Opinion on relations between the European Union and Russia, Ukraine and Belarus

(95/C 102/11)

On 29 April 1993, the Economic and Social Committee, acting under the third paragraph of Rule 23 of its Rules of Procedure, decided to draw up an Opinion on relations between the European Union and Russia, Ukraine and Belarus.

The Section for External Relations, Trade and Development Policy, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 13 January 1995. The Rapporteur was Mr Petersen.

At its 322nd Plenary Session (meeting of 26 January 1995), the Economic and Social Committee adopted the following Opinion by a majority with three abstentions.

Chechnya: a rapid end to the hostilities

The Economic and Social Committee has followed the bloody hostilities in Chechnya with sorrow and concern. Every day human rights are being violated on a massive scale and the Chechen people exposed to unspeakable suffering. The Committee appeals to the European Union to persuade Russia finally to put an end to the senseless bloodshed and to bring about an immediate political solution to the conflict. The European Union must make it clear that the credibility of the Russian Federation's political reforms is at stake and that there is a growing danger of serious damage to Russia itself and to its economy. Respect for human rights and basic freedoms, including the rights of members of national minorities, democracy and the rule of law are our common objectives, enshrined in the 1992 CSCE Helsinki document, and incontrovertible. Respect for these principles is the basis for cooperation in the CSCE and underpins the development of our societies. The Committee asks what value these solemnly proclaimed CSCE principles and objectives have if they can be so easily flouted by individual signatory states.

The Committee has always advocated an intensive political dialogue with the democracies of Central and Eastern Europe and has unanimously supported rapprochement between the Eastern European partner states and the European Community, and the integration of these states into a pan-European economic area. The Committee has unreservedly welcomed the desire expressed in the partnership and cooperation agreements to work together to strengthen the political and economic freedoms which are the real basis of partnership. To this end respect for the principles of democracy and human rights should be regarded as a guiding principle of domestic and foreign policy and an essential component of partnership. The European Community and its Member States should make it clear that they attach great importance to these passages in the agreements; the Community should therefore not yet implement the interim arrangements for the trade section of the agreement. The EC Member States should delay ratification of the agreement until Russia has more firmly embraced political and social reforms and it has become clear that internal conflicts - such as the one in Chechnya - will be solved politically and not through military force.

Summary

In view of the length of the Opinion, the Committee considers it appropriate to summarize its stance and recommendations. The Opinion focuses on the partnership and cooperation agreements concluded in the first half of 1994 between the European Community and its Member States on the one hand, and Russia and Ukraine on the other. To promote better understanding of the radical changes currently taking place in the Eastern European partner states, the Opinion also contains a brief sketch of the collapse of the Soviet Union. The attempts at political and economic reform in the independent Republics are touched on, as individual passages in the agreements can be understood only against this background.

The Committee in principle welcomes the partnership and cooperation agreements, but stresses that differences in the negotiating clout of the independent Republics should play no part in the shaping of treaty relations, and that as far as possible no distinction should be made between the European and Asiatic Republics. Any inequality of treatment would exacerbate the worrying disintegration of the CIS economic area and create considerable problems for the recently established CIS economic committee. These non-preferential agreements, which are of a hybrid nature and consequently require ratification, define a broad range of political, economic and commercial relations. The form of the agreements is mid-way between that of a trade and cooperation agreement and that of a Europe agreement. Bilateral discussions with Russia began at the end of 1992, and with Ukraine a little later (points 3.1 to 3.6).

The Committee unreservedly welcomes the determination of the parties to work together to strengthen the political and economic freedoms which constitute the very basis of the partnership. The Committee also shares the parties' belief in the paramount importance of the rule of law, of respect for human rights (particularly those of minorities), of the establishment of a multiparty system with free and democratic (secret) elections and of economic liberalization leading to a market economy. At the same time the Committee endorses the link established by the parties between the implementation of partnership and the continuation of political and economic reforms in these countries (point 3.7).

The Committee considers the parties' statement that Russia is a country with an economy in transition, to be a political compromise. The future will show to what extent this assessment is economically realistic and viable. Ukraine on the other hand continues to be classified as a state-trading country. The Committee feels that the different classification can probably be attributed mainly to the fact that for the Community Russia was the stronger negotiating partner (point 3.8).

The Committee is very critical of the absence from both agreements of an open commitment to the principles of social justice. The negotiating partners should be sufficiently aware that the processes of transformation are associated with huge social upheavals. They may ultimately mean democracy and the market economy being rejected by the people because the social and human cost is seen as too high In this context, the Committee urges that the agreements speak not merely of a market economy, but of a social market economy (points 3.9 and 3.10).

