Perspectives of Economic Cooperation of Ukraine with the States of the Baltic-Black Sea Region
By Taras Danko, Ph.D.
Laboratory for the International Business Environment Research, Kharkov State Polytechnic University, Ukraine
Ukraine has significant economic ties with the countries of the Baltic-Black Sea Region1). Ukraine also plays an important role in the transfer of traded goods from East to West, from North to South and vice-versa. The shape of the economic and political interactions within the Region will obviously change with the enlargement of the EU, the evolution of Russia, the development of the Caspian oil deposits and the emerging Turkish industrial economy. Much depends on the ability of Ukraine to adopt to the new realities within the Baltic-Black Sea Region. Currently Ukraine proclaims its European choice and vector of development. Which factors will influence the Ukrainian input into the prosperity and sustainable growth within the region is the core issue of the report.
Economic ties with the countries of the Baltic-Black Sea Region as the priority for Ukraine
Among the ten major trade partners of Ukraine seven belong to the Baltic-Black Sea Region. They are Russia, Germany, Poland, Belarus, Turkey, Hungary and Slovakia. Three other major partners of Ukraine are situated outside the region, namely the USA, China and Italy. A remarkable share of the FDI flows also originates from the region. Thus we can draw the conclusion that the development of the Ukrainian economy largely depends on successful relations with the Baltic-Black Sea states as well as on the overall economic performance of the region. Ukraine should also acknowledge that its major foreign markets are situated within the Baltic-Black region. This situation will never change because transportation costs as well as business transactions and promotion costs correlate with the distance from the home country to the target market. If Ukraine will not manage to trade successfully with its neighbours this will result automatically in an overall reduction of the goods exports and consequently in worse economic performance.
As the evidence of Ukraine's economic vulnerability to regional threats one can refer to the Russian financial crisis on August 17, 1998 which was transmitted with some delay to Ukraine. While the ruble depreciated four times in August, the exchange rate of the hrivna to the dollar reduced two times during September-October. This case has taught Ukraine the powerful lesson that economic developments in the region should be closely watched and accounted for in domestic economic policy.
The new reformist government of Ukraine emphasizes the importance of bilateral economic ties within the region. Much attention is paid to the facilitation of direct multilevel contacts with the representatives of the Baltic-Black Sea region. These contacts include political leaders, business people, decision-makers, researchers, cultural and personal contacts. The intensive development of partnership and cooperation with countries of Central Europe and the Baltic takes on a decisive meaning for the acceleration of Ukraine's European integration. This is so because for a number of reasons Ukraine is not yet ready to become a full-fledged partner of western European countries. In their turn the Baltic countries and Central Europe should be interested in the development of relations with Ukraine and even more so in its comprehensive support. They fully understand that the existence of an independent and democratic Ukraine is ultimately important for their own national security and the support of their full-fledged sovereignty.
As the French Minister Dominique Strauss-Kahn said to the World Bank European Conference on Development Economics on June 23, 1999 "Europe symbolises integration that goes beyond free flows of goods, services and capital. European integration has been a dual process of lifting obstacles to trade and building co-operation between public authorities. Without the establishment of laws and institutions for co-operation, Europe would just be an antechamber to world markets. West European countries have learned just as much from competing with each other as they have from co-operating with each other. The experience of European construction provides a wealth of lessons for many other countries seeking to forge relationships with their neighbours, between governments that want openness, but without giving up control over their own future."
The situation as it stands in Central Europe today is generally conducive to such partnership and co-operation. The political leaders of the region's countries are decisively intensifying the democratisation of socio-political relations and is supporting the course of market reforms. The region's economic situation is on the whole stable, disregarding certain difficulties connected with the reform of the social spheres of societies and with the introduction of norms of socially oriented market economics. In this regard Ukraine should count upon the interest of Central Europeans in stabilising their eastern borders. In the economic sphere much emphasise should be given to the realisation of joint business and production projects with regional states. Interstate projects directed toward the development of transportation infrastructures, communication networks, etc. are also possible. New impetus should be applied to the idea of the creation of new "Euro-regions" and to the expansion of the sphere of activity of existent interstate creations (eg. the Carpathian Euro-region, the "Buh" Euro-region). Significantly more attention should be paid to the processes of cultural, informational and educational exchange with Central European states.
