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DE RUEHKV #1875/01 2661237
ZNR UUUUU ZZH
P 221237Z SEP 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 6388
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 0137
RUCNCIS/CIS COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 04 KYIV 001875 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EUR/UMB, EUR/ERA, EB/TPP/MTA 
STATE PLEASE PASS TO USTR FOR CKLEIN, PBURKHEAD 
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK 
GENEVA FOR USTR 
USAID FOR E&E/AA, E&E/EA, E&E/PO, EGAT/EG, DGST, E&E/EG 
 
E.O.: 12958: N/A 
TAGS: ETRD ECIN PREL EUN UP
SUBJECT: UKRAINE'S NEXT STEP TOWARD THE EU: A "DEEP" FREE 
TRADE AGREEMENT 
 
REFS: A) KYIV 1860 
      B) KYIV 1330 
      C) KYIV 915 
      D) 2007 KYIV 1862 
 
¶1. (SBU) Summary: Ukraine and the EU have launched 
negotiations on a Free Trade Agreement (FTA), which would 
slash bilateral tariffs and reduce a range of other non- 
tariff trade barriers.  Ukraine's chief negotiator told us 
that the talks are not true "negotiations," as they are 
focused on how Ukraine can best adapt its economy to 
existing EU norms.  Many on the EU side see the FTA as a 
way to bring Ukraine as close to Europe as possible without 
EU membership, which is not on the EU agenda at the moment 
because of "enlargement fatigue."  Once completed, the FTA 
should significantly increase EU-Ukraine trade and boost 
Ukrainian economic growth.  The GOU strongly supports the 
FTA negotiations, although warns that a few areas, such as 
environmental issues and government procurement, could 
prove difficult to resolve.  The influential Party of 
Regions also supports an FTA, but less vigorously.  A few 
large Ukrainian businesses publicly support the FTA, but 
there is a lack of knowledge more broadly among the 
business community, and some companies are worried the FTA 
could hurt trade with Russia.  Post believes that an EU- 
Ukraine FTA is strongly in the U.S. national interest, as 
it is a further step anchoring Ukraine in Euro-Atlantic 
institutions.  We recommend that the USG support the EU- 
Ukraine negotiations in every appropriate manner.  End 
Summary. 
 
FTA Talks Launched 
------------------ 
 
¶2. (U) Ukraine and the European Union (EU) officially 
launched negotiations on a Free Trade Agreement (FTA) with 
much fanfare on February 18, shortly after members of the 
World Trade Organization (WTO) agreed to the terms of 
Ukraine's accession to the WTO.  Substantive discussions 
began in April, with follow-on meetings occurring every two 
or three months.  The last round of negotiations took place 
July 7-11 in Kyiv, with the next round expected in October. 
 
¶3. (U) An FTA was long viewed both by Kyiv and Brussels as 
the logical next-step in their trade relationship after WTO 
accession, which occurred on May 16 (ref C).  (Note: Post 
continues to work on a handful of WTO accession commitments 
that remain outstanding (ref B and previous).  End note.) 
The FTA will serve as a central pillar of a New Enhanced 
Agreement between the EU and Ukraine.  Some experts point 
to macroeconomic models showing that trade flows between 
Ukraine and the EU could double as a result of the 
agreement, and GDP could grow by an additional four or five 
percent in the medium term. 
 
"Deep" FTA - Not Just Tariffs 
----------------------------- 
 
¶4. (SBU) The most palpable feature of the future FTA will 
be a drastic reduction in tariffs between the EU and 
Ukraine.  Luis Portero-Sanchez, head of the Trade Section 
at the EU Commission's office in Kyiv, told a meeting of 
the European Business Association in May that the EU hoped 
to eliminate tariffs for almost all goods, although a few - 
- ideally less than five percent of all tariff lines -- 
would likely be left outside the agreement.  Portero- 
Sanchez noted that no sector would be excluded a priori. 
(Comment: We would expect agricultural products to lead the 
list of goods not included under the FTA.  End Comment.) 
Portero-Sanchez said that the EU wanted maximum 
liberalization immediately upon signing the agreement, but 
will be open to transition periods for lowered tariffs, 
likely of up to five years, on particularly sensitive 
goods.  Olga Shumylo, responsible for FTA negotiations 
within Deputy Prime Minister Hryhoriy Nemyrya's office, 
told Econoff on August 27 that the EU had already agreed to 
allow transition periods for reductions of some Ukrainian 
import tariffs. 
 
 
KYIV 00001875  002 OF 004 
 
 
¶5. (U) Although lowered tariffs will perhaps be the most 
visible element of the FTA, there is also widespread 
agreement that it must be a "deep" FTA (or "FTA Plus"), 
that is, an agreement that not only lowers tariffs but also 
reduces a myriad of non-tariff barriers.  In the words of 
an official EU Commission statement, "the FTA will build on 
the liberalisation undertaken as part of WTO membership and 
work towards 'deep convergence' - not just cutting tariffs 
but addressing red tape for exporters by aiming for similar 
regulatory standards and norms in both economies." 
 
