Vilnius 2013: the suspension, and the arithmetic behind it

On 21 November the government issued a decree suspending preparations for signature of the Association Agreement with the European Union, eight days before the Vilnius Eastern Partnership summit at which it was to be signed. The stated grounds were the need to protect national economic interests and to restore trade volumes with the Commonwealth of Independent States.

The political consequences of that decision are unfolding now on Kyiv's streets and are not the subject of this entry. The economic reasoning deserves examination on its own terms, because parts of it were substantive and parts of it were not.

The substantive part

Ukraine's export structure genuinely differs by destination in a way that makes the adjustment asymmetric.

Exports to the CIS, and to russia in particular, are concentrated in manufactured goods: railway rolling stock, machinery, chemical products, processed food. These are the higher value-added categories in Ukraine's basket, they employ more people per dollar of output than commodity exports, and they are geographically concentrated in the eastern and central industrial regions.

Exports to the EU are of comparable total value but weighted toward raw and semi-processed goods: grain, oilseeds, sunflower oil, iron ore, steel semis. The DCFTA would improve access for agricultural and food products, but it does not create European demand for Ukrainian railcars.

So the adjustment profile is genuinely difficult: costs arrive quickly and land on specific regions and workforces, benefits accumulate slowly and diffusely. Any honest advocate of the agreement had to acknowledge that, and few did.

The part that does not hold

Three counter-arguments are stronger than the ones being made.

First, the CIS market was already closing regardless. The trade restrictions applied through 2013 — the August customs blockade, the sequence of sanitary bans on Ukrainian confectionery, dairy and steel pipe — demonstrated that access to that market is a policy instrument controlled by another government and revocable at will. An export dependency that can be switched off administratively is not a market position; it is an exposure.

Second, the DCFTA's substance is regulatory rather than tariff-based, and the regulatory convergence has value independent of the trade flows. Adopting EU product standards, food safety rules, competition law and procurement procedures makes Ukrainian firms exportable to markets beyond Europe and makes Ukrainian assets valuable to buyers who cannot currently underwrite them.

Third, the adjustment costs were negotiable and partly financeable. Transition periods for sensitive sectors were built into the text, running up to ten years in places. The financing that was available was inadequate to the scale of Ukraine's immediate fiscal problem, which is a fair criticism — but that is an argument about the size of the package, not about the direction.

The immediate fiscal reality

What actually drove the timing was the balance of payments. Ukraine faced large external repayments in 2014, reserves covering barely two months of imports, no IMF programme because gas tariff conditionality was unacceptable, and eurobond markets pricing new issuance at prohibitive levels.

In that position, a government needs cash within weeks, and the agreement on offer from Brussels delivered regulatory convergence over years. Whatever one thinks of the choice, the constraint was real, and it was created by a decade of deferred domestic reform rather than by the terms of the European offer.

What businesses should do now

The practical position is one of high uncertainty with a known set of branches. Do not commit capital that cannot be paused. Check the currency composition of your Ukrainian exposures, because the exchange rate has been held at an unsustainable level for two years and the reserve position no longer supports it.

And keep the technical work going regardless of the politics. The DCFTA text exists, it has been initialled, and whatever happens over the next twelve months the direction of Ukrainian product regulation over the next decade is toward EU norms. Certification work done now is not wasted under any plausible scenario.

Related in this archive

• Why the trade choice was framed as a choice, and what the economics actually said
• The Association Agreement: read it as a specification, not a treaty
• What external partners can actually deliver, and what they cannot
• Ukraine Annual Review 2013: the year the model ran out

What was visible on our side that autumn was not politics but cancelled orders: in the week of the announcement, part of the pending contracts went on hold. A business finds uncertainty more expensive than direction itself — what stops it is not which way the country goes but not knowing which way. That, to me, was the real cost of that year.