Ukraine at the crossroad from East to West, from North to South and vice versa
Enlargement of the EU, the political and economic renaissance of Russia, the development of the Caspian oil deposits and the emerging Turkish industrial economy will obviously change the shape of economic interactions within the Baltic-Black Sea region.
The Ukrainian Foreign Ministry has notified Slovakia that as of June 28, 2000 Slovaks entering Ukraine will need visas, TASR reported on May 2. Kyiv's decision, in response to last week's announcement by Bratislava, is that it will demand visas from Ukrainians beginning June 28, 2000. Slovakia is co-ordinating its visa policy with the Czech Republic, which is to cancel its visa-free arrangement with Russia and Belarus at the end of this month. At the same time as of 1 May, 2000 the Ukrainian government has simplified the visa application procedure for citizens of the EU, the U.S., Canada, and Japan, the "Eastern Economist Daily" reported on May 3, 2000. Persons from those countries can now apply for business, service, scientific, cultural, and private visas without an invitation. Earlier this year Ukraine discussed with Turkey the possibilities for mutual simplification of their visa procedures.
These developments prove that while some Eastern Europeans want to accelerate their accession into the EU by means of building strong barriers on their eastern borders Ukraine is trying to find moderate solutions which will liberalise relations with EU. The enlargement of the EU should not cause the decline of the level of co-operation and mutual trust in Baltic-Black Sea region. Those who do not take into account such obvious facts can not be regarded as serious and responsible politicians. In this regard Ukraine can highly appreciate the balanced foreign policy of Poland which is aware of its importance in the region and consequently its responsibility for the safe future of it.
This is especially important when considering the rather predictable renaissance of Russia, which is the greatest power in the region. Speaking in St. Petersburg on April 29, Russian Duma speaker Seleznev said that the election of Vladimir Putin as president of the Russian Federation is accelerating the integration of the Commonwealth of Independent States. "Everybody understands that Russia should be a locomotive, and Russia is sending signals that it is ready to develop the CIS," Seleznev concluded. 2)
If in 2000 - 2001 the Russian economy will demonstrate the predicted 4-5 annual growth, then newly elected President Putin will concentrate on his stated intention of restoring Russia's strength and national prestige. One can see the first steps in this direction by analysing Moscow's new foreign policy concept, its decisions to develop a Russian-Belarusian 300,000 joint force, and its new military doctrine.
At the same time Putin claims that Russia will continue to strive for closer ties with the EU. Moscow "welcomes" the enlargement of the union but hopes that it will "not hurt in any way" Russia's relations with those countries aiming for EU membership. Recently Vladimir Putin and Aleksander Kwasniewski pledged to strengthen Polish-Russian ties and agreed to meet in the near future.
Watching those developments Kyiv should not disregard the warning which was received by Leonid Kuchma and Vladimir Putin in Sevastopol, where they were greeted by pickets of ethnic Russians with placards reading "Putin, don't forget that Crimea and Sevastopol are Russia."
Another significant process for the region takes place in the Caucuses, where the international community has shown increased interest in the development of oil deposits in the Caspian Sea and the establishment of a trans-Euroasian network of transport and energy communications. For Ukraine which, imports some 85 percent of its energy requirements, mainly from Russia, it is vital to diversify its sources of supply. That's why Ukraine is closely engaged in the disputes regarding energy sources in the region.
The Black Sea region, and not the least Ukraine, encapsulates core oil transportation routes along the "East-West" axis as well as along "South-North" axis. It would be enough to mention that the use of Ukrainian territory more than halves the length of the oil transportation route from the Middle East (via Turkey and the Black Sea) to Europe. Ukraine-Georgia transportation corridor is much shorter than alternative routes through Turkey or through Russia.
