Signing of EU Association Agreement by Georgia, Moldova, and Ukraine likely to lead to Russian economic retaliation

Georgia and Moldova signed their full Association Agreements (AAs) and Deep and Comprehensive Free Trade Agreement (DCFTA) after initialling them at the EU Eastern Partnership Vilnius Summit in November 2013. Ukraine was due to sign its AA in Vilnius, but then-president Viktor Yanukovych opted for financial assistance from Russia instead, triggering the months of unrest that have included Yanukovych's ouster and Russia's annexation of Ukraine's Crimea region. The new Ukrainian government signed the political parts of the AA in March and the economic part, the DCFTA, on 27 June. The agreements commit the countries to introduce several laws and regulations in line with EU standards in a wide range of areas from intellectual property rights to phytosanitary standards and competition policy. This process will be monitored by the EU, which has also agreed to increase its financial assistance to the countries to assist the implementation. The process of ratification by each EU member state will likely take at least a year, but certain parts of the agreement will be provisionally applied upon ratification by the Georgian, Moldovan, and Ukrainian parliaments, which is likely to be completed shortly. These areas include democracy, human rights, rule of law, free market economy, and sustainable development.

Ukraine: Impact overshadowed by ongoing security crisis

The AA has primarily symbolic significance for Ukraine at this point in time. It will help to buttress the legitimacy of President Petro Poroshenko, winning the approval of his core electorate, and give him some political capital with which to be able to engage in talks with Russia and make certain concessions (such as on prospective NATO membership), without prompting further protests by the pro-Maidan (independence) movement. IHS does not consider that the signature of the AA is unlikely to have a material impact on Russia's position in future talks with Ukraine. The AA has not featured among Russia's core conditions for resolving the crisis in eastern Ukraine, and realistically, there is little Russia can do about the Agreement from a political standpoint now that it has been signed. The signing also does not increase the likelihood of any Russian military intervention in eastern Ukraine.

However, from an economic perspective, it is far from clear that the Agreement will have a net positive effect in the near term. There is a strong possibility that the Customs Union of Belarus, Kazakhstan, and Russia will move to restrict trade with Ukraine as a result of its signing of the AA, with Russian minister of foreign affairs Sergei Lavrov stating that they could impose protective measures if the deal impacts upon the Customs Union's free-trade zone. This would have a significant impact on the already struggling Ukrainian economy, with these countries accounting for around a third of its exports, and around 40% of its imports. In particular, eastern Ukraine's heavy industry and machine-building sectors would suffer from any reduction in Russian imports. At the same time, the potential economic benefits of completing the AA are not likely to be realised for several years – while substantial costs are expected to be incurred in achieving compliance with the Agreement – so it cannot be seen as a panacea to Ukraine's ongoing economic troubles.

Georgia: hope of European perspective is tempered by concern over Russia's response

The signing of the AA is of historical importance to Georgia as it firmly anchors the country on the path towards European integration, which tops the Georgian government's foreign policy agenda. In addition, Georgia stands to benefit from the sectoral co-operation with the EU in energy, environment, civil service, and other areas. The main economic advantage of AA adoption stems from the removal of trade quotas and customs duties on Georgian products in the European market, which will increase bilateral trade with the EU and contribute to job creation in Georgia. The AA process is also likely to speed up the EU-Georgia dialogue on visa liberalisation, which was launched in June 2012. Georgian Prime Minister Irakli Garibashvili repeatedly emphasised the importance of achieving visa-free travel to EU for Georgian citizens.

The celebration of the AA signing is tempered by concerns over Russia's likely response. The Russian government has sent out mixed messages on this issue. In a statement released on 26 June, Russia's foreign ministry spoke of the AA's harmful impact on the Russian economy "as a result of the breakdown in co-operation and reduction in trade and economic relations with [its] neighbours". Yet on the day of the signing, Russia's permanent representative to the European Commission, Vladimir Chizhov, expressed Russia's willingness to participate in consultations with the European Commission regarding AA implementation with Georgia and Moldova. There have also been direct talks between Russian and Georgian representatives on trade and economic relations in light of the AA. After working to normalise trade relations with Russia in 2013, which resulted in the return of Georgian wines and mineral water to the Russian market, the Georgian government is now wary that signing the AA will prompt Russia to selectively reintroduce trade restrictions. Another concern is rooted in the possibility that the Russian-controlled separatist authorities in Georgia's breakaway regions of Abkhazia and South Ossetia will expel the remaining Georgian population, which would produce a humanitarian emergency in Georgia proper. The harassment of Georgian residents in both regions has been steadily increasing lately, especially when it comes to their right to move freely across the de facto border.

Moldova: deportation of Moldovan migrant workers the most likely Russian reaction

The signing of the AA represents the completion of a long-term political goal for Moldova's Pro-European Coalition government, and a political victory over the pro-Russian opposition parties as well as pro-Russian Moldovan regions, including the separatist Trandniestr and the autonomous Gagauzia. The Russian reaction is likely to be primarily economic in nature. Russia already banned Moldovan wines from its market in September 2013, in order to put pressure on the Moldovan government not to proceed with the AA. It is now likely to implement further trade barriers, as well as to start deporting up to more than 200,000 Moldovan migrant workers, around half of the total Moldovan migrant worker population in Russia (see Moldova: 12 May 2014: Russian deputy PM's warning over EU-Moldova Association Agreement indicates likely measures against Moldovan migrant workers). This would enable pro-Russian opposition parties to galvanise anti-EU and anti-government sentiment ahead of the parliamentary election on 30 November by presenting the deportations as the consequence of EU integration. The primary risk to the implementation of the AA is the potential opposition victory in the November election: the Communist Party (Partidul Comunistilor din Republica Moldova: PCRM) has been polling between 30% and 50% and is likely to maintain its position as the largest party but depend on the performance of other, smaller parties for a majority. The separatist leadership in Transdniestr is likely to increase its intransigence in regular negotiations with Moldova and to maintain its calls to Russia to recognise it as independent and allow it to accede to Russia. The Russian government will support the intransigence but likely ignore calls for annexation.