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07:48 | 04/12/2019

Free trade agreement between Ukraine and Turkey

Ever since the fall of the Iron Curtain, Turkey and Ukraine have been strengthening their economic ties.

Turkey was one of the first countries to open its doors for trade with budding Ukrainian entrepreneurs, who could do business with just a few hundred dollars of capital. In the 21st century, trade turnover reached over a billion dollars per year and now stands at $4 billion and rising.

“After the EuroMaidan Revolution of 2014, Turkish companies started to heavily invest in Ukraine, and Turkey became one of the top three investors,” says Burak Pehlivan, chairman of the Turkish-Ukrainian Business Association (TUID), which has more than 200 member companies.

Turkish business has shown an appetite for risk that other countries’ companies often lack. Turkish firms know how quickly a country can develop after it signs a free-trade agreement with the European Union, which Ukraine did in 2014.

Power of trade

In 1995, Turkey signed a customs union agreement with the European Union. Pehlivan remembers the apprehension of Turkish businesses at the time, because many could not compete with European ones. But with the customs union in place, they won in the long run.

Besides competition from the European companies, the agreement resulted in considerable amounts of European investment into the Turkish economy. “In the first five-six years, Turkey could not get enough investments from the EU,” Pehlivan says.

As foreign investors’ fears about rule of law, corruption and geopolitical risk in Turkey declined after 2000, the country “could attract more than $100 billion of investments only from the EU,” into an array of industries. Currently, “more than 75 percent of all foreign investments come from the EU, and Turkey exports five to six times more to the EU than 25 years ago.”

Pehlivan, an engineer by training, started his career in 2003 as a salesman at a Turkish company that traded with Ukraine and other countries transitioning from socialism to capitalism in Eastern Europe and Central Asia. Over 16 years, he has seen Turkish firms build airport terminals, highways and football stadiums in Ukraine.

He currently runs an engineering equipment and services firm in Ukraine and Turkey that he started in 2004. Since then, it has grown to over 20 employees. Except for Pehlivan himself, all of them are Ukrainians.

Two years ago, he also started a solar energy company because Ukraine opened its energy market to small and medium-sized producers and offered incentives for alternative energy generators. The company now operates a solar plant in Khmelnytsky Oblast in western Ukraine and sees opportunities for expansion to Odesa and Chernivtsi oblasts.

A nagging issue

The possibility of Ukraine and Turkey signing a free trade agreement is a long-standing subject for both Kyiv and Ankara. It’s also important to Pehlivan, who jumps on the topic without the faintest prompt.

“The major challenge is always to make foreign trade between the two countries much bigger, to make the cake much bigger, to integrate both countries’ economies and to sign a free trade agreement between the two countries,” he said.

Talks about the potential agreement have been ongoing for 12 years. So far, they have yielded no results, though both countries have shown interest in increasing trade, which reached as high as $8 billion in 2008.

However, it fell drastically soon after due to Russia’s invasion of Crimea and Donbas and Ukraine’s loss of control over mining, metallurgical and heavy industry assets in these territories. Combined with political instability, this significantly weakened Ukraine’s economy.

In 2018, trade between Ukraine and Turkey picked up again but so far has only reached the $4 billion mark. In Pehlivan’s opinion, the volume of trade between the two countries will grow by 10% annually even without a free trade agreement. If the agreement is signed, he believes the annual growth rate will reach 20%, making it possible to achieve the ambitious, bilateral goal of $10 billion in trade annually.

During an Aug. 7 meeting in Istanbul, Ukrainian President Volodymyr Zelensky and Turkish President Recep Tayyip Erdogan spoke in favor of signing the agreement, and Zelensky said he hopes to “to reach a compromise on this issue as soon as possible and prepare all necessary documents.”

Erdogan was also optimistic but said that the agreement was not the only game in town. The two countries also plan “to accelerate the activities aimed at investing in infrastructure and construction” and boost economic development in general, he said.

Pehlivan translates the presidential statements into everyday language: “We do not want to eat the (economic) cake, we want to make the cake bigger and bigger and bigger.”

Experts cautious

While politicians prefer to be upbeat about the agreement and businesses are relentlessly pushing to boost trade, the long history of negotiations suggests that there is much more to the story than bureaucratic stubbornness. The two countries’ interests are difficult to reconcile.

