Ukraine’s accession to the European Union: what difference would it make?

Existing agreements between Ukraine and the EU have already promoted substantial trade flows. Accession would have bigger implications for freedom of movement of capital and workers – investment inflows and migration outflows. These areas are where negotiations are likely to focus.

On 28 February 2022, only a few days after the Russian invasion began, Ukraine’s president, Volodymyr Zelensky signed and submitted an official request for his country to join the European Union (EU) under a new special accession procedure.

For the government in Kyiv, military aid and security are immediate needs, but since membership of the North Atlantic Treaty Organization (NATO) is unlikely at present, the EU application is a symbolic move designed to strengthen the security of Ukraine against Russian aggression.

Georgia and Moldova submitted similar applications on 3 March 2022 creating an ‘association trio’. While the inclusion of these two states makes geopolitical sense – given their own political vulnerability to Russian influence and hostility – discussions about incorporating three countries of such different size, political outlook and economic development could hamper Ukraine’s urgent request.

Visiting Kyiv on 5 April 2022, the European Commission president, Ursula von der Leyen, together with the high representative of the union for foreign affairs and security policy, Josep Borrell Fontelles, presented President Zelensky with a pre-accession questionnaire. This stated: ‘It will not, as usual, be a matter of years to form this opinion but I think a matter of weeks’. President Zelensky laughed, replying that it would take his team only a week to answer the questions. A second questionnaire was completed on 9 May 2022.

It remains to be seen whether Ukraine will join the EU. This article looks at the current relationship and considers how this might change if Ukraine were to become a full member.

What is Ukraine’s current relationship with the EU?

Ukraine already has a sophisticated association agreement (AA) with the EU, which has been in place since September 2017. Additionally, since January 2016, it has been part of a deep comprehensive free trade area (DCFTA) with the EU.

The key elements of the DCFTA include:

Mutual abolition of import duties on the majority of goods imported into each other’s markets.
Introduction of rules of origin of goods, to facilitate trade preferences.
Bringing Ukraine’s technical regulations, procedures, sanitary and phytosanitary measures, and food safety measures in line with EU rules, so that Ukrainian industrial goods, agricultural and food products do not require additional certification in the EU.
Establishment of the most favourable conditions of access to the services markets of both Ukraine and the EU.
Introduction of EU rules into public procurement by Ukraine, which will allow gradual opening of the EU public procurement market for Ukrainian businesses.
Simplification of customs procedures and prevention of fraud, smuggling and other offences in cross-border movement of goods.
Strengthening protection of intellectual property rights in Ukraine.

The AA also allows for goods originating in EU member states to be processed in Ukraine and re-exported back into the EU – for example, food processing.

When signing the economic section of the AA in June 2014, after the Revolution of Dignity, the (then) Ukrainian president, Petro Poroshenko, saw this moment as Ukraine’s ‘first but most decisive step’ towards EU membership. Similarly, the then president of the European Council, Herman Van Rompuy, stated that ‘In Kyiv and elsewhere, people gave their lives for this closer link to the European Union. We will not forget this’.

The economic and political aims of the AA and DCFTA were to divert trade from Russia towards the EU. This occurred alongside a process of aligning Ukraine’s laws with the EU’s acquis communautaire, modernising its financial and political institutionsand developing closer political ties.

It is often described as Ukraine ‘choosing to look west’. At the same time, it is an example of the EU using its soft power of trade as a foreign policy tool.

Russia immediately retaliated by raising tariffs against Ukrainian goods. More ominously, Russia’s president, Vladimir Putin, stated that making Ukraine choose between Russia or the EU would split Ukraine in two. The annexation of Crimea in 2014 and Russian support for separatists in eastern Ukraine were the consequence of this political shift. They were also the forerunners of the invasion in early 2022.

The AA has a political dimension to encourage dialogue between Ukraine and the EU. It requires regular summits between the president of the European Council and the president of Ukraine. Members of the Council of the EU and the cabinet of ministers of Ukraine must meet regularly, as well as members of the European Parliament and the Ukrainian parliament, and other officials and experts.

The EU has funded training programmes in EU law and lent officials for capacity-building. In hindsight, perhaps more could have been made of these political provisions in order to develop closer ties.

How have the AA and DCFTA affected Ukraine’s economy?

