VZCZCXRO6094
RR RUEHIK
DE RUEHKV #1834/01 2941458
ZNR UUUUU ZZH
R 211458Z OCT 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8633
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHEHAAA/NSC WASHDC
RUEHRC/USDA FAS WASHDC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/USDA WASHDC

UNCLAS SECTION 01 OF 05 KYIV 001834 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/UMB AND EEB 
USTR FOR PAUL BURKHEAD 
DOC FOR ITA/USCS/OIO/EUR/RMILLER/MCOSTA 
AND 
ITA/MAC/EEUR/JBROUGHER/CLUCYK 
 
E.O. 12958: N/A 
TAGS: ETRD EAGR PREL USTR UP
SUBJECT: EU-UKRAINE FTA: STILL A WAYS OFF 
 
KYIV 00001834  001.2 OF 005 
 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1. (U) Summary.  President Yuschenko's recent statements 
indicating that the EU and Ukraine could complete 
negotiations on a Free Trade Agreement (FTA) in the next few 
months are at odds with the assessments of both the EU and 
Ukrainian negotiators.  Furthermore, the president's 
suggestion that Ukraine could sign an Association Agreement 
with the EU in advance of finalizing details of an FTA seem 
unrealistic, and contrary to stated EU positions. 
Nonetheless, Ukraine is pushing ahead, with its new Foreign 
Minister in the lead, looking to make as much progress as 
possible by the end of the year to bind Ukraine closer to the 
European Union.  This cable reports on the FTA negotiations 
and specific problem areas in the negotiations.  End Summary. 
 
---------- 
Background 
---------- 
 
¶2. (U) In an effort to further integrate Ukraine into the 
economic networks of Europe, the European Union (EU) is 
negotiating a Free Trade Agreement (FTA) with Ukraine.  This 
is the most ambitious trade agreement the EU has ever entered 
into with a non-member state, going beyond the system of 
preferences worked out with other non-member trading 
partners.  The FTA envisions a harmonization of Ukraine,s 
trade laws, product safety standards, and inspection regime 
with those of the EU, as well as the elimination of all 
defensive trade barriers.  The creation of the FTA will not 
be an easily realized goal.  The negotiations are already 
behind schedule, and Ukraine lacks the funds to implement the 
full range of changes required by EU trade laws and safety 
regulations.  Moreover, GOU negotiators have doubts that a 
truly unrestricted trade agreement would have enough 
political support to be ratified. 
 
¶3. (U) Further political and economic integration of Ukraine 
and the European Union is a priority for President Yuschenko, 
and he regards the signing of a Free Trade Agreement with the 
EU as a fundamental step towards that goal.  To get a better 
picture of the progress being made towards adoption of an 
EU-Ukraine FTA, Emboffs spoke with Valeriy Piatnytskiy, First 
Deputy Minister of Economy and European Integration at the 
Ministry of Economy, Pavlo Klimkin, Director of the EU 
Department at the Ministry of Foreign Affairs, and Ulrike 
Hauer, Head of the Trade and Economic Section of the 
Delegation of the European Commission to Ukraine. 
 
-------- 
Timeline 
-------- 
 
¶4. (SBU) The original target date for the signing of the FTA 
was December 2009, but this has slipped to mid-2010.  Deputy 
Piatnytskiy stated that his focus was on getting an agreement 
that could be ratified by the Verkhovna Rada, Ukraine's 
parliament, even if that meant taking additional time.  He 
did not expect completion by the end of the year.  Director 
Klimkin said that the timeline is up in the air, due to the 
difficulties in working out conceptual differences.  He 
stated that the Verkhovna Rada is not ready to give 
concessions in key areas.  From the EU viewpoint, however, if 
the GOU cannot come to agreement on the FTA by a mid-2010 
deadline, then Ukraine,s seriousness about its intentions 
will come into question. 
 
