Ukraine Digs Into EU Trade Talks

KIEV -- Ukraine kicked off trade talks with the European Union on Monday, a step likely to further alienate Russia, which has been fiercely resistant to the pro-Western policies adopted by governments in Kiev and Tbilisi.

President Viktor Yushchenko, who is locked in a tense power-sharing coalition with Prime Minister Yulia Tymoshenko, said the trade talks with Europe were a priority for the country.

"In September we may be able to sign this agreement and create an economic integration of Ukraine with the EU," he told a Kiev investment conference organized by Renaissance Capital. "This is part of the process of integrating with global economies."

While Yushchenko emphasized the importance of greater integration with the EU and other leading global economic players, he made no reference to Russia in his speech, an indicator of the cool relations between the two countries.

Yushchenko last week struck a deal in Moscow, where he agreed to pay off the country's gas debt to Russia, while allowing Gazprom to double its market share in Ukrainian gas distribution to 50 percent.

Gazprom had earlier threatened to reduce gas supplies to Ukraine, an important consumer of and transit point for Russian gas, if the government did not pay its bill.

In return, Ukraine secured Moscow's approval for the eventual removal of controversial gas trader RosUkrEnergo, a 50-50 joint venture between Gazprom and two Ukrainian businessmen, which acts as an intermediary for handling sales between Russia and Ukraine.

Yushchenko's deal with the Kremlin came ahead of a two-day visit to Moscow by Tymoshenko that starts Thursday.

Yushchenko's emphasis on bolstering trade relations with the West is unlikely to be welcomed in the Kremlin, which has reacted strongly to his stated wish to take Ukraine into NATO. President Vladimir Putin last week threatened to point nuclear missiles at Ukraine if NATO's missile-defense units were placed on its territory.

Speaking at Monday's conference, former British Prime Minister John Major acknowledged the growing importance of the European Union over Russiaas a trade partner to Ukraine.

"Ukraine will always have a political and commercial relationship with Russia, which will be important, but Ukraine can now look toward the gravitational pull of the West," he said, noting that an agreement with the EU would open up "large and important new markets."

"Permanent membership may lie ahead," Major added.

Shortly after he was swept to power in Ukraine's Orange Revolution in late 2004, Yushchenko identified a deepening of relations with the West as a priority direction for the government. Earlier this month, Ukraine obtained approval to join the World Trade Organization. Membership in the body could add as much as 1 percent to Ukraine's GDP, Yushchenko said at the signing ceremony in Geneva earlier this month.

Russia, which has been seeking to join the WTO for the past 15 years, hopes to complete talks on accession this year.

But ahead of holding talks in Kiev on Monday, EU Trade Commissioner Peter Mandelson said there was a tough road ahead.

"If it was as easy as turning on a light or turning on a switch then we could do it much more quickly, but then also the consequences and benefits would be far fewer," Mandelson said, Reuters reported. "If we want to make this as deep and comprehensive a trade agreement as both sides do, it will take time. It will take some tough negotiations, but I can promise you, it will not take a day longer than it needs to."

Some Ukrainian officials have said the trade talks could take up to five years.

Sergei Ivashnovsky, associate director at Moscow-based Prosperity Capital Management, said Ukraine should not rush into an agreement with the EU.

"Ukraine's integration with the EU will bring a lot of benefits but will also give access to its own consumer market, and the quality of [products] made in Ukraine is not as high, and [their] competitiveness doubtful," he said on the sidelines of the conference.

Moscow has fought efforts by former Soviet satellites to forge closer ties with Europe. Relations between Russia and the pro-Western government in Georgia are particularly frosty, and flights between Moscow and Tbilisi are still banned, as is the import of Georgian wine.

Yushchenko on Monday also promised a serious effort on the reform front, most notably in the areas of taxation and the stock market, key to promoting investment in the country. But some investors expressed doubt that Yushchenko could push through the reforms, given his public disagreements with Tymoshenko.

That view was reinforced by Ukrainian officials.

"We have imperfect legislation, and we are in permanent political conflict," said Anatoly Balyuk, head of the government's financial markets watchdog. "The infrastructure of the market is not perfect, and that's why transaction costs are higher."

But some investors insisted that the government would have no alternative but to cooperate if it is to attract greater foreign investment into the country.

"Yushchenko is not going to kick Tymoshenko out," said one Moscow-based investor. "They have to work together."

"It's definitely important that all branches of the government are in unison," said Alexander Pertsovsky, chief executive of Renaissance Capital. "There are quite a few problems to tackle, and it is obviously an issue."

He denied, though, that the difficulties among the differing parties in the government would derail the reform effort.

"There is an understanding among them," he said. "[But] it's difficult to expect that all [the reforms] will happen."

Ukraine reported impressive economic growth last year of 7.3 percent, but the country is also battling inflation, which at 16.6 percent in 2007 threatens to outpace income growth.

There are still powerful barriers to investment in the country, particularly in terms of public governance, and the country's stock market is highly illiquid.

But in an effort to stress Ukraine's emerging importance as a transparent partner, Yushchenko said privatizations slated for 2008 would be "fair."

"I guarantee that none of the assets offered for privatization is earmarked for a certain buyer," he said.