The Committee considers the content of the agreements' general principles to be highly unsatisfactory. It is true that respect of democratic principles and human rights is an important component of the agreement. But this is insufficient. Above all, the Committee regrets the Community's failure to make the introduction and maintenance of market economy principles, which were specifically highlighted in the original negotiating mandate, an integral part of the agreement with Russia. The Committee feels that dropping this element gives a false political signal, which is discouraging for Russia's market-orientated reformers. In addition, the Committee urges that the maintenance of basic social rights and minority rights be made a substantive part of the agreements (point 3.1.4).

The Committee attaches importance to the evolution clause under which a joint study is to be carried out in 1998 to establish whether the economic preconditions (e.g. basic market economy structures) have been fulfilled in Russia (or Ukraine), thus enabling negotiations to begin on the establishment of a free trade zone. Not least in view of the need for confidence building, the Committee would have preferred a more precise wording (point 3.15).

The Committee reiterates its criticism of the failure to mention the essential contacts between the economic and social groups in the countries concerned. It should be possible to achieve consensus in the Community that there is no chance at all of creating a pan-European economic area if economic and social interest groups are kept in the background. The Committee suggests that during the first revision of the agreements the Community consider whether the time has come to institutionalize contacts between the members of the ESC and the members of corresponding bodies in the Eastern European partner states by setting up a joint advisory committee. In the interim period, dialogue and cooperation between the committee's social groups could be discussed (points 3.18 and 3.45).

In the section dealing with trade the signatories grant each other general most favoured nation (MFN) status within the meaning of Article I of the GATT. The Committee welcomes the reciprocal abolition of quantitative import restrictions, without prejudice to the special rules for textiles, ECSC products and nuclear material. The Committee feels that the safeguard clause agreed in the event of market disturbances should be made more precise and replaced as soon as possible by the relevant provisions of GATT 94. The same applies to the anti-dumping and countervailing measures. On customs policy, the Committee regrets that the Community has failed to agree a freeze on the Russian/Ukrainian external tariff. As long as these two countries are not members of the GATT/WTO, they are free to increase their customs protection at will, without prior consultation (points 3.19 to 3.26).

With regard to the labour market, the Committee can see no reason why the families of workers from Russia and the Ukraine who are employed legally in a Member State, should not be given access to the Community labour market. However the high level of unemployment and the very limited scope for action in the medium term mean that there is little likelihood of any significant demand for additional workers on the Community labour market over the next few years. The Committee therefore feels that it would be unwise to make undertakings which might give rise to a claim (even a political claim) for (cross-border) freedom of movement for workers from non-Community countries (point 3.27).

The Committee considers improvements to the rules negotiated on firms' right of establishment and activity - in particular with regard to financial services - to be urgently needed. The agreements with Russia will initially place EC banks at a clear competitive disadvantage, which must be eliminated rapidly, at all events more rapidly than planned under the current outline timetable (point 3.30).

The Committee welcomes the authorization of current payments connected with the bilateral movement of goods, services and persons in convertible currency. The Committee also supports the first attempts at liberalizing capital movements. The Committee also calls on the parties to continue along this road. The Committee is convinced that advantages in terms of location and specialization conferred by free movement of goods and services can be fully exploited only if there is cross-border freedom of movement for capital (point 3.33).

The competition arrangements are a weak point of the agreements. The provisions are so soft and non-binding that it is unlikely that any claims would arise, either for the signatories or for European firms. The Committee endorses the Community's willingness to provide the Eastern European partners, at their request, with technical assistance in the drawing-up and implementation of competition rules (point 3.34).

Russia and Ukraine intend to strengthen the protection of intellectual, industrial and commercial property and achieve a level of protection 'comparable' with that of the European Community five years after the agreement's entry into force. The Committee feels that it would have been better to agree on an 'equivalent' level of protection. The Committee is also critical of the procedure agreed for the settlement of disputes arising from application of the agreement and the listed multilateral agreements. This procedure too is ill defined; it boils down ultimately to non-binding discussions and falls far short of the GATT mechanism (point 3.35).

Russia and Ukraine will endeavour to ensure that their legislation is gradually made compatible with that of the Community. The Committee welcomes this statement of intent, but by no means fails to appreciate the serious difficulties which approximation of legislation poses. The Committee feels that groups should be set up, within the framework of the cooperation committees, to identify priority areas for approximation. The Committee regrets that the agreements contain no timetable for the legal adaptation measures (points 3.36 and 3.37).