As a strategic route of energy carriers to Europe and taking into account Ukrainian processing capabilities, Ukraine has an opportunity to become a significant link in European economic security. With the activation of the Odessa oil terminal Ukraine will have considerable opportunities to regulate oil flows from the Middle East and Caspian area to Europe. Thus it will have an influence over the geopolitical balance of the entire Eurasian region 3).
Another factor influencing the region is Turkey's increasing power. Its low per-capita income notwithstanding, Turkey has the 16th largest economy in the world and is expected to be among the top 10 within the next decade. Ankara is also in the group of G-20. Concomitant with its increasing might, Turkey has started to play a much more assertive role in its local region. While a decade ago Turkish foreign policy was largely limited to the issues of Cyprus and possible threats from the Soviet Union, now Turkey's sphere of interest has grown so wide that it includes all the Balkans, Central Asia, the Caucasus region and the Middle East.
Not surprising is that one of the main Ukrainian priorities in the southern direction is the development of relations with Turkey. An agreement of great importance regarding friendship and cooperation between the two states in the next 10 years has been signed. No evident tension between Kyiv and Ankara has become apparent since Ukraine gained independence. The direct and immediate interest of both states is centered on the solution of problems concerning the military and ecological protection of the Black Sea region, and of its demilitarization. Ukrainian and Turkish interests can also coincide in the search for a balance of power in the new and complex geopolitical situation that has developed in the region in recent years. Turkish sensitivity to problems connected with the return of the ethnically related to Turks Crimean Tartars is sympathetically understood in Ukraine.
Turkey is a key state for Ukraine because the most opportune transportation routes to the Mediterranean and the Middle East pass through it. Currently Turkey is developing diversified paths for the course of its own foreign policy, which on the whole remains pro-western. Motives for Ukraine's friendliness with Turkey appear sufficiently grounded: the necessity to ensure the transportation of energy carriers to and through Ukraine, the correspondence of economies, cooperation within BSEC etc. At present, trade with Turkey accounts for almost half of Ukraine's trade with all Middle East states. The development of partnership with Turkey should be conducted within a framework of bilateral economic cooperation or within the BSEC system, avoiding its transformation into a strategic political-military Alliance.
The Ukrainian foreign policy in the Baltic-Black Sea Region should concentrate on the transformation of the conflicts of interests in the region into the co-operative efforts of the interested parties. Such policy should allow Ukraine and its neighbors to enjoy long lasting peace, prosperity and sustainable growth within the region.
Ukraine and regional organisations
Several regional organisations are active in the Baltic-Black Sea region. Participation in each of them allows Ukraine to make substantial and constructive contribution into the formation of a new model of relations in Europe, and the strengthening of international security and stability. At the same time, regional co-operation also means the implementation of concrete economic projects in accordance with the economic vector of Ukrainian foreign policy.
The establishment of regional organisations in the Baltic-Black Sea region corresponded with the collapse of the bipolar political system of Europe in early nineties:
Ukraine also actively participates in such regional bodies as the 11-nation Budapest-based Danube Commission. The agreement establishing the Danube Committee was signed by Bulgaria, Czechoslovakia, the former Yugoslavia, Hungary, Romania and the former Soviet Union. Austria joined in 1960 and Germany, Croatia and Moldavia in 1998.
Ukraine regards co-operation with the listed regional organisations as a high priority. While Ukraine is the member of the CIS, BSEC, GUUAM and an observer in the CBSS it is constantly looking for higher status in its relations with CEFTA, CEI and Visegrad Four Group.
As some analysts predict the future of the Europe in the next decade will be determined by the political outcomes of the regional structuring processes which are now underway in the Baltic-Black Sea region. While structuring of Central Europe has already occurred with CEFTA, CEI, CBSS and the Visegrad Four Group being its major outcomes, the structuring process along the axis including the Balkans, Turkey, the Caucuses, and Central Asia only just begun. The Commonwealth of Independent States (CIS) intended in 1991 to co-ordinate intercommonwealth relations and to provide a mechanism for the orderly dissolution of the USSR, can transfer into the mechanism for orderly reunification of the great Russian Empire.