¶6. (SBU) Deputy Minister of Economy Valeriy Pyatnytskiy, 
who was Ukraine's lead trade negotiator for much of the WTO 
accession process and is continuing in that role for the 
FTA negotiations, noted to Econoffs in July that talks with 
the EU would not be "normal" negotiations.  Instead, the 
vast majority of issues would require Ukraine to bring its 
domestic practices into alignment with EU rules.  Ukraine 
would have little room to negotiate, said Pyatnytskiy. 
 
Battling Ukraine's Oppressive Bureaucracy 
----------------------------------------- 
 
¶7. (SBU) As we saw with Ukraine's tortuous 14-year WTO 
accession process, the greatest obstacles to concluding an 
FTA will likely be reform of Ukrainian institutions and 
elimination of non-tariff barriers.  Portero-Sanchez 
identified the following areas as priorities for the EU: 
reform of Customs procedures; elimination of technical 
barriers to trade (TBT), especially modernizing standards 
and testing procedures; reform of sanitary and 
phytosanitary (SPS) measures; improved enforcement of 
intellectual property rights; and fairness in government 
procurement.  Portero-Sanchez recognized that the GOU would 
likely seek concessions on the free movement of people 
(i.e. visa-free travel to the EU for Ukrainians), but he 
said the EU would resist any significant movement in this 
area and did not want the FTA to become a migration 
agreement.  Portero-Sanchez also noted that EU negotiators 
would seek some commitments from Ukraine on trade-related 
aspects in the energy sector -- primarily energy transit -- 
as they did during WTO accession. 
 
¶8. (SBU) Pyatnytskiy argued that, while the agreement 
should benefit Ukraine's economy overall, some industries 
would suffer.  He specifically pointed to the environmental 
chapter of the FTA as one that would involve real costs for 
Ukrainian industry and said a detailed cost/benefit 
analysis was still needed.  Shumylo said the GOU would seek 
to avoid signing up for much of the environment chapter of 
the EU acquis communautaire. 
 
¶9. (SBU) Vyacheslav Tsymbal, a member of Ukraine's 
negotiating team at the Ministry of Economy, told Econoff 
on August 21 that he expected the chapter on government 
procurement to be particularly difficult to negotiate. 
Ukraine's government procurement process was still very 
chaotic (ref D), said Tsymbal, and reform to meet EU 
standards would likely prove difficult.  Elena Scherbakova, 
who takes the lead on FTA negotiations at the State 
Department of Intellectual Property, Ukraine's IPR 
coordinating body, told Econoff on September 11 that she 
expected geographical indications (GIs) to be another major 
sticking point. 
 
Setting the Stage for EU Accession? 
----------------------------------- 
 
¶10. (SBU) Supporters of Ukraine's European integration 
ambitions look to the FTA as a step towards eventual EU 
accession.  Pyatnytskiy commented that he believed the FTA 
was being used as a kind of pre-accession instrument for 
Ukraine, given that "enlargement fatigue" among EU members 
currently prevented any more formal steps toward accession. 
The FTA would be a tool to push significant changes within 
Ukraine and prepare the country for EU membership, said 
Pyatnytskiy. 
 
¶11. (U) Former Polish President Aleksandr Kwasniewski has 
 
KYIV 00001875  003 OF 004 
 
 
been among the most visible outside supporters of the FTA, 
visiting Kyiv several times to push the idea and identify 
it as a key step to EU accession for Ukraine. 
 
GOU Enthusiastic, Party of Regions Less So 
------------------------------------------ 
 
¶12. (SBU) Prime Minister Yulia Tymoshenko and President 
Victor Yushchenko have made several public statements 
strongly supporting the FTA negotiations.  Deputy Prime 
Minister Hryhoriy Nemyrya has taken the role of main 
advocate and coordinator of the FTA within the government. 
Shumylo told Econoff that DPM Nemyrya was forced to abandon 
plans to create a separate European Integration Agency in 
the face of strong resistance from several Ministries, but 
instead established a bureau under his leadership within 
the Cabinet of Ministers to coordinate the government's 
European integration policy.  (Comment: Establishing a 
coordinator at the DPM level should help overcome 
bureaucratic resistance within the GOU to some elements of 
the FTA, and marks an improvement from WTO accession 
negotiations.  End Comment.) 
 
¶13. (U) Shumylo also told Econoff that the GOU was actively 
preparing an analysis of specific areas where Ukraine 
needed help in negotiating/implementing an FTA, and trying 
to identify potential donors.  The World Bank and the 
Swedish aid agency SIDA already expressed a willingness to 
provide some technical assistance, said Shumylo, and the 
GOU would welcome any potential U.S. assistance. 
 
