Full Terms & Conditions of access and use can be found at http://www.tandfonline.com/action/journalInformation?journalCode=rege20 Download by: [Scuola Superiore Sant'Anna], [Aron Buzogany] Date: 26 April 2016, At: 05:31 Eurasian Geography and Economics ISSN: 1538-7216 (Print) 1938-2863 (Online) Journal homepage: http://www.tandfonline.com/loi/rege20 EU-Russia regulatory competition and business interests in post-Soviet countries: the case of forestry and chemical security in Ukraine Aron Buzogány To cite this article: Aron Buzogány (2016): EU-Russia regulatory competition and business interests in post-Soviet countries: the case of forestry and chemical security in Ukraine, Eurasian Geography and Economics, DOI: 10.1080/15387216.2016.1163642 To link to this article: http://dx.doi.org/10.1080/15387216.2016.1163642 Published online: 25 Mar 2016. Submit your article to this journal Article views: 20 View related articles View Crossmark data
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Full Terms & Conditions of access and use can be found athttp://www.tandfonline.com/action/journalInformation?journalCode=rege20
EU-Russia regulatory competition and businessinterests in post-Soviet countries: the case offorestry and chemical security in Ukraine
Aron Buzogány
To cite this article: Aron Buzogány (2016): EU-Russia regulatory competition and businessinterests in post-Soviet countries: the case of forestry and chemical security in Ukraine,Eurasian Geography and Economics, DOI: 10.1080/15387216.2016.1163642
To link to this article: http://dx.doi.org/10.1080/15387216.2016.1163642
EU-Russia regulatory competition and business interests inpost-Soviet countries: the case of forestry and chemical securityin Ukraine
Aron Buzogány*
Departement of Political and Social Sciences, Freie Universität Berlin, Otto-Suhr Institute forPolitical Science, Ihnestr. 22, 14195 Berlin, Germany
(Received 18 September 2015; accepted 5 March 2016)
A central aspect of the EU’s influence over countries located in its neighborhoodconsists in its ability to export regulatory governance arrangements beyond its bor-ders. Taking the example of developments in the field of forestry and chemical secu-rity management in Ukraine, this contribution underlines the importance of theinterplay between domestic and external interests by pointing to macro-political andmicro-political (i.e. sectoral) dynamics. While the first case study illustrates howinter-sectoral conflict can hamper harmonization with EU rules, the second showsthat macro-political decisions relating to the geopolitical orientation of the state canoverride sectoral logics.
European Union (EU) environmental policy became an area where European integrationdeveloped particularly far and fast. From the late 1990s on, the EU began includingenvironmental components into its foreign policy agenda (del Castillo 2010). However,despite the relevance of EU environmental policies at the transnational level, these havereceived only limited attention in the EU’s relations toward its immediate neighborhoodin Eastern Europe (Buzogány 2013; Ehrke 2010; Schulze and Tosun 2013; Wetzel2011). There are several potential explanations as to why both the EU and its neighbor-ing states in Eastern Europe were cautious to engage in far-reaching harmonization withEU environmental policy templates. Post-Soviet transition states combine lower levelsof economic development and weaker environmental regulatory systems with lesserenvironmental consciousness than is the case with the EU member states (Chaisty andWhitefield 2015; Fagan and Carmin 2011). The non-EU states also lack incentives toimplement high-quality environmental regulations. The comparative advantage of thesestates located at the EU’s periphery is exactly to exploit the benefits stemming not onlyfrom cheap labor costs, but also from the low levels of regulation in environmental pol-icy (Copeland and Taylor 2004). Investors in these countries situated in the immediatevicinity of the EU might value a less demanding regulatory environment, cheap laborcosts, and the absence of well-organized environmental lobbies (Ehrke 2010).
Adding to this, harmonizing environmental policies and regulatory styles with thoseof the EU is an extraordinarily costly and difficult exercise. Studies assessing the costsof harmonization with the EU’s environmental policy template (the acquis) in the 10Central and Eastern European States1 (CEE) that have inherited a largely similar institu-tional framework as the post-Soviet states but are now EU members (including the threepost-Soviet states now in the EU: Estonia, Latvia, and Lithuania) have found that thishas absorbed several percentage points of their GDPs (Dimitrov 2009). At the sametime, the crucial difference between the remaining post-Soviet and the CEE states liesnot so much in their levels of economic development or the quality of the inheritedenvironmental governance, but in the presence of EU “membership conditionality”(Schimmelfennig and Sedelmeier 2005). Arguably, in the CEE states far-going andexpensive reforms were made possible through the promise of EU membership. Thishas allowed policy-makers to take a long-term view and factor in future expectationsabout the benefits of being part of the common EU market. In addition, the EU has alsoprovided massive financial and technical support and waived application deadlines tomake harmonization in its new member states manageable (Buzogány 2015). Withoutclear membership perspectives, having weak(er) environmental regulatory systems, andmuch more limited technical and financial assistance flowing from the EU, the likeli-hood of the post-Soviet states to adhere their environmental legislation to that of the EUis indeed far from being promising.
Nevertheless, some empirical evidence suggests that despite the lack of strict condi-tionality and the high costs this might involve, countries located beyond the borders ofthe EU do harmonize at least some of their environmental regulations with EU tem-plates. Pointing to the EU’s supply of regulations, researchers using the “external gover-nance” framework argue that the codification of norms has played a role in explainingwhy some EU policies diffuse beyond the EU’s border and others do not (Freyburget al. 2011). At the same time, the strength of EU environmental regulations is highlyuneven across different regulatory areas: In areas of environmental policy where the EUlacks legal competence, monitoring capacity, or both, it frequently endorses multilateralenvironmental treaties as a “default” common standard (Schulze and Tosun 2013).Others have emphasized the role of domestic stakeholders, such as administrative orcivil society networks, and argued that the likelihood of successful norm transferincreases if this is supported by domestic private stakeholders acting as watchdogs ofgovernments. Looking at the interaction between domestic and external factors, it hasalso been suggested that if EU norms and expectations “fit” domestic ones, harmoniza-tion is likely to happen even without further interference from the EU. However, whenobstacles arising from high costs have to be ameliorated, external capacity building andpolicy conditionality by the EU might help in moving the countries toward EUregulatory models (Buzogány 2013; Langbein and Börzel 2013).