Russia can be tempted to play on natural contradictions in the Balkans — Central Asia axis, hoping to gain major geopolitical dividends. At the same time, the ability of the EU to smoothly absorb its Eastern European applicants can be doubted 4). These can bring Western and Central Europe at the edge of deep political and economic crisis.
As the Internet-based analytical centre Stratfor 5)predicts, in its next decade forecast for Russia, "along with … house-cleaning, of course, will come a new foreign policy. The frontiers of Russia are irrational. Apart from pure military geography, a century of empire has created economic dependencies that were torn apart when the Soviet Union collapsed. There was a rationale to the old Soviet borders. Now, there is no doubt there is deep antipathy toward Moscow in many of the former republics, and deep nationalism supporting a desire for independence. But there are substantial, if minority, forces in these countries that want reunification. The remnants of the Russian security apparatus remain active enough in these countries that with a powerful, even ferocious, government in Moscow, resistance can be overcome, in many cases on a voluntary basis."
If Ukraine will not be soon integrated into the CEFTA and CEI as an equal economic partner of other Central European countries, a strong danger exists that such forecast can come true. Consequently this will bring uneasiness to the eastern borders of the EU and NATO. Of course, building a fortress out of Slovakia or, say, Poland will bring prosperity into these countries but the expenses will be paid mostly by the USA, Germany and Russia.
At the other hand the ultimate integration of Ukraine into the European structures will softly undermine the illusions of those in Russia who hope that their country, with half the budget of Texas and GNP equal to Turkey, will be able to use the nuclear fist for dictating its interests to Europe. This will bring stability to the Baltic-Black Sea region with the EU, Russia and Turkey transforming into a balanced triangle able to guarantee real security on the eastern borders of the EU. Consequently this will help West European countries to focus on the achievement of their ambitious economic goals for the next decade, while East European countries will manage to demonstrate sustainable growth which will allow them to enter EU, not like beggars asking for extra funding but like prosperous nations with their own dignity.
The active participation of Ukraine in BSEC and GUUAM can be viewed as the logical element of a strategy that encourages a zone of stability at the south-eastern borders of Europe.
Black Sea Economic Cooperation (BSEC) aims to enhance regional stability through economic cooperation. BSEC includes eleven members — Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Turkey, Ukraine.
On June 25,1992 in Istanbul, the Presidents of Azerbaijan, Armenia, Bulgaria, Georgia, Moldova, Romania, Turkey, Ukraine and the Heads of government of Albania, Greece and the Russian Federation adopted the Bosporus caucus and signed the Declaration creating BSEC. It provided for the creation of favorable conditions for trade, industry, transportation, communications, science and technology, energy and agriculture, tourism and ecology. The goal was to exchange economic information, to create conditions for business contacts, to determine branch projects, etc.
According to plan, not only states of the Black Sea basin but also countries that have a direct interest in the Black Sea region can enter BSEC. BSEC is founded according to the principles of Helsinki's Final Act and subsequent documents, accepted on the highest level by the Organization for Security and Cooperation in Europe (OSCE) and, particularly, in the Paris Charter of a new Europe. The goal and principles established in the Declaration of BSEC completely correspond to the principles and main documents of the UN. The Declaration also emphasises that membership in BSEC is not a barrier for participation in and co-operation with other regional and sub-regional organisations.
In geoeconomic terms, taking into account states that are involved in the BSEC system, this region is a sphere of gravitation of many countries that although not directly involved with the Black Sea basin, have substantial economic and transportation interests here. Iran, Macedonia, the Federal Republic of Yugoslavia and Uzbekistan have put forward applications to join BSEC. Austria, Italy, Israel, Egypt, Slovakia, Tunisia and Poland participate in the organization in the role of observers; Bosnia and Herzegovina, Kazakhstan, Cyprus, Jordan, Slovenia and Croatia have submitted applications to become observers.
