Issue 1, 2014. February-March

   

GEORGIA AND UKRAINE: CAN THEIR ECONOMIC ALLIANCE CONTINUE?

The unfolding of recent developments in Georgia and Ukraine from their respective decisions to initial--and not initial--an Association Agreement with the EU could be written off as chiefly political, but the absence of Ukraine's signature has primed the economic posturing of Georgia and Ukraine to each other and to the world's largest trade union. The future economic relations among the trio will be hotly anticipated in the upcoming year. So what does the economic foundation look like now, and how might their relationship evolve?

Cordelia Ponczek

Meet the paradox of European Partnership neighbors Ukraine and Georgia: the first is the largest country--by size and population--in the Eastern Partnership (EaP) group, the third largest country in geographical Europe, and boasts a GDP of $176.3 billion. The second is a relatively small nation matched by yet a smaller population, generating an economy less than a tenth of Ukraine's, with a GDP of $15.75 billion. Yet, the former has entered 2014 mired in political disputes and reverberating with government distrust while the latter has embraced normative political-economic goals and general peace.

Ironically, the state of Ukraine's economy was one of the pivotal issues that caused President Yanukovych to snub his nose at the IMF-fund-lacking EU deal in favor of Putin's extension of a $15 million dollar line of credit and better gas prices (a generous offer that has since been stalled barring the new government formed pursuant to Azarov's resignation). Yet only a few years ago, Ukraine was the only country to have successfully completed negotiations on the Deep and Comprehensive Free Trade Area and the only country out of the Eastern Partnership to have made any reasonable progress towards stabilizing relations with the EU.

Diplomatic ties between Georgia and Ukraine were forged long ago, and grew stronger when Georgia was emerging triumphant from the 2003 Rose Revolution and Ukraine swiftly followed with the Orange Revolution in 2004. But as Ukraine struggles to determine its path, it is unclear how strong diplomatic—and thereby economic—relations between the two allies will be in the future.

The existing lineup of Georgian-Ukrainian economic partnerships is raw iron ready to be forged: it has potential, but it needs to go through fire and be shaped before it can reach its zenith. For starters, despite sharing the Black Sea as a transportation zone, Georgia is nowhere near the top of Ukraine's import or export favorites. The Ukrainian market made up just 7 percent of Georgia's $2.9 billion exports in 2013; imports from Ukraine were only 8 percent of the $7.8 billion that Georgia spent on foreign goods last year.

It is not for want of effort that economic ties are lacking. Georgia and Ukraine established a free trade area in 1994, which was promptly followed by a free trade agreement in 1995. One of the limiting tenants of the free trade agreement was the establishment of unfavorable conditions for re-export of goods—an essential section of the recently negotiated Deep and Comprehensive Free Trade Area (DCFTA) that Georgia hopes to use to craft its regional short-term and long-term trade strategy. So while the Ukrainian-Georgian free trade area and agreement set the framework for cooperation between the two countries, it left a lot of room open for modern interpretation in an ever-evolving market.

One common logistical question mark between Georgian-Ukrainian trade is transportation. To effectively be strong trading partners, both Georgia and Ukraine have focused on liberating transportation cargos and forging ahead with joint transport projects that benefit both countries. According to the Ministry of Foreign Affairs of Georgia, one prospect for development is the transportation of cargo via the Baltic Sea-Black Sea and Caucasus-Caspian Sea route. Anther option is a project called "Viking", which is a combination of the Kerchi-Poti and Batumi railway-to-ferry project, combining—as the name suggests—ferry-boat and railway access. Both of these projects aim to buttress transportation between Georgia and Ukraine and facilitate investment and trade favorable to both countries.

The logistics of ground and sea transportation is one aspect of the favorable trade paradigm, but another facet is comprised of state-imposed policies and regulation. This can be done through both exclusive trade organizations and broader regional consortiums.

One such agreement to create mutually favorable policy is the Joint Intergovernmental Commission on Economic Cooperation, which has been used as a means to heighten cooperation and awareness between authorities. A place where Georgia and Ukraine could use such bilateral cooperation and communication is in the agro-industrial complex, which is a key part to both export economies. A particular need is the cultivation of mutually beneficial conditions for arable land usage and livestock breeding. Using smaller, exclusive partnerships help both countries to identify their objectives and effectively communicate those objectives for the betterment of both partners.

Aside from joint initiatives, Georgia and Ukraine have larger frameworks to encourage (or mandate) collaboration. They are both members of the Black Sea Economic Cooperation (BSEC), which aims to develop bilateral relations between the member countries. The downside here is that, unlike the Joint Intergovernmental Commission on Economic Cooperation, the BSEC lacks exclusivity: the framework from the BSEC is to benefit all members, not just create ties between Georgia and Ukraine alone. The upside is that other large trading members, like Turkey, can provide a wider perspective and context for Georgia and Ukraine to consider in more personal deliberations.

Currently, both countries are facing a change in political climate, Ukraine for the worse; Georgia for the better. Meanwhile, on a global scale, the emerging market crisis is sweeping with indiscriminate force against the already fledgling developing economics.

At the 2014 Munich Conference European Council President Herman Van Rompuy laid out the EU perspective on "carrots and sticks" saying, "Our biggest carrot is our way of life; our biggest stick: a closed door." This reverberates with an uncanny force not just because President Rompuy was using the analogy to describe Ukraine's decision to not initial the Association Agreement, but because the same can be said about the future of trade relations between Georgia and Ukraine: a door closed is not easily opened. It is better to keep the lines of communication and trade open, and, better yet, to act on them.

Cordelia Ponczek is a researcher based in Warsaw and formerly taught in Georgia, where she was stationed outside of Zugdidi and later in Batumi. She earned her B.A. in Political Science at Miami University in Ohio, USA.