As Ukraine Fulfills Some EU Aspirations, Obstacles Loom

By Simon Nixon Features Dow Jones Newswires

When the leaders of Ukraine and the European Union met in Kiev for a summit last week, both sides had something to celebrate.

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For President Petro Poroshenko, it was an opportunity to highlight the latest steps toward fulfilling Ukraine's European aspirations that had been such an important feature of the Maidan revolution in 2013. European Council President Donald Tusk presented him with a copy of the EU-Ukraine Association Agreement, which the EU finally ratified last week, three years after it was first agreed to, having nearly been derailed last year by a referendum in the Netherlands. The agreement includes a free-trade pact that already has boosted exports to the EU by 25% since being provisionally applied on Jan. 1. Since May, Ukrainians have also been able to travel to the EU without a visa.

The summit also marked a victory of sorts for the EU. To the surprise of many, the EU has managed to maintain a united front in its policy toward Ukraine and Russia throughout the recent political turmoil across the continent. It has stuck by a sanctions regime which may not have succeeded in persuading Russia to abandon its illegal annexation of Crimea or withdraw its support for separatists in the Donbas region of southeast Ukraine but at least has helped deter Russian aggression elsewhere in Europe and prevented a tide of refugees from Donbas that might have further tested European unity. In Eastern Europe in particular, where Ukraine's war is very much regarded as Europe's war, this is seen as an important success.

Yet the warm words belied real anxieties. Kiev wanted the summit to end with a joint statement explicitly endorsing Ukraine's long-term aspiration to become an EU member. The EU's leadership wanted this, too. The Estonian government, which now holds the EU's rotating presidency, pushed for a text that would welcome, acknowledge or even just take note of Ukraine's goal. But this was vetoed by the Dutch caretaker government, nervous of inflaming domestic opinion after last year's referendum rejecting the Association Agreement.

Instead, Mr. Tusk merely read out the preamble to the agreement, which "welcomed" Ukraine's "European choice," even though the European Council has stated that the agreement doesn't offer a path to EU membership in response to Dutch concerns.

Does the EU's refusal to hold out the prospect of membership matter? In the short-term, perhaps not. All sides accept that it will be years -- decades -- before Ukraine is ready to join given the vast challenge of overhauling its economy and institutions. In the meantime, Brussels is continuing to provide Kiev with technical and financial assistance to deepen its integration with the EU, while Kiev consults with Brussels on all reforms to maximize compliance with EU rules. In time, there is no obvious reason why Ukraine shouldn't participate in EU arrangements such as its single market, customs union or even its Schengen passport-free travel zone, which are open to non-EU countries such as Norway and Switzerland.

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Even so, the lack of a long-term EU perspective troubles Kiev. The Ukrainian government is trying to overhaul the country under challenging conditions. Following the Russian invasion in 2014, Ukraine's output slumped by nearly 17% and the currency lost 70% of its value against the dollar, causing inflation to hit 60%. That has created difficult political conditions under which to push through reforms such as the abolition of subsidized gas prices for businesses and households.

Meanwhile, Russia appears determined to raise the cost of Ukraine's reform program. Its continued destabilization of the Donbas, where violence has increased this year, and repeated cyberattacks against the government discourage investment and add to pressures on public finances. Kiev believes Russian President Vladimir Putin's goal is to turn Ukraine into a failed state which will in turn destabilize the whole of the EU.

Kiev has nevertheless chalked up important successes. It has nearly balanced the budget and has brought down inflation below 10%. The economy is growing again, and overhauls of the gas market, the banking system and public procurement have eased the pressure on government finances and reduced opportunities for corruption. Other much-needed reforms are in the pipeline, including decentralization of the public administration, overhauls of pensions and health care and land reform. Even so, every reform runs into resistance from vested interests, including Ukraine's powerful oligarchs. The government's capacity to implement its reforms is also weak, reflecting a public administration stripped of talent and still wedded to Soviet-era rule books. And while Kiev has created six new institutions to tackle corruption, there is no dedicated anticorruption court and there have been no high-profile convictions.

To maximize Kiev's chances of success, the EU needs to find ways to lower the political cost of Ukraine's reforms. Kiev believes that offering a clear path to EU membership would strengthen its hand at home. Estonia will try again to convince EU leaders to send this signal at another summit in November. Not only the stability of Ukraine may be riding on the result.

Write to Simon Nixon at simon.nixon@wsj.com

(END) Dow Jones Newswires

July 16, 2017 12:41 ET (16:41 GMT)