF THE HUNGARIAN ACADEMY OF SCIENCES Major risks are of political character • On EU-side: ‘the no one voice’-syndrome (some member states may insist on the isolated treatment of Russia and Ukraine) • On Russian-side: excessive patriotism based on the image of the possibility to built own economic block (competitive approach) • On Ukrainian-side: different emphasises in EU-orientation and in relations with Russia

15. MTA VILÁGGAZDASÁGI KUTATÓINTÉZET INSTITUTE FOR WORLD ECONOMICS OF THE HUNGARIAN ACADEMY OF SCIENCES 1. RecommendationsHow to realise the idea? • Recommendations for SES: • to keep Ukraine in the whole SES idea (SES4 instead of SES3), but give up forcing the establishment of customs union (giving up the theoretically suggested stages of integration for SES4, which is still possibility for SES3) • to strengthen the harmonising element (? SES4 = a“FTA+”) in line with EU legislation where possible (selectivity), (WTO accession processes pave the way towards this.) • to give up the “competitive approach” towards EU initiatives and ideas

16. MTA VILÁGGAZDASÁGI KUTATÓINTÉZET INSTITUTE FOR WORLD ECONOMICS OF THE HUNGARIAN ACADEMY OF SCIENCES 2. RecommendationsHow to realise the idea? • Recommendations for the EU: • to keep the two frameworks (EU-Russia common spaces; ENP), but with a clear intent to harmonise their contents by involving all the affected parties into the same discussion (especially important on energy issues!) • common thinking on pan-European FT Area with regulatory convergence (to be worked out with appropriate timing and carefulness in details for each country) • The way towards the dreamed “Neighbourhood Economic Community” - NEC ( Brussels, non-paper, 2007)

17. MTA VILÁGGAZDASÁGI KUTATÓINTÉZET INSTITUTE FOR WORLD ECONOMICS OF THE HUNGARIAN ACADEMY OF SCIENCES Gains of co-operative approach? • for the EU: • step towards overcoming the EU’s Russia-problem • step in solving the EU’s Ukraine problem • more potential for strengthening world economic (and general international) position • for Russia: • to have the EU as a strong ally, real strategic partner • to help solving intra-CIS problems (integration intentions versus desintegration processes) • for Ukraine: • to avoid and overcome the “either…or” dilemma in foreign orientation and economic integration • more stable economic relations with Russia • for all of us: • Europe with fewer conflicts

18. Thank you very much!