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Ukraine economy in dire need of reform

Ukraine's economic situation is catastrophic - billions in debt, corruption and rising prices. The EU is trying to help by reducing customs duties. But it is likely to be a mere drop in the ocean.

The European Union is hoping to ease Ukraine's economic burden by freezing almost all customs duties for a limited period.

Around 98 percent of custom duties hitherto issued for Ukrainian exports to the EU are to be scrapped or reduced until November following a new regulation that took effect at the end of April. Ukraine in turn is not obliged to make its market more accessible for EU products.

"The EU introduced these unilateral measures because it wants to support the current government in Ukraine," a spokeswoman of EU Trade Commissioner Karel de Gucht told DW.

The EU Commission values the benefit of the customs duties agreement to Ukraine at 500 million euros ($680 million) per annum. The agricultural sector is set to profit the most, saving some 400 million euros in customs duties, especially with regard to grain, pork, beef and poultry.

Farms in the EU offering such produce are particularly affected by the customs deal, but the commission spokeswoman said that "mechanisms to monitor and protect" the European market were in place – without giving any further details.

Hardly able to compete

Claudia Kemfert

Kemfert: "Don't jeopardize good economic relations!"

The figures already point to an underlying problem of the Ukrainian economy - the country is lacking in competitive products. "They are importing high-quality technological products from the West and energy from Russia,” says Rainer Schweickert from the Kiel Institute for the World Economy. "And they're exporting agricultural produce, steel and raw materials but no diversified products containing technology."

The Ukraine's trade balance with the EU is negative. Last year, they exported goods worth 14 billion euros to EU member states but were forced to import EU products to the tune of 24 billion euros. The figures have hardly changed since 2007.

The customs duties agreement will benefit those companies the most that already export to EU quarters. All others will now have to start wooing potential customers in the EU.

Agricultural produce must also meet strict EU hygiene and processing requirements. Exporters must provide proof they can meet quality standards but only one in 10 farms in the Ukraine have the necessary certificates.

The EU Commission views the customs deal as a precursor to the planned free trade agreement with Ukraine (DCFTA - Deep and Comprehensive Free Trade Agreement), which should have been inked last year within the framework of an association agreement aimed at forging closer ties between the EU and Ukraine.

The decision of then President Victor Yanukovych to delay the ratification so as not to anger Russia added fuel to the Maidan protests that ultimately brought down the government.


Ukraine has won more time after paying part of its gas bill

Sigh of relief in gas row

Ukraine's new president

Petro Poroshenko

, a staunch backer of EU engagement, is now trying to mend fences with Russia. Kiyv has

settled part of its gas debt to Russia

in the row over gas deliveries. The Russian energy ministry confirmed on Monday (02.06.2014) it had received a payment of 577 million euros. The Russian threat to stop gas deliveries immediately has been averted for now, with the ultimatum extended by another week. Ukraine still owes Russia a total of 1.6 billion euros for gas deliveries made until April.

The EU can also breathe a sigh of relief for the time being. "Europe's energy security is not in danger," says Claudia Kemfert from the German Institute for Economic Research in Berlin. "But Ukraine remains an important transit route. Fifty percent of all imports from Russia pass through Ukraine. So it would be wise to maintain good economic relations without jeopardizing them."

Free trade agreement in the works

Petro Poroschenko

Petro Poroschenko: the former oligarch and minister has taken the helm in Ukraine

Last week the presidents of Russia, Kasakhstan and Belarus founded the Eurasian Economic Union. It remains to be seen whether and when Ukraine will sign the free trade agreement with the EU.

Rainer Schweikert from the Kiel Institute for the World Economy however says this will not automatically guarantee the country's swift economic recovery: "In order to make use of a free trade agreement with the EU, you need access to the market and you need competitiveness. This is hard to achieve in one or two years."

The new government has a lot on its plate, notably the fight against corruption and reining in the oligarchs. "The oligarchs could always rely on striking tax-dodging deals with the authorities," says the Ukrainian economist Boris Kushniruk. "They also bribed judges if any charges were brought against them."

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