¶14. (U) Iryna Akimova, Shadow Minister of Economy while the 
Party of Regions has been in opposition, made clear at a 
public forum in April that her party supported the FTA and 
European integration process.  But Akimova also used the 
issue to criticize what she called the government's 
"populism," arguing that an FTA could not and should not be 
finalized until necessary domestic reforms were made, a 
task that Regions did not find the Tymoshenko government up 
to.  Akimova also made some ambiguous comments on the need 
for "preconditions" for an FTA, such as macroeconomic 
stability (an attack on the government over inflation), a 
balanced budget (an attack on the government's social 
spending), and improvements in the investment climate (an 
attack on the government's tax policies), thereby softening 
Regions' support for an FTA.  (Comment: It is not clear how 
GOU policy might change if Regions were to join 
Tymoshenko's bloc to form a new ruling coalition (ref A). 
End Comment.) 
 
Support Among Ukrainian Businesses? 
----------------------------------- 
 
¶15. (U) The Yalta European Strategy (YES), a think thank 
founded by steel and pipe oligarch Victor Pinchuk, has held 
a series of public events meant to garner support for the 
FTA, and for European integration more broadly.  Another 
Ukrainian think tank, the International Centre for Policy 
Studies (ICPS), has reported that Ukrainian businesses 
participating in public forums organized throughout the 
country are largely supportive of an FTA, citing greater 
market access in the EU as the primary reason.  A common 
concern among businesses, however, was how an EU FTA would 
affect trade with Russia. 
 
¶16. (U) Shumylo noted that a few large Ukrainian companies, 
usually major exporters poised to benefit from improved 
access to EU markets, have already come out in favor of the 
FTA.  For example, Jock Mendoza-Wilson, Director of 
International and Investor Relations for System Capital 
Management (SCM), the major financial and industrial group 
owned by super oligarch Rinat Akhmetov, told Econoff in May 
that SCM intended to be active in and supportive of the FTA 
negotiations.  SCM was anxious to secure more favorable 
market access in the EU for its steel exports and viewed 
deeper integration with Europe as positive for its business 
plans, as SCM had already acquired a number of large assets 
in EU countries.  Mendoza-Wilson also said that SCM hoped 
to use the FTA to tap into the EU's internal carbon trading 
 
KYIV 00001875  004 OF 004 
 
 
system.  (Note: He was likely referring specifically to the 
EU's Greenhouse Gas Emission Trading Scheme (EU ETS).  End 
Note.) 
 
¶17. (SBU) Shumylo commented, however, that there was a real 
lack of understanding of the FTA process among smaller 
businesses.  The GOU needed to significantly step up its 
information campaign, said Shumylo, and planned to ramp up 
consultations with businesses ahead of the next round of 
FTA negotiations. 
 
Comment: A U.S. Foreign Policy Priority 
--------------------------------------- 
 
¶18. (SBU) The conclusion of an EU-Ukraine FTA is strongly 
in the national interest of the United States.  The FTA 
should serve to improve Ukraine's investment climate, 
having a positive impact on our bilateral trade and 
investment relationship.  And, most importantly, even 
though the economic impact on the U.S. economy is likely to 
be negligible, an EU-Ukraine FTA will be a further step 
towards integrating Ukraine into Euro-Atlantic 
institutions.  An FTA will help increase economic ties 
between the EU and Ukraine -- the EU currently accounts for 
about 30% of Ukraine's total trade, compared to 39% for the 
CIS and 24% for Russia alone -- and, more critically, force 
Ukraine to begin meeting EU accession requirements in 
earnest.  The failure of FTA negotiations would cast doubt 
on Ukraine's future within Europe and could push Ukraine to 
look eastward in further developing economic ties. 
 
¶19. (SBU) Although we are not a party to this agreement, 
the United States should look for every appropriate 
opportunity to support the EU-Ukraine FTA negotiations. 
Our support could come in the form of public statements or 
behind-the-scenes pressure on one or both sides should 
negotiations stall.  We should also consider providing 
advice or technical assistance to help Ukraine expand its 
trade negotiation capabilities and its ability to implement 
trade agreement commitments.  Such technical assistance 
could be modeled after that used successfully during WTO 
accession, when we provided expert advisers to the GOU. 
U.S. technical assistance would not involve actual 
negotiation but would help guide the GOU on how to reform 
domestic institutions and policies in line with EU 
requirements.  We would want to coordinate with the World 
Bank and other donors working in this area.  Post also 
requests that the EU-Ukraine FTA remain on the list of 
issues we raise in our regular dialogue with the EU.  End 
Comment. 
 
TAYLOR