Building on this line of research, this article shows how trade-related incentives setby the EU and domestic interests shape approximation with EU environmental policiesin the “contested neighborhood.” Deep and Comprehensive Free Trade Agreements(DCFTAs) between the EU and Ukraine, offer, pertaining to legal approximation, notonly the elimination of tariffs, but also of non-tariff trade barriers (cf. Delcour 2016).The pressure on Ukrainian market actors to overcome trade barriers for accessing theEU internal market has led to important adjustments in norms and standards used in dif-ferent industrial sectors even prior to the full-scale functioning of the DCFTA. At thesectoral micro-level, this might work through “hollowing out” existing legislation byactors differentially empowered through the perspective of closer relations with the EU.
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Equally, developments in the field of macro-political “high politics” might overwritelong-term sectoral logics (Ademmer, Delcour, and Wolczuk 2016). Disruptive politicalevents, such as the change of incumbents and the sudden and forced breakdown of tradeties as witnessed between Ukraine and the Russian Federation might force state andbusiness actors to reorient themselves despite initially lacking sectoral-level incentivesto do so.
Ukraine is a crucial case to observe in this context because it is here that regulatorycompetition between the two spheres of influence, the European and the “Eurasian,” hasproduced the most significant friction in the region. Starting from a cautiously balancingco-existence between the two overlapping spheres of integration until 2013, the recentcrisis has eventually led to war between Ukraine and the Russian Federation. Whilerecent studies focusing on the conflict in Ukraine have mostly highlighted the geopoliti-cal aspects of the crisis (Allison 2014; Haukkala 2015), this contribution underscoresthe sectoral implications of the conflict between the two regulatory spaces. This articleanalyzes developments in the field of forestry and chemical security management inUkraine, both crucial aspects of environmental policies. In both sectors, EU regulationshave important external effects on these industries. In the case of forestry, the EUTimber Regulation (EUTR) (995/2010) introduces a non-tariff trade barrier by allowingonly legally harvested timber to be sold on its internal market. Equally, in the case ofchemical management, the EU Regulation on Registration, Evaluation, Authorization,and Restriction of Chemical substances (REACH) requires extensive documentationfrom companies placing their products on the EU market. At the same time, in both sec-tors two well-developed private governance initiatives, the Forest Stewardship Council(FSC) timber certification regime and the chemical industry’s Responsible Care (RC)initiative, have provided expertise and capacity-building for the modernization of therelevant sectors in Ukraine. The article finds intra-sectoral and intra-temporal divergencein harmonization with EU rules. The conflict unfolding between Ukraine and Russiasince 2014 has further increased the incentives of Ukrainian political actors to step upharmonization with EU sectoral policies and resulted in far-reaching reforms. Differ-ences in how far these changes have gone can be understood mainly by taking intoaccount domestic sectoral (and sub-sectoral) interests constellations, which are affecteddifferentially by reforms triggered by the EU’s DCFTA.
The remainder of the article is organized as follows. The next section sets out ananalytical framework based on the existing literature and highlights the importance ofseveral factors, including EU regulations, EU and private capacity-building initiatives,and domestic interests and regulatory competition from Russia, which play a role infacilitating or hindering regulatory convergence with the EU. In Sections “Forestry pol-icy” and “Chemical Safety,” two case studies dealing with development of regulatoryharmonization in the forestry and chemical sector will be presented. Section “Conclu-sion” summarizes the findings and discusses the sustainability of externally triggeredreforms in the post-Soviet space.
In order to conceptually capture sectoral patterns of approximation with EU legislationin Ukraine, this contribution builds on several waves of research concerning theinfluence of EU norms on third countries (for overviews of the literature, see Ademmer,Delcour, and Wolczuk, 2016; Langbein and Börzel 2013; Schimmelfennig 2012). A firstgeneration of studies on external governance employed an EU-focused perspective and
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highlighted the importance of the codification of EU norms as explanatory factors fortheir external effects (Freyburg et al. 2011; Wetzel 2011). These studies have argued thatEU policies directed toward third countries are essentially a continuation of internal EUpolicies and regulations and that ruling elites in the EU’s vicinity are willing to acceptthe EU’s different regulatory templates mostly because these represent “better” standardsthan the existing domestic ones. Relating such a perspective to the cases analyzed here,we expect that it is mainly the quality of the EU’s regulatory framework; i.e. the contentof the EUTR and the REACH Regulation that helps explain policy change and thedifferences between sectoral patterns of harmonization.
