In view of Russian Prime Minister Vladimir Putin’s forthcoming visit to Kyiv, it is worth analyzing the possibility of Ukraine joining the Customs Union of Russia, Belarus, and Kazakhstan.
Any Ukrainian citizen who is interested in politics will wonder what Ukraine’s CU membership could mean. Yet few if any will suspect that the CU may threaten Ukrainian sovereignty per se.
It is important to point out that the CU membership proposal implies radical transformations in Ukraine’s geo-economic strategy, with an increasing share of trade along the corresponding geographic lines. Despite the existing free trade provisions in the CIS, Ukraine’s foreign trade has been increasingly moving from the post-Soviet bloc to EU countries, and especially fast-growing Asian countries, over the past 14 years.
In 1996, the CIS share in Ukraine’s foreign trade turnover was 58 percent, in 2010 it had dropped to 46 percent, whereas for EU countries it increased from 24 percent in 1996 to 34 percent in 2010. Trade with Asian countries showed an even bigger increase, going from 11 percent in 1996 to 21 percent in 2010, almost doubling.
Studies commissioned by the Ministry of Economy of Ukraine prior to the talks on a deep and comprehensive free trade area agreement with the EU showed that Ukraine would benefit from the FTA, with 1-2 percent growth and up to 4-7 percent living standard increment. Considering that in 2010 Ukraine’s nominal GDP amounted to 1.87 trillion hryvnias (about 136.5 billion dollars), the country’s lost benefits from failing to implement the FTA would be in excess of 1.4 billion dollars a year, to say nothing of the living standards.
What’s in the offing for Ukraine if and when it joins the CU?
A trilateral customs union envisages primarily the creation of a single customs territory, the absence of customs borders within this territory, and uniform customs regulation. A customs union can be effective only when adequately supported by legislation.
For the time being, customs relationships, in conjunction with the CU, between Russia, Belarus, and Kazakhstan appear rather problematic, with the CU Customs Code (CU CC) enacted on July 1, 2010.
It should be noted that the accelerated arrangements for the CU brought forth a great many legal problems and collisions due to the CU’s inadequate legislation. It took nine years (1959-68) to create the European Union. The CU started being formed on October 1, 2009, with arrangements being made for the CU CC. The process was finished on October 1, 2010, when the Customs Code was enacted and customs control transferred outside the CU territory (even now there are a great many amendments to this “brilliant” document, mostly made by Russian experts, a fact which becomes clearly apparent further on). Also, customs control in Kazakhstan remains to be transferred. This transfer is planned to be accomplished before July 1, 2011. However, all this remains on paper.
Harmonization of customs laws within the CU remains a problem. The member countries plan to create this legal framework before 2012, but experts are very skeptical, pointing out that it is anyone’s guess how a uniform customs tariff will work if. For example, the level of tariff unification in Russia and Belarus exceeds 95 percent (with five percent remaining problematic), compared to 38 percent in Russia and Kazakhstan (with 40 percent remaining to be regulated).
The CU CC contains more than 200 clauses referring to the member countries’ national regulations. This creates a negative precedent, considering that the said clauses (a) complicate the study and usage of the national customs laws on the part of officials and private individuals; (b) force business entities to perform customs procedures in the CU member countries where legislation is more “loyal” to them.
For example, the CU CC Article 9 reads that challenging procedures are to be performed in a given member country in accordance with its legislation, and the same applies to consulting with customs authorities (Article 11).
National legislation also determines the limit of duty-free imports of goods by individuals: 65,000 rubles in Russia; 1,000 euros in Belarus, whereas in Kazakhstan the sum depends on the type of goods. After transferring customs control outside the CU borders, nationals of the member countries will seek loopholes and bring their goods to the country with the more favorable conditions.
Apart from the abovementioned aspects of harmonization of the CU countries’ legislations, there are certain problems in terms of the CU’s inner activities. The Russian and Belarusian constitutions establish different official languages to be used when registering customs documents. There is no uniform approach to the CU language policy. Besides, under CU CC Article 15, the Federal Customs Service of Russia has practically unlimited access to the legal entities’ bank accounts within the CU.