Thus, according to some views, a geography is present here that does not limit itself to just the Black Sea region but envelops a broad area from the Balkans to Central Asia and from the Baltic to the Arabic states. This territory unites European, Asian and North African countries, regardless of the heterogeneity and level of development of their civilisations. BSEC is a potentially capacious internal market with significant resources and scientific-technical potential, and can become a key centre of trade between Europe, the Middle East and Asia. In practical terms this means the creation of a trans-regional integrative formation. This is also the first large integrative formation corresponding to the post-confrontational stage of development of the world economy, which is able to unite countries with different political and economic orientations.
The development of a system of Black Sea Economic Co-operation represents one of the important mechanisms for Southeast European states achieving pan-European integration. It also fully corresponds to the national interests of Ukraine as Ukrainian integration into Europe has been established as the main strategic direction of its policy. In his speech during the "New Opportunities in the Black Sea Region" Conference (Istanbul, April 28, 1997), Ukrainian President L.D.Kuchma mentioned that the gradual augmentation of economic co-operation in the Black Sea region plays an important role not only in the resolution of problems of economic development of countries united by the BSEC idea, but to a great extent also promotes the intensification of general European integration. On the other hand, Ukraine's participation in various forms of European regional co-operation, including long-term and temporary sub-regional unions, in no way contradicts the economic interests of Ukraine as a member of BSEC.
Ukraine has significant transportation-energy interests in the Caucasian region and plays an important role in the strengthening of international co-operation and in the intensification of integrative processes. The national interests of such countries as Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova in large measure coincide with each other. This coincidence of interests led to the declaration in Strasbourg in October 1997 of the creation of a new regional bloc known under the conditional name of GUAM (Georgia, Ukraine, Azerbaijan, Moldova) which later transformed into GUUAM after Uzbekistan joined it. GUUAM is a formation of equal post-Soviet countries with similar political and economic orientations.
The mutual economic interests of GUUAM states are mainly concentrated on two issues - the transportation of Caspian energy carriers and the building of new transit routes through the Caucasian region. The planning, construction and exploitation of transport communications from oil-gas deposits in Azerbaijan, Turkmenistan, Kazakhstan and Uzbekistan make the Transcaucasian Black Sea region appear extremely attractive. Today the idea of a Transcaucasian transportation corridor has obtained real significance. On the other hand, the Black Sea region, including the Transcaucasus, has considerable importance as a market for Ukrainian goods.
As stressed earlier Ukraine is an important strategic transit route of energy carriers to European states. This together with its processing abilities gives Ukraine the opportunity of becoming an essential link in the economic security of Europe.
Ukraine has put forward a proposition about a trilateral Ukraine-Georgia-Azerbaijan agreement concerning the creation of a Transcaucasian transportation corridor. The creation of a single transportation line that will serve passengers and freight traffic and will unite Baku, Tbilisi, Poti, Odesa and Kyiv or other Central European capitals is foreseen. In December 1996 the "Illichevsk (Odesa) - Poti" ferry crossing was opened, which created new opportunities for an increase in the level of the exchange of goods between Ukraine and the Caucasian states. Potential freight traffic in both directions is foreseen to total 1 million tons. The crossing becomes an important part of the TRACECA transportation corridor.
Analysts predict that if Ukraine will be excluded from the Transcaucasus transportation projects, the potential of the Caucasian region to transform into the zone of military confrontation will increase. The Russian Federation is most irritated by plans to protect the Baku-Ceyhan oil pipeline with a joint Georgian-Azeri-Turkish military force. Russia views this plan as a deliberate threat against Armenia, which is supported by Russia. Georgia has been placed in a difficult position as it has consistently opposed to the idea of putting any regional co-operation onto a military track. 6)
For this reason Georgia prefers the GUUAM alliance, which is essentially an economic regional alliance, without military or political implications. Recently Shevardnadze acknowledged that Russia's politicians and analysts are irritated with the increased co-operation between post-Soviet states that seems to draw them away from Russia's influence. As Shevardnadze quips, "many people are now more afraid of GUUAM than of NATO". Those who share such opinion do not understand the basic fact that the full-fledged participation of a neutral Ukraine in the Transcaucasus transportation projects is one of the corner stones of the security system in the Caucasus.