Olena Omelchenko, a partner at the Ilyashev and Partners law firm, used to work for the Ministry of Economic Development and Trade of Ukraine. She knows well the nature of free trade negotiations and the logic of international trade.

Major economies are generally members of the World Trade Organization (WTO), and Ukraine and Turkey are no exception. When countries want to liberalize their trade beyond WTO requirements, they negotiate a free trade agreement. Such deals represent an exception to WTO rules, but have become so widespread that entering into them is seen as a country’s right, Omelchenko told the Kyiv Post.

Omelchenko believes that signing free trade agreements is especially challenging for Ukraine, because “we entered the WTO on really bad terms and now acting in negotiations on new free trade agreements is very difficult for us.”

Simply speaking, Ukraine cannot stand its ground in the talks because “our tariff protection is too weak,” Omelchenko said. “The tariff rates on some positions are a flat zero and on others — 10%, but the average weighted rate is quite low compared to other countries, including Turkey.”

Insider take

Sergiy Korsunsky knows the two countries’ negotiations in and out. He was Ukraine’s ambassador to Turkey from 2008 to 2016 and currently serves as director of the Hennadii Udovenko Diplomatic Academy of Ukraine.

“The last negotiation round in fall 2013 ended in our failure to coordinate positions in agriculture,” he told the Kyiv Post.

According to Korsunsky, Ukraine agreed to open its industrial goods market to Turkey, but “at the same time, the Turks should have symmetrically opened their agricultural market to us, which was our major interest.” Instead, the Turkish negotiators rejected that possibility, citing the weakness of their agriculture.

When the EuroMaidan protests started in 2013, Ukraine entered a period of turmoil and did not return to negotiating with Turkey until 2016, when then-President Petro Poroshenko visited the country, along with a negotiating team chaired by (Deputy Economy Minister Natalia) Mykolska.

Korsunsky and his colleagues suggested that the team compromise with Turkey and accept a gradual reduction of tariff protections on Ukrainian agricultural goods. “On some positions, the tariffs were as high as 270% in case of wheat, for example,” he said.

However, the Ukrainian negotiators rejected his suggestion and decided to restart negotiations from scratch.

“Mykolska told the Turks that we were coming back to the very beginning of (the) negotiations and (would) fully cancel everything achieved so far.” This was unacceptable to the Turkish side. Erdogan tried to resolve the issue with Poroshenko directly, but to no avail, Korsunsky said.

Since then, the pending agreement has gone nowhere. Negotiations from 2016 to 2019 “were nothing but propaganda and nobody was really going to sign anything,” Korsunsky said. He wished best of luck to the new negotiation team, headed by current Deputy Economy Minister Taras Kachka.

Korsunsky said that agriculture will remain a contentious issue in future negotiations and that both sides will persist in pushing their positions.

Ukraine has lost many metallurgical facilities due to the war in Donbas, and now the country’s “major export staple is agriculture, so we need to do our best to open agricultural markets, which the Turks really mind,” Korsunsky told the Kyiv Post.

He believes both sides should seek mutually acceptable compromises.

Trade grows anyway

But even without the agreement, trade growth and economic cooperation will continue. Pehlivan has seen it in his own career.

He started off as an employee, then took managerial positions and eventually became an entrepreneur. Trade between Ukraine and Turkey has followed a similar path. It started with modest “shuttle merchants” bringing dozens of kilograms of merchandise across the border. Then, trade grew into family-owned businesses running one or two shops. Now, the bulk of economic cooperation is being performed by corporations.

TUID, the organization Pehlivan chairs, is also evolving.

“The biggest trend in our organization is that we see more professionals now than entrepreneurs,” Pehlivan said. The ratio of professionals in TUID has recently reached 80%. Indeed, Kyiv and other Ukrainian cities host many Turkish managers, including CEOs, CFOs and board members of such companies in Ukraine as Coca Cola, the European Bank for Reconstruction and Development, PrivatBank, Ukrenergo and others.

TUID has also become active in creating new business associations. For example, TUID is a founding member of ICBAC, the International Council of Business Associations and Chambers in Ukraine. TUID has also joined Turkonfed, an Istanbul-based association of Turkish businesses.

If Ukraine and Turkey sign the free trade agreement, their economic cooperation will skyrocket and TUID member companies will be the first to benefit from this potential success story. But even if the status quo remains in place, Pehlivan remains optimistic.