Francisco A. Laguna & Wojciech Kornacki
On June 27, 2014, the European Union (EU) and Ukraine signed the Deep and Comprehensive Free Trade Area (DCFTA) agreement. This agreement established a brand new free trade zone between the EU and Ukraine. Following the continuing hostilities in Eastern Ukraine, the ratification of this agreement will be put on a fast track in the EU and the Ukrainian parliament. The DCFTA will remove customs, tariffs, quotas, and harmonize Ukrainian regulations with EU regulations. The agreement revolutionizes current trade relations between the EU and Ukraine and is likely to generate hundreds of millions of dollars in revenue and result in economic development in Ukraine.
The European Union
Besides militarily, the EU is important to the Ukraine for obvious economic reasons. It is a supranational organization of 28 countries across the European continent. Its current population stands at over 500,000,000, which places it third behind China and India in terms of the population size. It is a single market with free movement of goods, services, labor, and capital and largely enjoys a common currency. The EU also has numerous Association Agreements with other countries, including Ukraine and Turkey. Its GDP stands at almost $16 trillion (2013), making it the second largest economy, behind the United States. According to its own statistics, the EU’s economy is bigger than that of the United States, and it accounts for 20% of all global exports and imports, exporting more than China and the United States.
The Ukraine emerged as an independent state in 1991 following the collapse and breakdown of the USSR. While independent, it has been heavily reliant on the Russian Federation for its energy needs and exports – 30% of exports go to the Federation. Ukraine’s economy has suffered from an ongoing recession and urgently needs structural reforms. The Russian annexation of Crimea further undermined the Ukrainian economy.
Earlier this year, the International Monetary Fund agreed to incrementally provide $14 to 18 billion of financial support to Ukraine. This may provide some level of relief; however, the Eastern Ukrainian crisis requires increased military spending, and Ukrainian President Pyotr Poroshenko has announced that he will increase defense spending to $3 billion by 2017.
Besides its now apparent geostrategic and political importance, Ukraine has important mineral resources, large land mass and annual output of over US$ 300 billion. That makes it an attractive partner for the EU, as well as an object of desire for the Russian Federation.
The Deep and Comprehensive Free Trade Area (DCFTA)
According to the recent report published by CTA Economic & Export Analysts in collaboration with the Ukrainian government, the DCFTA is:
“a comprehensive, broad and meaningful trade agreement which aims at reducing and eliminating the tariffs applied to each other’s products, liberalising access to services markets, and also at aligning Ukraine’s business related rules and regulations with those of the EU, with a view to ensuring that products can be traded freely between the two countries and Ukrainian companies, products, services and institutions treated equally with those of the EU…”
The agreement is expected to be in full force by the end of September 2014. It is hoped that this agreement will play a major role in economic development in Ukraine. It eliminates close to 100% of all duties which is expected to dramatically increase the trade in goods. For industrial goods, there is a period allowing a delay in the removal of tariffs. Here, specifically, Ukraine wants to protect its automotive sector.
Expected immediate direct benefits will include 330 million Euros for Ukrainian agricultural goods producers, and hundreds of millions of Euros likely to generate massive investment in Ukraine, increase commerce, and improve working conditions. This agreement also opens the Ukrainian market for all 28 countries in the EU.
Another major opportunity is access to the Ukrainian government procurement market. The DCFTA will allow European companies to compete in providing goods and services to the Ukrainian government that will be receiving billions of dollars in financial support from the IMF. This agreement also incorporates specific rules on energy transit between the EU and Ukraine. To read more about the agreement click here.
The DCFTA creates many immediate and long-term business opportunities. Entrepreneurs who will take an advantage of this agreement and from the opportunities it creates are expected to profit, and also will contribute to the modernization of the Ukrainian economy.
Contact TransLegal if you have any additional questions the agreement or would like to learn about any other business opportunities.