EU delays free-trade, accession pacts with Ukraine

Bloomberg | 4 December 2009

EU Delays Free-Trade, Accession Pacts With Ukraine

By James M. Gomez and Daryna Krasnolutska

Dec. 4 (Bloomberg) — The European Union will delay signing free-trade and accession accords with Ukraine because of growing skepticism about the former Soviet state’s commitment to economic and political restructuring.

EU Commission President Jose Barroso, leading an EU summit in Kiev today, urged political leaders to “get back on track” to unfreeze a $3.4 billion payment on its $16.4 billion IMF bailout and end political bickering that brought the country to a standstill. He said talks over a so-called association agreement, key to membership, may be completed next year.

“Too often, Ukraine’s promises were only partly met, commitments were only partly met, words are not always matched by actions,” Barroso said before talks with President Viktor Yushchenko. “Reforms are the only way to ensure citizens’ prosperity and deepening relations with the EU.”

Yushchenko, hosting the annual summit for the last time in his term, failed to make good on his pledges during the 2004 Orange Revolution to wean Ukraine away from Russian influence and win EU candidacy status. With the economy in tatters and his popularity at a record-low before January elections, he’s struggling to regain investor confidence after the hryvnia sank 43 percent against the euro since September 2008 and the cost of insuring against default soared.

Unrealized ‘Fruits’

“The fruits of the Orange Revolution haven’t been realized and there’s a lot of disappointment in Ukraine and Yushchenko’s administration,” said Vasily Astrov, a political economist at the Vienna Institute for Economic Studies, before the summit. “It’s more and more difficult for Ukraine and the EU to talk to each other.”

The summit, which also touched on Ukraine’s role in natural gas transit, comes during a contentious presidential campaign that has Yushchenko pitted against Premier Yulia Timoshenko and opposition leader Viktor Yanukovych. The election will be held on Jan. 17.

Yushchenko told reporters today that the reasons for not signing accords on political and trade ties with the 27-nation EU include the global economic crisis and failure of the country to renew cooperation with the IMF and pass reform laws. He said, though, that Ukraine’s ambition to join the EU remains strong.

“All the troubles are temporary,” he said.

‘Sore Spot’

The country is the world’s second-least creditworthy, as measured by credit-default swaps, which protect against default. Contracts were traded at 1,316.776 basis points in London, compared with 551,668 for Latvia and 237,500 for Kazakhstan, according to CMA Datavision. A basis point is a hundredth of a percentage point.

The EU has grown more skeptical after political wrangling over budget cuts prompted the IMF to freeze its loan program, meant to prop up the economy, which slumped 15.9 percent in the third quarter, and the teetering banking system.

Raiffeisen International, the biggest foreign lender in Ukraine, considers it a “sore spot” and will cut jobs there, Chief Financial Officer Martin Gruell said on Dec. 1.

Standard & Poor’s cut the outlook on Ukraine’s CCC+ credit rating to stable from positive on Oct. 31 and Fitch Investors Service lowered its rating to B-, six levels below investment grade, on Nov. 12. Moody’s B2 ranking is five levels below investment grade.

‘Astronomical’ Distrust

“The sense of distrust has reached astronomical levels,” said Susanne Nies, a senior research fellow and head of the Brussels branch of the French Institute for International Relations. “The Ukrainians would very much like it an accession summit. The EU has no such expectation.”

With Yushchenko poised to garner less than 5 percent in the Jan. 17 election, EU leaders also met with his biggest rivals, Timoshenko and Yanukovych.

He has defended his record, saying talk about accession was unheard of under his predecessor, Leonard Kuchma. He also claimed in a Sept. 17 interview that “standards of living are the highest in 18 years” and he ensured “freedom of speech, freedom of the press and free and democratic elections.”

Before the global crisis, the economy expanded an average 5 percent a year and attracted $30.2 billion of foreign direct investment since 2005, compared with $8.3 billion in the previous 14 years, the statistics office says.

“It would be fair for Ukraine to expect the EU to give it a membership perspective,” said Olga Shumylo, director of the International Center for Policy Studies in Kiev before the summit. “The country walked away from its past and moved on democratically. It’s clear the European Union has Ukraine fatigue.”

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source: Bloomberg