European choice of Ukraine
Ukraine has made its European choice, and the time has come for concerted efforts to be made toward its implementation in the interests of stability and security on the whole of the continent. This is demonstrated also by the change in the stance of the Ukrainian leaders over the years: from Russia-oriented declarations in the 1994 electoral campaign to the conception of a "multi-track" policy (“mnogovektornost') and subsequently to a course geared towards integration into the European structures. The logic of the construction of a new state are forcing the Ukrainian president on the one hand to balance the influence of the various regions on foreign policy and on the other to steer towards integration with Europe. The results of the recent presidential elections in Ukraine proved that Ukrainians wanted to move towards the west rather than turn back eastwards towards Russia 7).
"Many people in the U.S. who have been working on Ukraine over the past several years have felt they were swimming upstream," remarked John Tedstrom, Research Leader for Russian, Ukrainian, and Eurasian Affairs at RAND Corporation in Washington, D.C., at a Kennan Institute lecture on January 11, 1999 8). He posited that they have been swimming not upstream, but in the wrong river.
Tedstrom suggested that the U.S. make a strategic adjustment in its policy toward Ukraine in order to shift to "the right river." In essence, the U.S. should stop focusing on Ukraine as a former Soviet Republic and begin to look at it as an emerging European country. Tedstrom noted that 1999 was the year for this strategic adjustment to take place, as both the geopolitical conditions and the course of Ukraine's own "European choice strategy" have created ample opportunities for the shift. A strategic adjustment in U.S. policy would move Ukraine forward on reform, would address concerns of Central European countries that will soon be members of important European and transatlantic institutions, and would send a positive message to Moscow about the benefits of transformation, said Tedstrom. Most importantly, it would acknowledge trends independently underway in the region.
According to Tedstrom, this strategic adjustment would entail several policies. Firstly, Tedstrom suggested that the U.S. heighten engagement with Western and Central European countries bilaterally and multilaterally with Ukraine.
Secondly, the U.S. should support high-profile projects that have broad support within the Ukrainian government, include a Central European dimension, and encourage Ukraine to undertake reform measures. One example is the Eurasian Transportation Corridor from Odessa to Gdansk, which is highly supported in Ukraine and would create jobs for Polish refineries and encourage Ukraine to move forward with liberalising its investment laws.
So far the European Union has given promising signals to Ukraine and wants to develop closer ties with it but insists that Ukraine has a lot of work to do first. The 15-nation bloc said after talks with Ukrainian Foreign Minister Borys Tarasyuk in January 2000 that Kiev must reform and modernise to reap the full benefits of a new partnership pact agreed by EU leaders at a summit in Helsinki in December 1999.
“Obviously what happens now...is very much dependent on the capacity of Ukraine to adjust, to adapt, to modernise,” Portugese Foreign Minister Jaime Gama, whose country holds the EU's rotating presidency, told a news conference. He said the EU could support reform in Ukraine, but could not do the country's work for it.
Conclusion: Ukraine should focus on further efforts aimed at promoting productive economic co-operation within the Baltic-Black Sea region
The transformation policy of Ukraine has started to show some hopeful results. The study of political and economic relations of Ukraine with the countries of the Baltic-Black Sea region generally gives positive conclusions regarding their current level and potential. If both of those trends will prevail in the future Ukraine will demonstrate higher input in the prosperity, stability and sustainable growth of the Baltic-Black Sea region.
The steps that the Ukrainian side should take in further market and economic reforms, as well as for the forging of its relations with its neighbours, are generally understood and agreed both at the levels of Ukrainian society and politicians.
At the same time lack of information about developments, existent opportunities and achievements in the Baltic-Black Sea region can undermine the chances of the successful transforming of the region into a zone of stability and security.
This makes it all the more important in this phase to inform the public more comprehensively both in Ukraine and neighbouring states about the new political architecture and developments in the Baltic-Black Sea Region. We can suggest that more emphasise should be made both in Ukraine and internationally on the establishment of think tanks providing research, analysis and discussion as well as disseminating information covering economic, political, legal and socio-cultural issues within the Baltic-Black Sea region.
11 May 2000