Adding to the above expectation, the importance of capacity-building and legiti-macy-enhancing instruments employed by external actors has also been highlighted inthe literature. External actors, such as the EU, can change entrenched domestic powerequilibriums by differentially empowering reform-minded domestic actors (Dimitrovaand Buzogány 2014). Supporting domestic reform processes, the EU has employed vari-ous instruments, including policy conditionality and capacity-building (Andonova andTuta 2014; Langbein and Wolczuk 2012). Complementing the role played by EU actorsin post-Soviet states, privately set governance rules can also be supportive of conver-gence with EU rules. These rules are determined by transnational stakeholders andaffect the rule targets directly and (often) even without the existence of domestic legisla-tion. Once firms become signatories of such private agreements, they are obliged toundergo regular compliance checks, which might include peer-reviews or third-partyaudits. The literature on the implementation of private governance rules has underlinedthe role of market incentives, including trade and investments as well as the presence ofpublic pressure in explaining companies’ choice to join these initiatives. In addition,recent research also emphasizes, particularly when turning to countries beyond WesternEurope or North America, the role of state actors in promoting such private regulatorystandards because these might help the development of export-oriented industries(Buckingham and Jepson 2013). At the same time, the EU can also reinforce privateregulatory rules in its external relations (Overdevest and Zeitlin 2014), as these offerpossibilities to circumvent weak state capacities and lacking willingness to reform.Thus, export-oriented enterprises in third countries can use the opportunity arising fromprivate certification initiatives to standardize their products according to EU normsdespite the reluctance or the lacking capacity of state actors to engage with EU rules(Langbein and Wolczuk 2012). Equally, research on the diffusion of the FSC and theRC certificates shows that companies from Eastern European states with EU member-ship aspirations were particularly keen to become members of these “green clubs”(Andonova 2005; Andonova and Tuta 2014; Tosun 2012). In line with this literature,we expect that sectoral capacity-building projects by the EU and/or private governanceinitiatives (such as FSC or RC) will ease the harmonization process with EU rules.
A second generation of studies focused on differential convergence patterns butunderscored more prominently the role of domestic interests in the neighborhood coun-tries as change agents. Studies focusing on “high politics” have underlined the vestedinterests of incumbent elites relating to political survival, economic rent-seeking, or con-cerns of national security (Way 2015). However, researchers focusing more closely onspecific policy fields – from anti-corruption policies (Börzel and Pamuk 2012) to migra-tion (Ademmer and Börzel 2013; Wetzel 2016) to technical standardization (Delcour2013, 2016) – have found more variation when looking at domestic interests determin-ing which EU norms domestic policy actors “pick and choose” from the EU’s list ofoffers. For example, export-oriented Ukrainian business actors interested in trade with
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the EU, including so called “oligarchs,” have become bottom-up forces actively support-ing convergence with EU rules (Buzogány 2013; Langbein 2016; Melnykovska andSchweickert 2008). Similarly, reform-oriented bureaucratic actors or NGOs could usethe EU as an opportunity to strengthen their position domestically against forces oppos-ing reforms (Andonova and Tuta 2014; Buzogány and Costa 2009; Wolczuk 2009).Support for reforms often coincides with the interdependence of domestic actors, under-stood both as sensitivity and vulnerability, with external actors (Ademmer 2015). Ingeneral, it is argued that policy change was possible where domestic actor coalitionscould be found in support of reforms and where these actors possessed the capacity toinstitutionalize EU-relevant policy changes. Thus, for the cases analyzed in this article,we would expect that approximation with EU rules would be driven by constellations ofdomestic interests either at the sectoral or the macro-political level, or both.
The emphasis on domestic actors has also highlighted that the EU is far from beingthe only external actor in the post-Soviet region. A third generation of studies found thatthe Russian Federation can also exert leverage on post-Soviet states (Casier 2015).While earlier analyses focusing on highly politicized questions such as democracy pro-motion (Ambrosio 2009) or energy policy (Dimitrova and Dragneva 2009; Wolczuk2016) gave a rather negative assessment of Russia’s activities in these states, morerecent studies of other policy fields have differentiated these findings by showing that incertain cases Russian influence was not necessarily obstructive (Way 2015). Several pol-icy studies provide evidence showing that Russian policies can be even supportive ofEU-demanded policy changes – if these have matched or at least did not obstruct itsown policy goals (Ademmer and Delcour 2016; Delcour and Wolczuk 2015; Hagemann2013; Langbein 2013). Thus, for the present study of the approximation of EU rules inforestry and chemical management policy, this leaves us with the expectation that theRussian Federation would play a negative role at the sectoral level only in cases whereregulatory competition between Russia and the EU is prominent.
The following two case studies focus on the harmonization of EU rules in the Ukrai-nian forestry and chemical sector under the influence of sectoral domestic interests andregulatory competition between the EU and Russia, as well as external influence bothfrom the EU and from private governance initiatives. The focus of the contribution ison regulatory change toward EU rules at the sub-sectoral level. Both regulatory fieldsanalyzed here have EU regulations in place with important external effects and faceindirect regulatory pressure due to its trade-related effects: in the case of forestry, theintroduction of the EUTR, and in the case of chemical management, the REACH regu-lation has established a non-tariff trade barrier affecting business actors in Ukraine.Despite these similarities, the two sub-sectors differ in their outcomes and also tempo-rally; that is, whether and when the domestic sectoral legislation converges with EUsectoral regulations. In the forestry sector, Ukraine has initially adopted legislation thatgoes a long way toward adhering to the EU templates and continued reforms of its for-estry policy after 2014. But policy changes in 2015 have departed from the EU’s expec-tations formulated in the DCFTA. In contrast, legislation in the chemical sector, whichwas initially rather reluctant to harmonize, has engaged in far-going harmonizationtoward the regulatory models proposed by the EU. The remainder of the article illus-trates these two pathways – micro-political and macro-political – leading to these differ-ences by looking at different constellations of domestic interest behind the regulatoryapproaches chosen. While EU trade restrictions, EU capacity-building, and private gov-ernance initiatives have helped to establish a momentum of change in the forestry sectorafter the political changes in 2014, intra-sectoral conflict between the export-oriented
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forestry industry and the protectionist wood-processing industry resulted in legislativechanges contradicting EU rules. In the case of chemical policy, where Ukraine has ini-tially meandered between EU and Eurasian regulatory approaches, which are bothimportant for its energy-intensive chemical production, these sectoral incentives havebeen overwritten by the logic of the conflict between Russia and Ukraine, forcing Ukrai-nian chemical companies to re-orient themselves toward the EU.