Another interesting aspect is the distribution of customs proceeds between the CU members. After long talks a decision was made on the mechanism of transfer and distribution of import duties (other customs duties, taxes, and payments that have equivalent effect), so that these sums have to be distributed as follows: Russia receives 87.97 percent; Kazakhstan, 7.33 percent; Belarus, 4.7 percent.
While analyzing certain other general aspects, it seems worth considering the issue of harmonization of Ukrainian legislation with the CU rules if and when Ukraine agrees to join the CU.
CU CC has the status of an international treaty, which means that it has to be ratified. The Constitution of Ukraine and the international treaties ratified by the Ukrainian parliament make this ratification problematic.
But first things first.
(a) Conflict with the Constitution of Ukraine.
Any associations in Ukraine must conform to the Constitution and other laws of Ukraine as an inalienable component of the integration process. Section 90, Article 92, reads that foreign relations, foreign trade, and customs procedures are regulated exclusively by the Constitution. Section 8, Article 116, has it that the Cabinet of Ministers of Ukraine organizes and secures Ukraine’s foreign trade and customs procedures. These constitutional powers cannot be delegated to any supranational authorities.
In the event of Ukraine’s accession to the CU, under the Constitution of Ukraine the bill on amendments to the Constitution may be considered by the Verkhovna Rada, in the presence of a ruling of the Constitutional Court of Ukraine on the constitutionality/unconstitutionality of this bill, which provides for the delegation of part of the national sovereignty to the CU supranational bodi-es (Regulations on the CU Commission and the Court of the Eurasian Economic Community make it perfectly clear that these bodies are supranational).
In other words, the formation of a supranational authority capable of determining Ukraine’s tariff policy runs counter to the Constitution of Ukraine.
(b) Conflict with agreements within the CIS.
The Verkhovna Rada’s statement in conjunction with the signing of the Agreement on the Commonwealth of Independent States (Dec. 20, 1991, No. 2003-XII) reads that Ukraine is opposed to the idea of transforming the CIS into a state formation with its bodies of authority and administration; Ukraine believes that coordinating institutions within the CIS cannot be vested with such powers and that they can only offer recommendations.
Article 2 of the agreement on the formation of the CU directly contradicts the VR statement. It has it that the CU is to be vested with the powers of a supranational authority and that the latter will formulate the CU members’ uniform customs policy.
(c) Contradiction with the agreements of Ukraine within the WTO.
Under the WTO membership agreements signed and ratified by Ukraine, this country, once it becomes its full-fledged member, must apply customs import duty rates not in excess of those laid down in the tariff obligations that are an inalienable component of the Law of Ukraine “On the Ratification of the Protocol on the Accession of Ukraine to the World Trade Organization,” ratified by the Verkhovna Rada on October 4, 2008 (No. 250-VI).
A selective comparative analysis of the import duties effective in Ukraine and the CU points to a substantial difference in the tariffs for household goods. In fact, these tariffs are considerably higher in the CU.
Accession to the CU will make it necessary for Ukraine to revise its legislation on a large scale, particularly in terms of foreign trade. Increased import customs duties will entail compensatory adjustment procedures in regard to the WTO member countries, as per Article XXVIII of the General Agreement on Tariffs and Trade (1994). In view of this, Ukraine’s failure to honor its WTO tariff obligations may result in:
- restrictive sanctions against Ukraine;
- worsening export situation;
- compensatory demands toward Ukraine;
- review by WTO member states of Ukraine’s WTO membership commitments.
(d) Deceptive prospects of trade preferences within the CU.
Since free trade is in principle practiced with the CU countries, in the event of Ukraine’s accession only separate trade restrictions will be lifted as exceptions from these procedures. Today, under bilateral arrangements, such exceptions are envisaged only by agreements with the Russian Federation (e.g., white sugar, until January 1, 2013) and Kazakhstan (alcoholic beverages, tobacco products, and manufactured tobacco substitutes).
Simplified customs procedures within the FTA with the EU will allow Ukraine to expand its export markets and increase imports of investment goods, the usage of which in production will be a prerequisite for stable long-term economic growth.
Summing up everything stated above, considering the international treaties signed by Ukraine, it stands to reason that it should retain its status as an observer within the Eurasian Economic Community.
Alina Karas is chief consultant with the National Institute for Strategic Studies
