Ukraine's Economic Future Rests on One Key Decision

Ukraine’s economic future is contingent on a key decision that will be made by government leaders in the next couple of weeks.  In short, the country’s leaders must decide whether or not to accept a free-trade and political-association agreement with the European Union.  If Ukraine passes on this agreement, it is likely that the country will become a part of the Russian-led Customs Union, which also includes Belarus and Kazakhstan.  This decision will undoubtedly shape Ukraine’s economic environment going forward, especially related to trade.

If the agreement with the European Union is signed, Ukraine will become a part of what is arguably considered the most successful and democratic political association in the world.  From an economic development standpoint, the decision is a simple one – go forward with the EU agreement.  The association agreement, if enacted, would provide stability to Ukraine, which is currently on the brink of defaulting on its foreign debt.  The agreement would also open markets and bring Ukraine’s trade competition up to European Union standards.  According to the European Union, the agreement focuses on core economic and political reforms, while promoting “democracy and the rule of law, respect for human rights and fundamental freedoms, good governance, a market economy, and sustainable development.”

Like many governmental decisions, however, this one has political ramifications.  Ukrainian President Viktor Yanukovych has made the completion of the EU deal a primary objective for the country, but if the agreement is accepted would lose a lot of political supporters who are uncompromisingly pro-Russian and anti-Western.  Russia has also threatened a trade war or a cutoff of energy supplies to Ukraine if the agreement with the EU is enacted. 

There is little question that Ukraine and its economy will change significantly, regardless of which course of action is taken.  If the agreement with the EU is signed, Ukraine will benefit from free trade with other EU members and have a far greater chance to realize economic stability.  The alternative is to join Russia’s Customs Union and risk ceasing some economic control to Moscow.  It will be interesting to see how the decision made impacts Ukraine and its economy in the coming years.