Forestry policy
Forestry policy in the EU remains a largely national domain despite a long history ofEU measures supporting common forest-related activities in the field of sustainable for-est management in the EU’s member states. Complementing this development, an exter-nal dimension of forest policy was developed in the last decade. In 2003, the EUlaunched the Forest Law Enforcement, Governance, and Trade (FLEGT) Action Plan,which stipulated common initiatives of the member states aiming to ban illegally har-vested timber from the EU markets. Based on this Action Plan, the EUTR (995/2010),which entered into force 10 years later in March 2013, has been an important steptoward developing an external dimension of a common timber trade policy. Essentially,the EUTR posits that only legally harvested timber and timber products can be placedon the EU market and asks traders in Europe and beyond to provide evidence by keep-ing records that allow the traceability of their products. For the Ukrainian logging andwood processing industries, the introduction of the EUTR made regulatory changespressing, mainly because over 50 percent Ukraine’s timber exports are directed towardthe EU market. Impact studies showed that EU timber exports requires 7–20 percent ofyearly production costs in order to ensure product compliance with EU norms(ECORYS 2007, 74). Accordingly, forestry policy has been considered as one field ofpotential cooperation between the EU and Ukraine. Article 294 of the AssociationAgreement between Ukraine and the EU signed in June 2014 underlines the importanceof cooperation in the field of sustainable forest management, including forest lawenforcement and governance. More indirectly, the forestry sector is also affected byrequirements of the EU toward Ukraine to abolish export restrictions and harmonize itscompetition law with EU templates.
For Ukraine, the EU requirements have complemented previous attempts of sectoralreforms, which were, however, carried out rather haphazardly. Some initial reformattempts were made after the Orange Revolution in 2004 (Soloviy and Cubbage 2007).The 2006 Forest Code has set new directions toward modernizing forestry management,including the introduction of certificates of origin for timber exports. Nevertheless, theforestry sector remained negatively affected by poor infrastructure, large-scale illegallogging, and unclear division of labor between political, controlling, and managerialfunctions of the State Forest Resources Agency (Derzhlisahenstva), which owns theoverwhelming share of Ukrainian forests. As a result, the forestry sector became a placeof rampant large-scale corruption (Spets Kor 2013). This included the use of intermedi-ary firms for channeling timber exports, illegal trade with export certificates, bid-riggingthrough price cartels in the wood processing sector, and wide-spread petty corruption atthe local level (Pavelko and Skrylnikov 2010).
From 2008 on, reform constituencies in the Ukrainian forestry sector were strength-ened by the EU-funded ENPI FLEGT capacity-building program “Improving ForestLaw Enforcement and Governance in the European Neighborhood Policy East Countriesand Russia.” The multi-year, multi-country program was managed by the World Bank
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and involved well-known NGOs such as the International Union for Conservation ofNature (IUCN) and the World Wildlife Foundation (WWF). The project allowed forexchange of experience in the countries covered by the European Neighborhood Policyand Russia and focused on necessary reforms in each country individually, includingcertification and the regulation of illegal logging as well as approximation to EU forestlegislation made necessary by the EUTR (FLEG 2010). In Ukraine, questions of forestgovernance in general, private forest certification, and EU standards and trade wereamong the issues the program placed specific emphasis on. After the first period(2008–2013), in 2014 the ENPI FLEGT project was renewed for a further five years.2
One important result of the EU funded capacity-building program was to bringtogether different stakeholders involved with forestry policy in a transparent manner(see also Wetzel 2011). This included not only domestic actors, but also Western andEastern European experts who were helpful in highlighting different reform optionsbased on their knowledge of similar processes across the post-Soviet region. Forinstance, experts from the Moscow-based FSC Regional Center for the Commonwealthof Independent States (CIS) region were involved in advising regulatory reform regard-ing private certification in Ukraine. Private certification in the forestry sector has beenone of the major examples for the establishment of transnational, market-driven gover-nance structures (Gulbrandsen 2010). FSC certificates stand for sustainable environmen-tal and social criteria applied at the company level in the management of timberproduction based on an external auditing procedure. While the FSC’s system of certifi-cation follows a global template, it can be adjusted by stakeholders at the national levelin order to incorporate domestic specificities. In the case of Ukraine, the FSC’s standardcomplements many of the requirements posed by the EUTR.3
Driven both by the fear of losing market access and the promise of sectoral modern-ization, a development toward compliance with EU trade regulations resembling theUkrainian one could be witnessed also in the Russian Federation. Particularly, privatecertification through the FSC scheme received increased attention from business actorsas it promised to solve some of the problems the Russian forestry sector faced in the1990s, including unclear and overlapping legislation, lacking clarity on property rights,and illegal logging, as well as large-scale corruption. As these problems have particu-larly affected foreign investors, foreign-owned companies provided support for thedevelopment of the FSC; for example, IKEA has entered a partnership with WWF andcooperated to develop pilot projects using sustainable forestry management practices(Ulybina and Fennell 2013). Beginning in 2006, Russia started to develop a strategicforest policy by steeply increasing taxes on unprocessed timber exports (up to 80 per-cent), decreasing export taxes on processed timber, and incentivizing domestic process-ing capacity by eliminating import duties for acquiring technological equipment(Romashkin 2008). The drafting of the new forest policy process involved private actorssuch as the FSC, WWF, and Greenpeace and a number of large FSC-certified compa-nies. Regulatory pressure from the EU was acknowledged, and the EU’s EUTR haseven been referred to by Vladimir Putin as a positive example for Russian regulation tocombat illegal logging (IUCN 2010). The new federal Forest Policy Act, which wasfinally adopted in 2013, contains several regulatory provisions proposed by the FSC,such as the harmonization of Russian forest law with international forest managementstandards and stricter penalties on illegal logging (FSC 2013).
