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Wednesday, March 5, 2014

EU-Ukraine trade agreement: give us ethanol, we'll take your utilities.

I've read the draft of the EU-Ukraine agreement. Below I'll explain the main documents.

The agreement is slightly skewed in favour for export TARIFFS from Ukraine to EU.
Tariffs are not taxes. It are costs exporters/importers have to pay directly into state-coffers.
Further more it pushes the Ukraine to be more inline with IMF regulations, so they can start dancing to their ropes more. That IMF carrot for quick cash influx is very tempting for nations with large debts and corrupt leaders. But devastating in the long run.

The problem for me is article 148 about the EU directive on opening the market for public utilities as water, energy, transport and postal services. This will be in effect 4-5 years after the treaty is signed.
It's the next step after the opening of some general markets upon signing.
In that period Ukraine has to change national laws regarding the tendering of contracts to comply with EU directives on how the tendering of contracts should be handled. For Ukraine it does mean some judicial changes.
So increase in opportunities for Ukrainian companies to the EU at first, while in a few years EU companies, or US companies that have residencies in the EU (who hasn't with the Irish-Dutch sandwich?) to pluck all the state owned properties after the financial crisis has loomed. But most international companies are sitting on full coffers already...

We've seen in Europe that liberalising these markets is not wise. The UK sold their Royal Mail recently meaning they have a short influx of cash, but in the long run will not receive any further revenue on this. I'll not address the issues of the Royal Mail share price since going public ;-) Look it up yourself and judge if selling off national interests is smart at this time, if at all.

This is what the IMF/WTO likes to implement world wide and the EU is supporting it:
Sell off all national assets. In the end the only way to sustain a nation is by implementing higher taxes to compensate for the loss of regular income from those services.
and quick liberalisation of public services like water could have some nasty consequences. Remember Brazil anyone? Where the water company even claimed the rainwater so locals where fined if they collected it off their roofs... Some 3rd wold country, you say. Well the privatized company was US-owned.

Further more, there is a military clause attached to it as well: Regular security meetings between the parties and the obligation to work together in crisis situations. (what ever that means)
As well as engagement in training operations, just with the EDA (European Defense Agency), of course. Not a word about NATO. And all explorational, of course. Next are the disarmament article and "Combating terrorism" article.
Oh yeah, maybe sharing some military technology too, they're not sure about that, yet.

Ukraine will, Ukraine shall
All in all there is a whole lot of "Ukraine will" and "Ukraine shall" in there. Only a few times that the EU Parties will or shall do something as well. Plus the fact that this agreement does imply that an outside party, the EU, can insist that some laws are changed within a non-EU country. And there is not a word about joining the EU in this agreement. This include how judges are chosen, how the judicial system should look at corporations, patent laws, trademarks, etc. As well as how the police system works.
For better or worse, the fact stays that when EU directives change, so do laws in the Ukraine, just to stay within the agreement. Does a sovereign country want that? That's up to the people. And that does include giving that public a neutral view, not participating on a square with the people demanding that a given, elected, government signs that agreement.
I do have to add that in May 2013 a law was drafted in the Ukraine for a re-vote in five districts where it was not clear if the voting was rigged or not during the 2012 elections. So you could agree that the EU (and US) politicians where in their right when on Maidan square. On the other hand, there wasn't a nation that questioned the 2012 elections and the US and the EU recognised Yanokovitch as the lawfully elected leader of the Ukraine after the 2012 elections and have held meetings and talks with him.

Myths explained by the EU
There is a nice Myths document about the treaty as well.
I was puzzled by the graph on page 14. It shows the GDP of Poland, Romania and Ukraine.
There is a noticeable dip in 2012 for Poland and Romania. But not for Ukraine.
Not explained in the text why, but I suspect it may have to do with ex-pats sending less money back home or ex-pats returning back home unemployed or in the process of starting up businesses. The two countries that opened their borders the most early on are now in austerity. (Ireland and the UK). It could also be the burden of the crisis in Greece.
Continuing that myth, on page 15, they mention Russia made very little GDP growth between 1990-2012.
They forget to mention that Russia paid an enormous amount of money back to the WTO somewhere in the end of the nighties for loans, at high rates, that where "granted" to them after the fall of the Soviet Union. It caused quite a stir at the time because the bankers that are joined in the Group of Paris didn't want Russia to pay the loan back entirely and so early, because they where loosing out on future interests. After that payment Russia finally decreased their deficit, and in the end increased their GDP. So yeah, on a 22 year average you get slow growth, take only 2000-2012 and you'll get a different average for Russia.

appendix to annex IA annexes IB-ID; you really need to have OCD to get a job in Brussels
Only odd point I found is in the export restrictions for the Ukraine. Most are set, some can be increased after 5 years. In general the lifting of quotations look like optimistic growth figures. so from 8.000 tons to 10.000-20.0000 tons. from 20.000 tons to 40.000 tons.
Only thing that can increase in export to a whopping 400% is ethanol: from 27000 tons/year to 100 000 tons/year for export. Will Europe finally step into ethanol? Or force Ukraine to get into that industry. As they will keep agricultural restrictions in favour of the EU  with direct subsidies to EU farmers.