¶5. (U) On October 13th, President Yuschenko restated his 
hopes that Ukraine would conclude an Association Agreement 
with the European Union by December 2009, in time for the 
Ukraine-EU Summit.  Possibly recognizing the difficulties of 
concluding an FTA  with the EU in such a short time frame, 
President Yuschenko further stated that the Ukraine-EU FTA 
negotiations should be completed a few months later, 
effectively splitting the two. However, the EU's longstanding 
policy position is that the FTA is an integral part of the 
Association Agreement and a pre-requisite to the Association 
Agreement.  Media reports indicated that the Ministry of 
Foreign Affairs was taken by surprise by Yuschenko,s 
announcement of a December target date for signing of the 
 
KYIV 00001834  002.2 OF 005 
 
 
Association Agreement.  Some speculated that this may be a 
move by Yuschenko to discredit the new Foreign Minister, 
Pyotr Poroshenko, purportedly a current ally of Prime 
Minister Tymoshenko (despite earlier close ties to 
Yuschenko), by giving him an impossible deadline. 
 
----- 
Scope 
----- 
 
¶6. (U) Representatives of the GOU see the FTA as a means to 
remove barriers to the free movement of goods, services, 
capital, investment and persons between Ukraine and the EU. 
For its part, the EU is focusing on the elimination of 
defensive trade measures and bringing Ukrainian product 
safety standards up to EU levels. 
 
----------------- 
Expected Benefits 
----------------- 
 
¶7. (U) In an ideal world, the EU would expect to: gain broad 
market access to Ukraine; eliminate excessive business 
registration requirements for EU members doing business in 
Ukraine; ensure that EU members operating in Ukraine have the 
protection of a transparent legal system; and gain 
competitive access to the GOU's public procurement market. 
While these goals will be negotiated into the treaty, 
interlocutors all note that full implementation will be a 
long-term project. 
 
¶8. (U) For its part, Ukraine views the FTA as a means to 
develop its economy by gaining access to European markets, 
but also by forcing upgrades to its business environment, 
which will eventually allow for increasing foreign 
investment.  The main objective of Ukrainian agribusinesses 
is to get into the supply chains of the major European 
supermarkets.  In the short term, Ukraine foresees benefits 
for specific product exports, such as grain, sunflower oil, 
and poultry, which command higher prices on the EU markets 
than domestically. 
 
¶9. (SBU) Post notes, however, that increased exports in the 
specified categories are unlikely to result from an FTA. 
Ukraine,s sunflower oil is already exported to the EU in 
large quantities without an FTA, and it has little 
competition due to GOU-imposed price controls that make it 
artificially undervalued.  The same is true for grain, which 
is also heavily traded to the EU without an FTA.  Meat is a 
different story.  Ukraine,s poultry industry failed an EU 
inspection earlier this year, and without substantial 
improvements, Ukraine would not be able to export to the EU 
even under an FTA.  The beef industry is presently being 
inspected, but given dwindling herd sizes and Ukraine,s 
present status as a beef importer, it is difficult to 
envision Ukrainian meat reaching EU markets in significant 
quantities until production levels increase substantially. 
 
------------------ 
Negotiation Points 
------------------ 
 
¶10. (U) The EU seeks to secure equal access to compete for 
GOU contracts.  However, GOU representatives believe the Rada 
would not ratify the FTA if it included strong government 
procurement provisions, which would threaten entrenched 
interests. 
¶11. (U) The EU's environmental protection regime is far more 
stringent than Ukraine's, and GOU representatives state that 
harmonizing Ukraine's legal code and enforcement capabilities 
will place a severe fiscal burden on the budget, making this 
an area of difficulty in the negotiations.  Interlocutors 
note the need to train inspectors and business interests, for 
example, as a major undertaking that has not yet begun. 
 
¶12. (U) The EU is inclined to push Ukraine as far as possible 
on the issue of intellectual property rights protection, and 
wants to harmonize Ukrainian law with EU legislation.  The EU 
considers the negotiations to be at an advanced stage, though 
the GOU indicates that there are still technical difficulties 
 
KYIV 00001834  003.2 OF 005 
 
 
to be worked out, mostly concerning the effort to bring 
Ukraine,s legal code and IPR enforcement regime into 
alignment with EU standards. 
 
¶13. (U) As part of the FTA, the EU wants geographical 
indicators held by EU members to be respected by Ukrainian 
manufacturers.  This may negatively impact several Ukrainian 
wineries by denying them the right to make certain types of 
wine claimed as the exclusive property of EU member-state 
wine-making districts.  Klimkin, for example, pointed out 
that every Ukrainian household pops a bottle of &Soviet 
Champagne8 on New Year,s Eve.  This is also seen as a 
difficulty by the GOU because there are very few 
internationally recognized Ukrainian products with 
geographical indicators. 
 