As in the Russian Federation, private certification has been regarded early on as apossibility to carry out reforms in the forest sector also in Ukraine. This developmentwas mainly driven by market demand when traditional markets for Ukrainian timber,
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such as Poland, Slovakia, and Hungary, became EU members and the demand forcertified timber products increased steeply (Pavelko and Skrylnikov 2010). A Task Forcefor launching a national FSC standard was established already in 2004 but did notbecome officially approved due to difficulties with the domestic standardization regime(Palekhov and Schmidt 2014). Nevertheless, certifications with the generic FSC standardwere used by export-oriented state forest enterprises (leshozy). Altogether, over 10 per-cent of Ukrainian forested territory became FSC-certified, Derzhlisahenstva being alsoclosely involved with pilot projects related to FSC certification.
During 2014, the reform process in the forestry sector intensified due to the neces-sity of complying with EUTR expectations. The coalition agreement of the Ukrainiangovernment elected in 2014 and the new Working Plan of Ukraine’s parliament, theVerkhovna Rada, included reform measures that were suggested by the FLEG capacity-building project based on discussions in previous years (ENPI FLEG 2015). Thesecomprised the division of controlling and economic functions to different governmentagencies from the presently unified state forestry administration Derzhlisahenstva inorder to reduce corruption risks. The proposed legislation is considered to bring Ukrainecloser to European standards (ENPI FLEG 2015). Previous experiences made with pri-vate certification and with the functioning of the comprehensive timber tracing system,“Unified State System of Electronic Account of Wood,” introduced by Derzhlisahenstvausing unique barcodes for logs were reassessed under the impact of the EUTR andrequirements stemming from the Association Agreement. In this context, the ENPIFLEG capacity-building project commenced a detailed report on adjusting the timbertrade flow control system compliant with EU requirements (Kravets 2014). Thisincludes proposals for simplifying and strengthening legislative support for the woodaccounting system and implementing a new online system for forestry companiesdeclaring the origins of their timber, as well as the implementation of the FSC’s “chainof custody” system for wood-working companies.
These developments in the forestry sector have raised fears of negative side effectsof EU timber exports within the Ukrainian wood-processing industry. In particular,shortage of timber as a raw material and massive increases in prices for domestic pro-ducers were expected, leading to a negative trend in the industry which is confrontedwith cheap furniture imports, particularly from China and Turkey, and faces difficultiesin accessing the EU market. In April 2015, the fears of these protectionist industrialactors led to the adoption of a 10-year moratorium on the export of wood and timber inan unprocessed condition (Reg. No. 1362 of 2015), which was introduced to the Ukrai-nian parliament, the Verkhovna Rada, by 11 MPs from different party groups. In parallel– and echoing the Russian example of a strategic forestry policy (see above) – twoadditional draft laws were registered with the Rada aiming to exempt woodworkingmachinery from import taxes. The main aims of the regulation mentioned in the justifi-cation of the bill concern reorienting production toward a higher value added; promotionof domestic wood processing industry, including job creation; and increased tax rev-enues for the state budget, as well as environmental considerations. The draft alsoremarks on similar developments regarding log export bans in several neighboring coun-tries, including the Russian Federation, Belarus, Romania, and Moldova. The draft lawwas met with strong criticism from within the forestry policy community and also fromliberal groups fearing increased state intervention in the economy (Mylovanov 2015).Critics argued that the ban violates the DCFTA, the Association Agreement (Article 35),and the standstill obligation included in Regulation 374/2014 granting AutonomousTrade Measures for Ukraine (De Micco 2015). These concerns have led to intense
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lobbying for a presidential veto against introduction of the law. Faced with the opposi-tion of the forestry industry, the European Commission, and the WTO, Ukrainian Presi-dent Petro Poroshenko shunned signing the law into life for three months, withstandingdemands by furniture manufacturers represented by the Association of Furniture andWood Processing Enterprises, Mebelderevprom, as well as the Ukrainian League ofIndustrialists and Entrepreneurs. After both the President and the Speaker of the Radawere threatened by Mebelderevprom with a lawsuit for unconstitutionally delaying thelegislative procedure, Poroshenko finally signed the bill into law in July 2015 (ZerkaloNedelii 2015).
In sum, the case of forestry policy shows how intra-sectoral conflict between theexport-oriented forestry industry and the protectionist wood-processing industry hasfinally resulted in legislative changes contradicting EU rules. Incentives related to themodernization of the forestry sector have led to the empowerment of a reform-mindedcoalition within forestry. However, the policy changes threatened the interests of a dif-ferent sub-sectoral coalition that was equally interested in accessing the EU market.Using the window of opportunity, this coalition was – at least temporally – more suc-cessful in implementing changes benefitting its sub-sectoral interests.
Chemical safety
Chemical safety is one of the well-developed areas of EU environmental legislation. Amajor milestone in this policy field has been the 2007 Regulation on REACH sub-stances which has introduced, after almost a decade of bargaining at the EU level (Selin2007), extensive novel requirements for testing, registration, and provision of informa-tion of chemicals produced both within and outside the EU. Hailed as a revolution inchemical management globally, REACH has shifted the burden of proof onto chemicalcompanies by requiring them to provide data on human health and environmentalimpacts of their products. A growing literature agrees that due to the importance of theEuropean chemical market, REACH is becoming a global standard and a core elementof transnational law in risk management and thus leads to a “Europeanization” of regu-lations in this field also well beyond the EU’s borders (Biedenkopf 2015).
Ukraine’s chemical industry produces mainly energy-intensive basic chemical andmineral fertilizers that are used domestically or exported to the CIS, Asian, and MiddleEastern markets, as well as to the EU. After the breakdown of the USSR, a large partof the Ukrainian chemical industry went bankrupt because of the lack of raw materialsand difficult access to former markets. The remaining few factories that survived werethose that could use local raw materials and secure affordable energy for their produc-tion. The core of the Ukrainian chemical industry is located in the more industrializedeastern and southern part of the country, including Crimea, and has been characterizedby high levels of interdependence with producers and markets in the former SovietUnion. For the Ukrainian chemical industry, the EU market has been a promising one,but also one that was extremely difficult to access due to anti-dumping restrictions lob-bied by EU producers represented by the European Fertilizer Manufacturers Association.From the 1990s on, the EU has repeatedly raised anti-dumping measures against severalUkrainian chemical products (ECORYS 2007, 54). Some of these restrictions wereeased in the 2000s for individual companies that received quotas to export to the EU. In2012, further extra duties affecting Ukrainian chemical companies were cut (Agropages2012).
