600 mln instead of reforms: Why EU's assistance may be harmful to Ukraine

Author : Yuriy Panchenko Serhiy Sydorenko

Source : 112 Ukraine

To get the tranche, Ukraine had to fulfill two tasks: payment of social assistance to IDPs and withdrawal of new trade restrictions. it failed to do it, but EU went on compromise
09:00, 15 March 2017

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In the coming weeks, Ukraine would receive the second tranche of EU macro-financial assistance of 600 million euros. This information was simultaneously approved by some European officials.

Of course, information on a new tranche of financial aid from the EU is good news for Ukraine. However, the circumstances of the allocation of these funds are quite special.

So news from Brussels force us to think whether there are more advantages or disadvantages in it.

The EU did not wait until Ukraine fulfills its requirements concerning the forests and the pension.

"The EU decided to transfer the second tranche in "advance" without previous fulfillment of all the conditions. Currently, some technical procedures would be conducted, and in a few weeks tranche would be transferred. And the outstanding items to be transferred to the third tranche," said one of our interlocutors.

In the spring of 2015, Ukraine and the EU have signed a memorandum of macro-financial assistance in the amount of 1.8 billion euros. Ukraine should receive three tranches of 600 million each. This is a credit, but significantly "longer" and cheaper than, say, the money from the IMF.

Related: Kyiv court bans work of plywood plant due to air pollution

The first tranche Kyiv has received in 2015. Then it was assumed that the second tranche we would get at the end of that year, and the last one - in 2016.

For two years of the issue of the second tranche was "frozen." First of all, because of the intransigence of Kyiv.

What caused such a "deep freeze"? And most importantly, what was the reason for changing the EU's decision?

In order to obtain the tranche, Ukraine had to perform "homework" on reforms. It included combating corruption, transparent procurement, reform in the spheres of energy, civil service, etc. The achievements of government was establishment of new cooperation with IMF. Of course, Kyiv planned to perform it without this document.

And there were enough of the requirements and challenges for Ukraine, in particular, for the part of government officials and MPs. They should solve the problem of sharp increase in the protective duty on exports of scrap metal (10 to 30 euros and ton), which is above the maximum level, set by the terms of the country's membership in the WTO.

Related: 7 arguments against export of Ukrainian roundwood

This decision, which violated the principles of the Association Agreement, lobbied the domestic steel industry. Of course, EU protested. Finally, legislation to raise taxes was vetoed by the president and approved again, given its proposals. First of all, the effect of high duties was limited to three years.

Thus, the EU was demanding full fees cancellation, but later ruled out the issue of scrap metal from its requirements.

This compromise has demonstrated major weakness of the European Commission that is to make concessions on the issue of macro-financial assistance.

Seeing first “assignment,” Kyiv was not in hurry to perform other tasks, and some of them it performed only formally. As an example, creation of an independent energy regulator. The law referred to in the memorandum was adopted, but without a number of regulations, this work was not completed.

There are two key issues though: payment of social assistance to IDPs and withdrawal of new trade restrictions. Or, in other words, pensions in Donbas and the round wood.

Related: Round wood export ban is only reason why EU blocks financial aid for Ukraine

The EU was satisfied with Ukraine regarding both issues. Kyiv claimed that the memorandum refers to the pensions to internally displaced persons, and not to those who pretends to be such and lives in the occupied zone. Therefore, there is no agreement between Kyiv and Brussels on this issue.

Finally, one more condition remained an obstacle to funding. It is about lifting the moratorium on the export of unprocessed timber. Brussels long believed that Ukraine is close to its implementation. In October 2016, European Commission President Jean-Claude Juncker said that lifting the moratorium is expected in the coming weeks. In fact, the government then was preparing for early parliamentary consultations on the subject.

These consultations have shown that the parliament is set firmly against it. It started producing some populist slogans like "price for EU tranche = deforestation of Carpathians".

The government effectively rejected to give the explanations, and arguments of the the EU against this background were inconclusive.

Related: 29 wagons of roundwood arrested on Transnistria border

So why the EU finally agreed to transfer the money to Ukraine?

Our numerous sources explain this is due to the bureaucratic reasons, the term for the allocation of these funds expires this year. And accordingly - if the tranche is not transferred Kyiv, it will be lost, and the EU will direct funds for the other purposes.

And here the main question arises - whether the EU is doing right, going against its principles? And what would be the consequences?

It is not a secret that the progress of Ukrainian reforms in recent months slowed significantly. So far, the EU and the IMF (or rather, their financial aid) were the main incentives for their implementation.

But what if the EU through their actions is actually destroying one of these incentives?

Would the EU continue firmly insist on Ukrainian government’s fulfilling its obligations?

As a result, the EU macro assistance price for Ukraine might be higher than the refusal to allocate these funds.

What is more important for the country - 600 million euros or the reforms? The government and society may have different answers to this question.

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