¶14. (SBU) Implementation of EU-style Sanitary and 
Phyto-Sanitary (SPS) regulations will be difficult for the 
GOU.  The GOU recognizes that it needs to make changes to 
conform to EU standards, but the funds required to do so are 
lacking.  Director Klimkin estimates that to implement all 
SPS requirements in the more than two thousand EU laws and 
regulations that touch on SPS would cost Ukraine EUR 1 
billion (USD 1.467 billion), based on the costs borne by 
Poland when they joined the EU as a full member.  Bringing 
the inspection regime up to European standards would require 
training thousands of personnel, establishing testing 
laboratories in every village, and restructuring the whole 
system of veterinary control of food products.  Overlapping 
authorities of various control agencies will need to be 
rectified.  For example, the State Standards Committee is not 
a regulatory body, but it duplicates the regulatory functions 
of other government food control agencies.  Before 
undertaking the effort to reform and upgrade their SPS 
system, the GOU wants guarantees of market access, clear 
guidance from the EU on what needs to be done, and assistance 
from the EU on making the reforms. 
 
¶15. (SBU) EU representatives view the SPS negotiations as one 
of the more difficult sections of the FTA. Conformity in 
standards is the goal ) bringing Ukrainian safety standards 
up to EU levels.  The EU has developed a number of analytical 
tools for use in this field, but the GOU complains that they 
lack the funds to make use of these instruments. 
 
¶16. (SBU) A recent letter written from the European 
Commission to Economic Minister of Ukraine Danylyshyn warns 
Ukraine that current commitments on trade are already being 
ignored.  The text of the letter admonishes the Ministry and 
expresses the opinion that Ukraine,s Veterinary Service 
Order 149, a meat and animal products measure notified to the 
WTO, but not yet in force, contradicts provisions already 
accepted in the SPS chapter of the FTA.  In the letter, the 
Minister is advised that Ukraine,s adoption of such a 
measure would send a clear signal that Ukraine is unwilling 
to comply with its commitments. 
 
¶17. (U) The EU would like to eliminate all defensive trade 
measures as part of the FTA.  Since becoming a member of the 
WTO, Ukraine has submitted notification of 17 measures that 
qualify as technical barriers to trade (regulations and 
certification requirements for goods that serve as effective 
barriers to market entry). 
 
¶18. (U) Ukraine would like to align itself with the 
Euro-Mediterranean approach on the Rules of Origin issue, 
which holds that only products that contain 80% or more of 
components originating in Ukraine will benefit for the FTA, 
restricting third-party countries from using Ukraine as a 
conduit into the EU market. 
 
¶19. (U) As part of the FTA negotiations, the GOU expects to 
obtain EU cooperation in upgrading its energy and 
transportation infrastructure to facilitate the movement of 
freight and fuel between the two parties. 
 
¶20. (SBU) GOU representatives told Emboffs that the current 
EU agriculture proposal is not acceptable for Ukraine, as 
Ukraine,s export opportunities to EU member states would 
still be governed by quotas similar to those on neighboring 
 
KYIV 00001834  004.2 OF 005 
 
 
Belarus.  The GOU wants its agribusinesses to export meat, 
poultry and eggs to the EU without restriction, or at least 
with higher quotas than non-FTA members. 
¶21. (U) The EU and GOU are just beginning their negotiations 
on tariff reduction.  Their eventual goal is to reduce all 
tariffs on trade goods to zero.  One part of the negotiations 
will involve determining a schedule for the gradual 
elimination of the tariffs.  The presence of government 
subsidies makes this process more complicated, due to the 
need to add counterbalancing surcharges. 
 
¶22. (U) Details also remain to be worked out on how to 
monitor implementation and settle disputes under the Free 
Trade Agreement. 
 