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While the Ukrainian chemical industry was highly inefficient regarding its energyuse compared to companies located in the EU, its competitiveness was based on verylow energy prices during most of the last two decades (Chyong 2014). Together withthe steel industry, the Ukrainian chemical industry accounted for close to half of thecountry’s gas imports from Russia. Due to the double interdependence on both Russiaand the EU, the Ukrainian chemical industry remained essentially interested in uphold-ing trade ties and regulatory networks with both spheres of integration. At the sametime, gas price increases had negative effects on the industry, as energy constitutes75 percent of the unit costs of fertilizers, which is the main product of the industry(Chyong 2014). Thus, after the gas price increases of the 2000s, the Ukrainian chemicalindustry embarked on a path of reform and began reducing gas consumption, refurbish-ing production technologies, and implementing various energy-saving initiatives(Chyong 2014). This trend was strengthened in the following years by the concentrationof the chemical industry, particularly after Dmytro Firtash, one of the “oligarchs” associ-ated with the inner circle of former Ukrainian President Yanukovych gained controllingshares in four out of the six major chemical producers of the country, making him thefifth largest fertilizer producer in Europe. Firtash made his fortune as an energy trademiddleman between Russia and Ukraine with his company RoskUkrEnergo (Reuters2014). By acquiring important stakes in the highly energy-dependent chemical industry,Firtash could capitalize his intimate linkages with the energy sector in the entire post-Soviet region. Relying mainly on cheap gas imports from Turkmenistan, Firtash’s DFGroup started to rapidly modernize his newly acquired plants in the early 2010s, manag-ing to increase production up to fivefold, to develop a modern domestic fertilizer retailsystem and regain 30 percent of the domestic market from Russian companies (InvestUkraine 2013).
Initially, both Ukrainian and Russian chemical companies were eager to follow Wes-tern templates and regarded harmonization of the domestic regulatory framework withthe European one as a chance for the modernization of the sector. Thus, Ukraine’smacro-political balancing strategy to keep good relations with both the European andthe Eurasian “sphere of integration” was not contradictory at the sectoral level. Russiancompanies have outpaced Ukrainian ones in the modernization process mainly becausethe Russian market made itself one of the favored destinations for European chemicalcompanies. Russian policy-makers were involved in far-reaching reforms aiming toreplace the product-specific mandatory standards (Gosts) with more generic, regulatory,and safety requirements common in the EU and North America (Danilov 2009). Thebusiness association Russian Chemists Union (RCU), which brings together the mostimportant Russian producers, developed a number of projects directed both to attractWestern foreign direct investments into Russia and to ease the access of Russian prod-ucts to the EU market. Private regulation, such as the industry’s global RC initiativeprovided additional means to do so. RC was set up as a voluntary management standardor “code of conduct” covering environmental, health, and safety practices. The initiativeis established and administrated by national associations of the chemical industry andthe International Council of Chemical Associations (ICCA) globally. Collaborating clo-sely with ICCA, RCU began promoting RC in its member companies, many of whichwere already familiar with the system due their contacts with Western companies. WhenRussia became an RC signatory party in 2007, an explicit hope of the Russian chemicalindustry was that by introducing the voluntary private regulatory scheme, the implemen-tation of REACH, which was decided upon in the same year, would be substantiallyeased (Chemical Watch 2007). At the same time, the Russian chemical industry was
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also engaged in active dialog with the EU regarding technical regulations and showedinterests in harmonizing domestic legislation with REACH. Being fully aware thatignoring the regulation would significantly hamper Russian exports to the EU, RCUmade translations of REACH guide documents available for its members and set up aspecialized consultancy service, REACH-Ekovostok, to advise Russian exporters indealing with the regulation. In 2007, Russian authorities started elaborating a new safetyregulation that consisted to a large extent of translations of the REACH regulation(Danilov 2009).
However, from 2009 onward, the Russian reaction toward regulatory harmonizationbased on the REACH regulation became increasingly cautious. With REACH develop-ing into a “de facto world standard” (Danilov 2009), the Russian chemical industry real-ized the high costs stemming from the regulation, which goes well beyond thestandardization practiced in Russia and holds high costs implications, particularly forsmaller companies and local authorities (RCU 2008). It became also clear for the Rus-sian side that the hoped-for agreement to use the “mutual recognition” principle tobridge regulatory differences between the Russian and EU registration systems wouldnot be accepted by the European side given the economic and administrative realities inthe Russia Federation (Danilov 2009). RCU criticized the high costs of compliance withREACH, mentioning, among other things, high laboratory charges for analyses that canbe carried out only in EU-certified laboratories. It also raised concerns about the Euro-pean Chemicals Agency’s transparency and bemoaned that the price for “letters ofaccess” accompanying chemicals exported to the EU can reach more than €1 m for sin-gle substances (Chemical Watch 2010; Prozherin and Ismailov 2011). As a consequence,instead of following regulatory convergence with the EU, the Russian side chose to ini-tiate integration on its own terms in the framework of the Customs Union (CU), whichincludes the Russian Federation, Belarus, and Kazakhstan. For the European Commis-sion, the emergence of the Eurasian Economic Commission as an alternative regulatoryauthority has made discussion with Russia increasingly disappointing (European Com-mission 2012). The Regulation on chemical safety of products, which started initially asa template to find common ground with EU regulations, became the groundwork for theCU Regulation in the field of chemicals. Instead of following the EU’s template, CU’sProgram of Development for technical regulations for 2012–2013 included further legis-lation regarding the registration and notification procedure for chemical substances(Chemical Watch 2014a, 2014b).
