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Market status of Ukraine’s economy
Economy of Ukraine has been in a new market status for more than four months already. Following a decision taken by the USA, Ukraine is recognized as a state with a market economy as of February 1 2006.
Six years of talks
The term “state with market and non-market economies” is officially used to characterize processes of foreign economic activities and international trade relations. The following states formed the list of countries with non-market economies which was approved by the European Union on April 27, 1998: Ukraine, Albania, Azerbaijan, Armenia, Belarus, Vietnam, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Mongolia, Korean Republic, Tajikistan, Turkmenistan, and Uzbekistan.
Negotiations with the European Union on granting the status of a market economy state started six years ago. Ukraine was granted a transition “quasi-market” status by the European Union Council of Ministers in autumn 2000. It implied a possibility of a full-fledged market economy for certain Ukrainian companies rather than for the state as a whole. Two companies took the opportunity to individually become market producers over these six years — Cherkasy-based Azot and Gorlovka Stirol.
In 2001, Ukraine ventured to raise an issue of being granted a full-fledged market status. The European Commission was to take a decision on the issue. And the documents to obtain a market economy state status were submitted by Ukraine again in May 2002.
MES – Market Economy State
Canada was the first state which granted the market economy status to Ukraine. According to Canada antidumping legislation Ukrainian metallurgy was qualified as a market industry as of May 10, 2001. Meanwhile, none of the European states shared this decision of Canada.
Difference in opinions occurred mainly because the very notion of market economy is not clearly defined. For example, to become a market economy state in a worldwide practice, the state should meet a number of criteria: prices should be non-fixed, foreign trade and liberal, budget process should be transparent; the central bank and judicial system should be independent, and the terms of conducting business should be equal for al the participants. As long as each country treats the definition of “a market state” in its own way, subjective opinions of Washington and Brussels are decisive in the process.
Will it bring more investments?
The struggle for being granted a market status that went on for several years has brought its results. It means both the cancelling of limitations in trade and augmentation of the foreign trade turnover, as well as the stirring up of business activities. Nobody would deny that the very fact of being granted the status of market economy state to Ukraine would increase its attractiveness in the eyes of foreign investors.
At the same time, in the opinion of some investors only successful negotiations in the course of which they would be provided with proper guarantees, could help in the process of giving Ukraine an additional investment attractiveness.
A step towards EU
The new status of Ukraine also brings a better trust on the part of the European Union. It does not only accelerate the process of Ukraine’s accession to the WTO, but also improves outlooks for a future admission to the European Union. An intention to join the EU was declared at the summit Ukraine — European Union when European leaders confirmed their readiness to deepen economic cooperation with Ukraine. President of Ukraine Viktor Yushchenko stated that political decisions taken would lead to a new qualitative stage in relations between Ukraine and the European Union.
On the other hand, there is a view that the opinions of the European states outbalance the opinion of the USA on the scale of importance, because the CIS states and the European Union are the main trade partners of Ukraine. However, without similar acknowledgement of Ukraine by the USA, Ukraine would hardly become a member of the WTO.
Pursuant to the USA legislation, any foreign state in which the sale of goods does not reflect their real cost is named “no-market economy state”. Six criteria should be met to become a market economy state for the USA: the level of currency exchange in the state; agreements between workers and employers as to payment; level of the state openness for foreign investments; the share of the state property in the means of production; state control over prices and sharing of resources, and other factors that vary for different states.
In its turn, the European Union grants the status of a market economy state if the following conditions exist:
• decisions of companies as to prices, costs, technologies and manpower, volume of sales, and investments are made based on demand and proposal on the market without any significant interference by the state; at the same time, resource costs should reflect their market value;
• a transparent single accounting system and conducting of an independent audit in accordance with GAPP is available;
• no disruptive influence on production costs and financial status of the company are observed (like assets’ underevaluation, other forms of cost elements’ concealing, give-and take counter-trade practice, and payment by indebtedness offset);
• legislation in the sphere of property and bankruptcy of companies guarantees legal certainty and stability of their activities;
• currency exchange is done according to the actual market rate.