----------------------- 
EU Technical Assistance 
----------------------- 
 
¶23. (SBU) Director Klimkin told Emboffs that the current 
level of technical assistance being provided by the European 
Union is not enough, and that for proper implementation of 
the FTA, it will need to be increased five or six times, to 
the same level of sustainable assistance received by the 
Baltic states.  He stated that future assistance from the EU 
should be revised to be more effective and better 
coordinated.  At present, technical assistance is provided on 
an ad hoc basis by individual EU members, and, while the GOU 
appreciates the efforts, Klimkin feels that EU technical 
assistance would be more effective if EU member-states pooled 
their money and coordinated their programs through a central 
agency. 
 
¶24. (U) The EU has 60 people in Ukraine working on technical 
assistance in support of the FTA.  They are working with the 
GOU to harmonize Ukraine,s regulations with those of the EU 
in the areas of technical standards, food safety, trade 
barriers, competition policy, and intellectual property 
rights. 
 
-------------------------- 
Barriers to Implementation 
-------------------------- 
 
¶25. (SBU) Administratively, implementation of an 
EU-harmonized safety inspection regime would require close 
coordination between the Ministry of Health, Ministry of 
Agrarian Policy, the State Veterinary Service of Ukraine and 
other ministries.  This presents a problem for the GOU, 
according to Klimkin, as its bureaucracy is only slightly 
upgraded from the legacy structure it inherited from the 
Soviet Union. 
¶26. (U) As a precondition for access to the markets of the 
European Union via the Free Trade Agreement, Ukraine,s 
parliament would have to enact a large number of reforms. 
Given the sharp divides in Ukraine,s legislative assembly, 
passage of all required laws in a timely fashion will be a 
considerable challenge. 
 
¶27. (SBU) Klimkin sees enforcement of EU-level regulations in 
Ukraine as a big problem.  Not only does the GOU have to pass 
new laws, but judges and law enforcement agencies must 
enforce them at all levels.  The GOU will need to take steps 
to ensure that the decisions made by Ukrainian courts are 
based on EU legislation ) not just European Council 
directives but edicts of the EU Court of Justice as well. 
This has the potential to cause constitutional problems in 
the area of jurisdiction.  Klimkin says that he hopes to make 
use of the EU,s judicial training programs to aid Ukraine,s 
judges in making proper decisions. 
 
------------------------------- 
Effect on Relations with Russia 
------------------------------- 
 
¶28. (SBU) Klimkin told Emboffs that the FTA with the EU will 
not impact Ukraine,s political relationship with Russia, 
which is presently governed by systematic points of conflict. 
 Ukraine,s economic relationship with Russia remains strong, 
and there may be future joint projects towards further 
 
KYIV 00001834  005.2 OF 005 
 
 
integration, depending on the outcome of Russia,s efforts to 
create a single economic space in the region.  He added that 
diversification in trading partners is a good thing for 
Ukraine, and that the FTA is likely to divert Ukrainian trade 
from Russia to the EU, and attract more EU investors to 
Ukrainian opportunities, displacing Russians seeking 
acquisitions. 
 
---------------- 
Public Sentiment 
---------------- 
 
¶29. (SBU) Klimkin says that the Free Trade Agreement is not a 
high profile issue for Ukraine at present.  The man on the 
street wants a visa, but doesn,t particularly care about 
trade with the EU.  Ukraine,s business community is aware of 
the FTA and supports its implementation.  Despite requiring 
significant political decision-making, the FTA has not 
received much attention from Ukraine,s political leaders. 
Klimkin opined that this was a good thing, since the 
negotiations could become much more difficult if the FTA were 
to become an issue in the presidential campaign. 
 
¶30. (SBU) From the EU,s point of view, the low profile of 
the FTA in Ukraine is a problem.  When the time comes to 
actually implement the political reforms mandated by the 
agreement, there will need to be a high level of public 
support for their enactment.  This may prove to be an 
insurmountable problem for the GOU. 
 
------- 
Comment 
------- 
 
¶31. (SBU) Comment.  While the FTA would be of immense benefit 
to Ukraine in the long term, it is still unclear whether the 
GOU will be able to muster the political will to implement 
the necessary upgrades to their infrastructure and reforms to 
their economic system.  The EU is willing to provide some 
financial support and technical assistance, but their 
patience appears to be waning.  If the GOU doesn,t make 
measurable progress in the near future, the prospects for the 
signing of the FTA may be in doubt.  End comment. 
PETTIT