The Ukrainian chemical industry has benefited from the modernization process thattook place in the Russian chemical industry in the late 2000s and early 2010s. TheUkrainian sister organization of the RCU, the Ukrainian Chemical Union (UCU), hasmaintained particularly close ties with Russian companies, and the RCU also played arole in introducing new chemical management methods associated with RC in Ukraine.4
UCU member companies became signatory to the covenant in 2011, expecting that thiswould ease compliance with the new REACH regulation. Both affected by the REACHregulation, UCU and RCU have cooperated closely to take the hurdles implied by thenew EU regulation. In 2011, the Ukrainian government approved a National Action Planfor Environmental Protection for 2011–2015. This included a number of regulationsmeant to fulfill EU expectations (cf. Buzogány 2013). In parallel, EU capacity-buildingprograms, such as the Sector Policy Support Program, were in place helping to reformthe Ukrainian system of technical regulations. A special REACH-focused InformationCenter was opened at the State Research Institute for Technical and EconomicInformation in the Chemical Industry in Cherkassy, and 70 percent of the relevant EU
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legislation has found its way into the according domestic legislation (Chemical Watch2013). By the end of 2013, more than half of UCU’s 30 members were in partial com-pliance with REACH. However, signing the legislation modeled after REACH into lawwas postponed, as the costs of the regulatory burden were considered too high in faceof the uncertainties of the integration process witnessed at the macro-political level.During the previous years, Ukrainian chemical companies had observed cautiously thedeparture of the Russian Federation from the path of regulatory convergence with the EUbut remained essentially interested in maintaining ties with both the EU and the RussianFederation. In October 2013, the Ukrainian-Russian Interstate Commission’sSubcommittee on Industrial Policy agreed on a draft program in the field of the chemi-cal industry, including harmonization of the sectoral legislation. Meetings of Russianand Ukrainian regulators and industry representatives evaluating possibilities for closercooperation took place even during the days of political limbo that emerged in Ukrainewhen then-President Viktor Yanukovych decided to suspend signing the AssociationAgreement just before the Eastern Partnership meeting held in Vilnius (Cēbere 2014).This was followed by massive protests at Kyiv’s Maidan Square, eventually leading tothe violent crackdown that paved the way to ousting Yanukovych.
These macro-political developments, including the change of the incumbent, hadimportant effects at the sectoral level also. The events unfolding following the regimechange in Kyiv and the conflict in eastern Ukraine had important repercussions for thecountry’s chemical industry as well and have led to strengthening of Western ties andthe weakening of those with the Russian Federation. During 2014, the Ukrainian chemi-cal industry faced its worst year since independence. Output declined steeply by one-fourth, and export markets in the United States, South America, Asia, and the MiddleEast were fully or partially lost to competitors (Kabash 2014c). The main reason leadingto the decline of the Ukrainian chemical industry was the annexation of Crimea and theoccupation of the Donetsk and Luhansk regions by pro-Russian forces. These regionsharbor Ukraine’s largest titanium, respectively, ammonia and carbamide exporting plantsStirol and Azot. Both plants belong to Dmytro Firtash’s holding, who briefly lost con-trol of factories located in the Donbass area and had to re-register his Crimean holdingsin Russia (Kabash 2014c). In the meantime, Firtash, who left Ukraine after former Presi-dent Yanukovych fled the country, has faced extradition from Austria to the UnitedStates under the US Foreign Corrupt Practices Act for suspicions that he bribed officialsto procure titanium mining concessions in the Indian state of Andhra Pradesh(Department of Justice 2014).
To counter this dire situation, the Ukrainian chemical industry has chosen two strate-gies. First, they strengthened their efforts to align with EU norms and standards. As aresult, on 3 January 2015, the Verkhovna Rada adopted a new law “About standardiza-tion,” and in April 2015, the UCU and main fertilizer producers led by the OstchemHolding owned by Firtash started a joint program entitled “Competitiveness improve-ment of Ukrainian chemical products on European markets in the context of Ukraine-EU Association Agreement” (Group DF press release 2015). At the same time, the StateResearch Institute Cherkasy NIITEKHIM has developed a new technical regulation onfertilizers that conforms EU standards, including legislation regarding fertilizer produc-tion. This was also supported by plans to implement a new law on technical regulationand compliance verification, which would supplement the harmonization with therequirement of REACH (Group DF press release 2015). Meanwhile, Ukraine has alsoopened a chemical laboratory that is compliant with the EU’s Good Laboratory Practicesand fulfills requirements needed for REACH registrations. Companies of Firtash’s
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Ostchem Holding could partially restart production during 2015 and have sought inter-national standardization and registration to fulfill REACH obligations. This was alsogreatly supported by the EU Commission’s decision to grant Ukraine unilateral autono-mous trade preferences by removing customs duties on Ukrainian exports, includingchemicals. This unilateral measure has allowed Ukrainian chemical exporters to benefitfrom preferential access to the EU market in line with the schedule of concessions nego-tiated under the DCFTA, but without the necessity to provide access to EU chemicalexports to the domestic market (Essencia 2015).