Yes, there will be lower import tariffs for goods from the Ukraine. As well as lower export tariffs from the EU.
The pro-side is saying that this will be an immediate influx in the Ukraine economy.
True, but just in cost savings and only directly to importers and exporters as they pay less fees. Making in the end the products cheaper IF the lowering of the tariffs are calculated in as well.
The pro-side is saying that Ukrainian goods will increase in quality, so that's good for the Ukrainian people.
There is a saying: you can get good, cheap and fast service. You can only select two of them. And good and fast service won't be cheap, as cheap and fast service won't be good.
At the moment people tend to go for the cheap and fast option, rather than the good option.
Just because that won't be cheap. or in the worst case: not fast.

with the implementations of so many EU directives, the inflation in Ukraine will increase. The people will not be able to effort higher quality of goods thus companies have to make a choice: go for export with high quality of goods and leave the "non-EU-compliant" goods for the national market.
We've seen that in most, if not all of the EU during and after WWII. It's called surrogates.

and I suspect Ukraine will be flooded by a lot of big international players to pluck all the good national assets and walk away with it in 4-5 years. Like has happened in Europe over the years. It's like saying: it's better to rent and move than to buy once and maintain, so sell your house and rent it back. It looks good for the first 10 years, but you feel the burden after 40-50 years... And for politicians you should look at those last kinds of timelines and not the first one when you're in office only.

But don't worry. Ukraine has to drop the tarrifs for second-hand clothing, so now all the Chernobyl charities can take your clothing again and flood Ukraine market. (one of the reasons those tariffs where implanted, or a bit of a proud stand: we don't need charity)
Talking in Chernobyl, there is mentioning on it where the EU is willing to help build a new dome over reactor 2.

Coming back to that ethanol thing
Ukraine's biggest opportunity in the whole agreement is the export of ethanol.
While the taxation on cars exported from the EU stay for a full 15 years.
That is, IF the car manufactures turn to ethanol. And to break a myth: EVERY car should be able to drive on ethanol with minor adjustments to the fuel injection system. Not just old T-fords, Citroen 2cv's or the modern "special hybrids". Although most of the old carburetor cars can make it a 1-2-3 change to run on ethanol, just by changing the nozzles inside the carburetor.
So Ukraine can make a lot of ethanol, but can't sell much of it on the national market, but only export it because those new European ethanol cars stay more expensive in the Ukraine.
But the car industry is coming up with the ethanol car for the last 50 years or so. They been playing that card over and over just by passing it on from one manufacturer to the next. Never gets further than a test-case. So I wouldn't really put my bets on it, yet.
This is, btw, the reason all those old carburetor cars need to go to the junkyard. You can quickly convert them to ethanol, making it less likely you go buy a new ethanol car. When the word gets out that most of those 60's, 70's and 80's cars can run on ethanol just fine a new round of cash for clunkers will be needed to increase the new car sales.

The only positive things for the Ukraine are the option to participate in some EU programs. But the Ukraine does have to pay a fee for each program, in order to benefit from it.
They do get a say in the regulation authorities over such programs, if the Ukraine chooses to participate in them.
The visa restrictions will not be lifted, but the EU will make it easier to obtain a visa for Ukrainians.

All in all, the EU wants to open up the water, energy, transport and postal service as soon as possible in the Ukraine. I doubt that Ukraine companies will be able to compete in this.
This agreement forces the Ukraine to keep updating laws to keep in line with EU directives. Changing the juridical system, and even some stuff about the police system.
Looking at the export quota's I'd say that the EU has little fate in produce from Ukraine and rather wish that they start producing Ethanol.
Ukraine needs to invest in procedures changes, both in politics as well as in production.
I can understand Yanokovitch saying: I want Russia in here as well, make it bi-partisan so to say. But it seems the EU doesn't want to risk the Ukrainian utilities in Russian hands. So that's why none of this agreement is up for negotiation. Ukraine just has to sign and deal with it. Further more, with the military cooperation in there, it will make it harder for Ukraine to do exercises with Russia, as it could be a conflict of interest. (EU procedures falling into Russian hands) So the EU is locking Ukraine into it's vault and create tension between Ukraine and Russia, although they firmly deny it.
Sorry, through the ages, Ukraine was always more brothers with Russia than with the EU.
While Poland and Ukraine do not always see eye to eye together. EU has always send a Polish ambassador to the Ukraine. It could be seen as a way of reconciliation, or a continues provocation.

after 15 years the EU will have the Ukrainian utilities, and Ukraine is the main exporter of ethanol. But will not receive benefits from it's utilities, and will lost out of income of the tariffs. How a bankrupt country can survive in the long run without owning it's own utility services and without receiving income out of imports is to be seen. One way is to tax the population higher. But the Ukrainian people will have more expensive and better quality goods, so they obviously can affort the higher taxes at that time.

The documents:
It is a bit of a puzzle. Like in article 148 they state at the end: (hereinafter referred to as "Directive 2004/17/EC"). So in the timeline only the directive is mentioned, not the concerning article 148
- Full draft agreement
- Timeline for implementation
- Trade related matters (with articles 148, 151, 152, those are the articles that handle the sell off of utilities)
- list of all quoata's on export from the Ukraine (appendix to annex IA annexes IB-ID)
- Myths document: (myths_aa_en.pdf)
- study into the Ukraine reform as of June 2013