Statistics show that the AA and the DCFTA have had some impact on trade between the EU and Ukraine:

The EU is now Ukraine’s largest trading partner. Conversely, Ukraine is the EU’s 15^th largest trading partner in terms of imports and 17^th in terms of exports. This accounts for around 1.1% of the EU’s total trade, reaching a value of €43.3 billion in 2019.
Ukrainian exports to the EU amounted to €19.1 billion in 2019. The main exports are raw materials (iron, steel, mining products, agricultural products), chemical products and machinery. This figure has increased by 48.5% since 2016.
EU exports to Ukraine amounted to over €24.2 billion in 2019, an increase of 48.8% since 2016. Machinery and transport equipment, chemicals and manufactured goods are the EU’s main exports to Ukraine.
The number of Ukrainian companies exporting to the EU has also increased at an impressive rate: from approximately 11,700 in 2015 to over 14,500 in 2019 (European Commission).

Nevertheless, Ukraine exports only a third of its goods to the EU (World Trade Organization, WTO). In contrast, Moldova, which has a similar DCFTA with the EU, exports two-thirds of its goods to the EU (WTO).

The AA commits Ukraine to an agenda of economic, judicial and financial reforms and to gradual approximation of its policies and legislation to those of the EU. This includes conformity to the EU’s technical and consumer standards. Progress has been slower in these areas.

There have been general problems in Ukraine’s economic and social development. Writing in the Financial Times on 26 January 2022, Alan Beattie commented:

‘Ukraine, a dysfunctional economy with a woeful business climate, has failed to get itself in shape to take advantage. Nor has the EU been able to provide enough aid or crisis lending to rescue it from balance of payments problems and help it to develop. The EU has largely left it to the IMF [International Monetary Fund] to provide emergency external financing, and EU technical assistance has fallen short of expectations.’

What characteristics of the Ukrainian economy over the past three decades have hindered its progress?

The Ukrainian economy suffered severe dislocation after severing its ties with Russia in August 1991. At the time of dissolution, almost all industry and agriculture were publicly owned, with a large proportion of GDP devoted to the infrastructure of the communist state.

GDP per head in Ukraine fell precipitously until the turn of the century, before a substantial recovery in the 2000s (see Figure 1). But the period after 2007 was one of stagnation in GDP per head (as in many other countries), exacerbated by the Russian occupation of the Crimea and part of two eastern provinces of Ukraine in 2014.

Yet it should be noted from Figure 1 that this standard measure of GDP per head overstates the decline in living standards in the first and last decades. Throughout the period, the share of GDP devoted to consumption expenditure (rather than state activities, military spending and infrastructure) grew steadily, which insulated the Ukrainian population from some of the adverse economic trends.

Figure 1: GDP per capita in Ukraine (constant prices) and consumption share in GDP, 1989-2000

Ukraine GDP per capita

Consumption expenditure as % of GDP

Source: World Bank national account data

The period of stagnation in GDP from 2010 onwards also saw a sharp deterioration in Ukraine’s balance of payments on current account – the difference between the value of imports and exports of goods and services (see Figure 2). This culminated in a current account deficit of almost 9% of GDP in 2013.

Unlike some other states in Eastern Europe after the dissolution of the Soviet Union, Ukraine was unable to diversify substantially away from its traditional exports of agricultural products and raw materials. By 2014, its foreign exchange reserves only covered one month of imports, and the Ukrainian currency depreciated rapidly against the world’s major currencies, such as the dollar (see Figure 3).

Ukraine was also hindered by a lack of foreign investment. Investors were reluctant to put their money into a country that was one of the most corrupt in the world. In 2015, Transparency International ranked Ukraine 130^th out of 168 countries in its Corruption Perceptions Index.

Figure 2: Balance of payments on current account for Ukraine, 2000-2020

Source: International Monetary Fund (IMF) financial statistics

Figure 3: Value of Ukraine’s currency to the dollar and foreign exchange reserves in months of imports

1 US$ = Ukraine currency (HRY)

Foreign currency reserves: months of imports

Sources: IMF financial statistics

What rescued Ukraine’s economy in the latter part of the period, other than some modest internal improvement in domestic economic conditions, was the flow of incoming remittances from the substantial number of Ukrainians working abroad.