The second strategy relied on protectionism and focused on increasing Ukrainiancompanies’ share on the domestic market. Anti-dumping measures against Russianchemical producers present on the Ukrainian market for fertilizers have allowed Ukrai-nian chemical producers to increase their domestic market share radically while theshortage of available fertilizers has driven the prices for domestic customers radicallyup (Kabash 2014a, 2014b, 2015). The lack of competition on the market for fertilizershas been estimated to result in losses reaching 250 million USD for Ukrainian farmers(Kyiv Post 2015a). While this was initially highly beneficial for domestic fertilizer pro-ducers such as Firtash’s Ostchem Holding and Igor Kolomoisky’s Dnipro Azot, the Yat-senyuk government took several measures to cut back the influence of the oligarchs inthis field. Most importantly, in 2015 the Ukrainian Ministry of Interior imposed an assetfreeze on 86 objects belonging to Ostchem for debt accumulated between 2006 and2011 and amounting to 3 billion UAH to be repaid to the state-owned energy companyNaftogaz. This has forced two of Firtash’s companies, Rivneazot and Cherkasy Azot, totemporally stop fertilizer production (Kyiv Post 2015a). In September 2015, Ostchemand Naftogaz signed an agreement about gradual debt repayments. Hailed as a successof the Yatseniuk government’s “deoligarchization” strategy, Ostchem had fully paid backits debt by December 2015 (Kyiv Post 2015b). In addition, in December 2015 the Ver-khovna Rada adopted law No 867-VIII concerning the deregulation of agriculture,which significantly eased the registration of imported fertilizers that were previouslysubject to costly procedures aimed at protecting domestic producers. Thus, by openingthe market for European chemical companies, the Ukrainian government has increasedthe pressure on domestic chemical producers to follow market processes instead of pro-tectionist strategies (Kyiv Post 2015a).
In sum, the case of chemical safety policy shows that Ukraine was split between EUand evolving sectoral regulation in the Russia-led Eurasian CU, as the Ukrainian chemi-cal industry was reliant on ties to both in order to maintain its markets. The Russo-Ukrainian conflict has, however, completely overwritten the balancing strategy of Ukrai-nian policy-makers and business actors in this sector. This has resulted, on the onehand, in regulatory harmonization with EU standards following the political reorienta-tion of the country toward the EU. On the other hand, domestic business actors activein this field are subject to increased pressure from the Ukrainian government to playaccording the rules of the market.
Conclusion
An important aspect of the EU’s influence over third countries consists in its “regulatorypower” and its ability to export governance arrangements beyond its borders. The litera-ture dealing with the EU’s external governance has put forward several explanations forregulatory convergence in distinct policy fields – or the lack of it. This paper contributesto this research by highlighting the interplay between private interests and intra-sectoral
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dynamics in Ukraine, a country where the conflict between different regional integrationprojects – the European and the Eurasian – has been particularly momentous. The twocase studies illustrate that EU trade regulations dealing with forestry and chemical safetyhad significant effects on convergence toward EU rules in both policy areas.
While substantial literature on external governance focuses almost solely on normsendorsed or capacity-building efforts undertaken by the EU to foster change-mindedconstituencies in post-Soviet countries, this paper shows that EU norms can be sup-ported by private actors, including stakeholder-led private governance initiatives whichprovide two things highlighted as important in the external governance literature: capac-ity-building and policy-learning. However, as this contribution has revealed, these pri-vate initiatives serve merely as a potential amplifier for policy change and becomeeffective when political support at the macro-political level and the goals of the regu-lated at the sectoral level coincide.
The paper also underscores the role of regulatory competition between Russia andthe EU in a nuanced way. Echoing recent research arguing that in contrast to highlysensible security or energy policy issues, Russian influence has often played a positiverole at the policy level (Delcour and Wolczuk 2015; Langbein 2013), both case studiescarry evidence that in Ukraine regulatory change toward EU rules has initially followedRussian examples, which was at its turn reliant on transnational and EU rules as a tem-plate for its own domestic reforms. Importantly, this has been also the case in the highlyenergy-sensitive chemicals industry, where partial convergence in the field of safety reg-ulations was originally taking place despite the high macro-political importance of theaffected policy field. However, the possibility of mutual integration on common termsdisappeared after 2014, and Ukraine was forced to opt for the EU’s regulatoryframework.
Both case studies presented in this contribution underline the importance of domesticinterests by pointing to intra-sectoral and inter-sectoral dynamics. While in the case ofthe forestry sector reforms have initially followed EU templates to a considerable extent,intra-sectoral conflict between domestic sub-coalitions, such as the protectionist wood-processing industry and the forestry sector, have led to the derailment of these reforms.In the case of the chemicals industry, which was for a long time interested in keepingboth regulatory options open, top-down inter-sectoral pressure related to macro-politicalfactors(i.e. the ousting of the incumbent, pro-Eurasia Yanukovych government) hasaccentuated EU-oriented reforms despite pre-2014 reluctance to engage with themwhole-heartedly. The example also shows that policy change toward EU norms can bedriven by oligarchic interest if these forces face political pressure to play according tothe rules.
Will these policy changes remain sustainable considering the sectoral conflicts thathave accompanied their confinement, the instability of domestic institutions, and thefluid political majorities that characterize post-2014 politics in Ukraine? On the onehand, the case studies highlight the macro-political pressures relating to the adoption ofEU (sectoral) regulatory templates in Ukraine. On the other hand, the case studies alsosuggest that even if support for EU-oriented reforms at the macro-political level isgiven, implementing these might – but most not be – derailed by conflicting interests atthe sectoral level. Balancing micro- and macro-level policy-making and containing oli-garchic interests to an acceptable level will be crucial both to understand the future of“Europeanization” – project in Ukraine – and the political and socioeconomicdevelopment of the country.
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AcknowledgmentsEarlier versions of this paper were presented at the 2015 Conference of the German PoliticalScience Association’s “Comparative Politics” Section in Hamburg and two workshops held inApril and July 2015 at the Kiel Institute of World Economy. Comments received from the review-ers of this journal, Esther Ademmer, Laure Delcour, Johannes Schuhmann, Anne Wetzel as wellas other participants of the meetings mentioned above are thankfully acknowledged.
Disclosure statement
No potential conflict of interest was reported by the author.
and Bulgaria.2. See http://www.fleg.org.ua/ for further information.3. Author’s interview, Forest Stewardship Council, Berlin, May 2015.4. Author’s interview, Ukrainian Chemical Union staff, May 2012.
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