Ukraine has met all the technical requirements necessary for obtaining the MES status. Now Ukrainian companies will be allowed to work in accordance with the new market status, which means that their local prices and pricing policy will be used as a basis for antidumping calculations instead of using information of the third states with the market status.
Head of trade and economic section of European Commission delegation in Ukraine
Council of the European Union declared on February 21, 2005 that it would grant the status of the market economy state to Ukraine as soon as remaining problems (legislation on insolvency and state interference into price formation) would be solved.
After stirring up of relations between Ukraine and the European Union Mr. Barroso, President of the European Commission, made an announcement during summit Ukraine — European Union on December 1, 2005 in Kyiv that Ukraine had met all technical requirements necessary for obtaining of the status. Now Ukrainian companies would be allowed to work in accordance with the market status, which means that their local prices and pricing policy would be used as a basis for antidumping calculations instead of using information of third states with the market status. These are technical consequences which can lead or not lead to lessening of antidumping customs duty or cancelling it in certain cases.
Granting of market economy state makes us one step closer to accomplishment of a joint Plan of actions. Mr. Barroso also repeated during the summit that Ukraine could rely on support of the European Union in joining the World Trade Organization.
Meanwhile, there is no direct connection between the WTO and market economy status. Ukraine should take steps demanded by the legislation to access the WTO and to conclude a number of left bilateral protocols. The European Union encourages Ukraine in this respect. In fact it is possible to start work on deepening economic integration between the European Union and Ukraine by conducting negotiations on Free Trade Agreement. The European Commission finances the programme aimed at studying of this agreement practicability, results of which would be soon revealed.
Deputy Head of trade and economic mission of Ukraine at the European Union
There are five criteria in the European Union to determine “market economy” of the state. The main requirements are non-interference of the state to the process of price formation, procedure of insolvency should be in force in legislation, there should be a unified system of accounting, and currency exchange. Materials that proved that Ukraine met the requirements of the market economy state were submitted to the European Commission back in 2001. Evaluation of materials took place from 2001 to 2005. More detailed questions occurred at certain stages. For example, issues of price formation and bankruptcy.
To be honest, there existed certain aspects of price regulation and possibility to provide state financing during insolvency of city-forming enterprises. Meanwhile, it should be mentioned that no economy in the world can be called 100% market economy. Should it be the case, incompliance to requirements can be found in any state. Still, Ukraine managed to prove that it is worth granting the status of the state with market economy. It became possible due to regular work of all concerned ministries and establishments. We supplied new information, figures, and materials to the European Union on a regular basis, and organized meetings at different levels. Secondly, economic reforms and support of changes that took place in Ukraine at present by the European Union also played an important role in this process.
Activation of cooperation with the European Union can be singled out among the factors that promoted granting the market status. In particular, 10 priorities of deepening relations with Ukraine were proclaimed in February 2005 in the European Union, including granting of market status. Granting of such status to Ukraine in itself is a sign that something has changed. First of all, it is a step forward in protection of Ukrainian producers from antidumping investigations. Such status should make easier activities of companies during such investigations. However, it does not mean that antidumping investigations would not be open at all. There is one more moment in this respect. If a complaint from the European industrialists as to any local company was submitted prior to December 30, 2005, the company would not be automatically considered as having a market status. In this case it would be necessary to prove compliance to the market criteria.
In principle the very understanding of the market status by Ukrainian companies should change. To answer the question, why granting the status by the European Union did not coincide with the decision of the USA on the matter, it should be mentioned that Brussels and America have different procedures of granting the status. Meanwhile, we are aware that necessary work is being conducted in Kiev and Washington, and the USA support Ukraine in this respect.
The material has been kindly provided
by the Ukrainian Market Review Magazine