These remittances rose substantially during the period, especially after 2014 given the underlying economic conditions and political dislocation arising at that time (see Figure 4). The share of GDP accounted for by remittances from Ukrainians abroad rose from 1% of GDP in 2000 to around 10% two decades later. The contribution of remittances to real consumption expenditure – and hence, to maintaining living standards – was even greater.

Figure 4: Remittances from Ukrainians abroad, 2000-2020

Source: World Bank

The question of EU accession is not therefore primarily a question of increased trade opportunities. It encompasses, crucially, a change in the investment environment and also the question of labour migration. Of the ‘four freedoms’ of the EU’s internal market (goods, services, capital and people), it is the last two that may prove crucial in negotiations and to the Ukrainian economy.

What would be required for Ukraine to join the EU?

The recent request for a special procedure has come as a result of the war in Ukraine. President Zelensky was mindful that a number of states, most notably Turkey, have been waiting to join the EU for a number of years, with accession agreements stalled.

While the EU has shown an interest in an integrated relationship with Ukraine since independence in 1991, it is only when crises hit the region – for example, the Orange Revolution of 2004-05, the invasion of Georgia in 2008 and the Revolution of Dignity in 2013-14 – that the EU has stepped up its interest in developing a political relationship with Ukraine (Bélanger, 2022).

The Russian invasion has changed the narrative of EU membership beyond issues of economic integration to those of political and social integration and security.

The first dimension of the accession process is political. It requires stable institutions and abiding by the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities. A prospective state must also show that it is capable of adopting the body of EU legislation (acquis communautaire) into its national system.

In addition, a state must satisfy economic criteria. The existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the union are the broad requirements that would be assessed by the European Commission.

There was widespread support for accession to the EU within Ukraine and most EU member states responded positively to the idea. But France’s president, Emmanuel Macron, has suggested that Ukraine should continue with the looser association status, likening Ukraine’s future relationship with the EU to that of the UK.

Some political commentators have also argued that Ukraine is not ready to shoulder the responsibility of EU membership, and the EU is not in a position to take on board Ukraine’s internal problems.

On 1 March 2022, the European Parliament recommended that Ukraine be made an official ‘candidate’ for EU membership and ten days later, the Versailles Declaration attempted to bring all EU member states on board to initiate an accession process.

Using data drawn from the AA and the DCTFA as the basis for accession is likely to be the easiest way to begin the process. These existing agreements can also provide the framework for the accession treaty (Van Elsuwege and Van der Loo, 2022).

How might EU membership improve on the AA and the DCFTA?

Unlike the AA and the DCFTA, membership of the EU would give Ukraine presence in the EU institutions – the European Parliament, the European Commission, judges and an advocate general in the European Courts. Ukrainian would also become an official language of the EU.

Ukrainian citizens would benefit from the principle of non-discrimination, enhanced free movement rights and family rights to move to work, study, settle, retire and gain access to social security benefits across the EU.

EU law would take supremacy in Ukrainian courts and would, in some cases, be directly applicable. Where the conditions are met for direct effect, individuals and legal entities (corporations) will be able to assert EU law rights in national courts. Ukrainian courts would be able to ask for preliminary rulings from the Court of Justice of the EU.

The EU budget would also need adjustments. It would be difficult to expect Ukraine to pay into it, but the resources it is likely to need to rebuild after the war would have an impact on EU budgetary priorities. The EU has already created special funds for Ukraine and would be likely to ask for outside contributions from the global community for a special rebuilding fund to offset the burden (EU Law Live, 2022). The issue of reparations and the use of Russian assets currently frozen abroad will no doubt be a live issue.

What might be the economic effects of Ukraine’s accession to the EU?

As suggested above, the existing AA and DCFTA agreements largely allow for tariff-free entry of goods to and from the EU. Further, given that bulk goods, such as agricultural products and raw materials, form the majority of Ukraine’s exports, Russia will continue to be able to disrupt such shipments, especially through Black Sea ports.

Even after the cessation of overt hostilities on land, this is going to limit the scope for rapid expansion of such trade with the EU. Since Ukrainian exports of services are minimal, the main focus of Ukraine post-EU accession would be on capital inflows and labour outflows. As it stands, we could expect further negotiation on investment standards and on Ukraine’s ability to stamp out corruption as part of any accession negotiations. The sources of capital for reconstruction will no doubt extend beyond the remit of the EU, and involve other international organisations and the question of reparations from Russia.

Issues of labour migration have been complicated by the large number of refugees from Ukraine who are currently housed in bordering EU countries and for whom returning to Ukraine may prove to be a drawn out process.

One of the striking aspects of Ukraine’s pattern of migration, even before the invasion, is the shift in destination of Ukrainian emigrants. Prior to 2014, Russia received the largest share of Ukrainian migrants.

But even before the occupation of Crimea and parts of the provinces of eastern Ukraine, the pattern of migration was shifting towards the EU (see Figure 5). In 2012, the primary destinations of Ukrainian migrants were Russia, Poland and Italy (International Labour Organization). By 2017, Poland had overtaken Russia and become the dominant recipient of Ukrainians (Centre for Economic Strategy).

Estimates from surveys of Ukrainian households indicate that migrants to Poland increased from around 200,000 to 900,000 in the period 2012-17, and that up to 2.9 million Ukrainians were working abroad at any one time (typically for relatively short periods). Further, these workers were relatively unskilled and around four million Ukrainians were engaged in this form of ‘circular migration’ (Centre for Economic Strategy, CES).

Figure 5: Destinations of Ukrainian migrants, 2012 and 2017

Destination of Ukraine migrants 2012

Destination of Ukraine migrants 2017

Sources: International Labour Organization, Centre for Economic Strategy

The likelihood that many of these short-term migrants do not hold valid EU residence permits is confirmed by official EU data. According to Eurostat, at the end of 2020, 1.35 million Ukrainians held valid residence permits for the EU: around 500,000 for Poland, 223,000 in Italy, 166,000 in the Czech Republic, 95,000 in Spain and the rest elsewhere, mostly in Germany and Central and Eastern Europe.

Most of these were issued for an initial period of less than 12 months but were often extended. It is clear that, unless the CES survey figures of migrant numbers are overestimated, many Ukrainian migrants, especially in Poland, are ‘under the radar’.

Ukrainian migrants complain that they are used as cheap manual labour in the EU, paid significantly less than EU natives. The CES provides survey data on the wages of Ukrainians in 2017 both in Ukraine and recipient countries. Not surprisingly, Ukrainians abroad earn a premium relative to wages in their own country (especially wages outside Kyiv), but wages are typically below those of local workers abroad, especially in Poland.

Figure 6: Average salary of migrants in dollars, monthly, 2017

Source: Centre for Economic Strategy

The question therefore arises as to whether the EU will want to implement transitional arrangements under which free movement of labour from Ukraine would be restricted for a period subject to national law in EU states. For example, the 2005 Act of Accession for Romania and Bulgaria permitted EU member states temporarily to restrict free access of workers from these countries for a period of up to seven years, although such workers should still be given preferential access over workers who were nationals of non-EU states.

The quid pro quo is, of course, that workers who are given access from accession states should have the same rights in terms of pay and other conditions of employment contract as other EU nationals irrespective of any restrictions on numbers.

The situation is further complicated by the fact that countries such as Poland will continue to host an influx of Ukrainian citizens who are not there as workers but as refugees, including children and the elderly, for a currently unknown period of time. Hence, there will need to be detailed negotiations as to how ‘free movement of labour’ is to be applied in the context of Ukraine.

Conclusion

Membership of the EU would bring economic benefits for Ukraine. These would be felt less in terms of trade in the short term, but regularising migration and migrants’ wages would be important.

Joining the EU would also place an administrative burden on an already stretched Ukrainian government and parliament, including the need to fast-track aspects of the EU acquis communautaire and monitor the observance of EU law and policy, particularly in relation to investment incentives and contracts.

Any accession treaty will be likely to contain transitional periods, especially for full free movement of labour, and opt-out clauses. The symbolism may be that Ukraine will be given the status of ‘membership of the EU’, rather than associated or affiliated status.

But the impact of the Russian invasion of Ukraine and its request for EU membership has altered the perception of the role of the EU in international diplomacy. In particular, the EU has come to realise the need to strengthen its own security and manage its internal problems – ranging from the consequences of Brexit to the handling of alleged breaches of the rule of law by Hungary and Poland.

The war in Ukraine has ignited a catalyst for change across the whole of Europe and this may be reflected in how EU member states and the European Commission handle the question of accession by Ukraine.