The parties wish to foster economic cooperation, in order to cement and develop economic links. It is particularly noteworthy that all the parties also consider it essential to contribute to a harmonious social development. But the Committee has strong grounds for doubting whether merely establishing a long list of unconnected policy areas will suffice to make an effective contribution to the overall macro economic objectives. We are not talking merely about one or two Eastern European partner states here; the associated Central European states, the Baltic States and the other independent Republics of the former Soviet Union expect similar support and cooperation. The Committee feels that it would have been better to agree on a list of economic priorities for cooperation from the outset. There is for example an urgent need for action in the fields of infrastructure, retrofitting or decommissioning of power stations, and the protection of the environment and human health (points 3.38 to 3.40).

In contrast to the Europe agreements, the partnership and cooperation agreement with Russia for the first time contains a list of areas for cooperation on prevention of illegal activities. The Committee considers this agreement long overdue. It calls on the European Community and its Member States to initiate the planned consultations and close interaction with Russia rapidly and to provide technical and administrative assistance (point 3.41).

The Committee welcomes the framework agreements under which Russia and Ukraine are to receive technical assistance funds via the Community's TACIS programme. In order to ensure optimum use of the available funds, this technical assistance is to be coordinated closely with contributions from other sources. The Committee supports this approach and assumes that the coordination will include all the financial aid which will contribute to the economic reorganization of the Eastern European reformist states. The Committee also urges that the reformist states' domestic sources of capital be exploited to a greater extent for productive investment and the significant outflow of capital curbed. But this will only be possible if a consistent macroeconomic stabilization policy is followed and at the same time effective, predictable conditions created for the corporate sector (points 3.42 to 3.44).

1. The collapse of the Soviet Union and the rise of independent Republics

1.1. After the end of the 1970s at the latest, Soviet citizens' material aspirations rose much faster than the ability of the economy to satisfy them. The high economic targets set year after year by the Soviet leadership proved to be hopelessly over-ambitious. The Soviet Union lagged further and further behind the leading industrial nations of the West. The gulf between claims and reality became so wide that a crisis in the Soviet economic system was inevitable. The problem had been discussed in depth within the ranks of the Party even during the Brezhnev era. Attempts at economic reform in the 1960s and 1970s were ultimately doomed to failure as they left the command planning system essentially untouched and were to have been carried out without political change. The election of Mikhail Gorbachev as General Secretary of the CPSU in March 1985 brought a new dimension to the discussion of reform. Gorbachev put it plainly at the 27th Congress of the CPSU in February 1986: 'The practical actions of party and state bodies have lagged behind the demands of our times, of our lives. Inertia, ossified management forms and methods, declining dynamism in the workplace [and] proliferating bureaucracy' () had done considerable damage. Following up this harsh analysis, at the Plenary Session of the Central Committee of the CPSU in June 1987 he argued for a radical economic reform and reorganization of economic management (perestroika). The aim was to overcome stagnation, to eliminate everything which was holding the economy back, to establish a reliable and effective mechanism for accelerating socio-economic development and to instil greater dynamism ().

1.2. The CPSU played a decisive role in the process of 'perestroika', which was to reform the Soviet Union's bureaucratic and dictatorial system and make it more 'alive, open, flexible and effective'. It was already clear that many Central Committee members did not support Gorbachev's reformist course. The process of reorganization collided with the authoritarian system at all levels and in all areas of social life. In June 1988, Gorbachev therefore convened the 19th All-Union Party Congress of the CPSU. The Congress called for a new parliament, a stronger presidency, the introduction of a market economy and greater economic autonomy for the individual Union Republics. These calls met with stiff resistance, as they affected the interests of many strata of Soviet society. Opposition came mainly from the Party nomenklatura, the state authorities (from central administration to local arms of the state), the military-industrial complex, and not least from a significant section of the population, who faced the prospect of losing their ideology and political orientation.

1.3. Without broadly based support, it was impossible to force through the reforms against opposition from ossified structures and conservative mindsets. It was essential to promote open discussion (glasnost). Problems and shortcomings were in future to be openly discussed. As part of the move towards more democracy, the Constitution was amended, and in March 1989 the Congress of People's Deputies was established as a constitutional body. The elections to the Congress of People's Deputies could not be considered free in the western sense of the word, but they were an important step on the road to democracy, and not to be compared with past 'elections' in the Soviet Union. Although the new Congress was heavily dominated by current and former members of the Communist Party, the elections broke the political monopoly of the CPSU. A start was also made on curtailing the power of the party apparatus, without however calling into question the 'leading role' of the party. The CPSU was deprived of its direct control of the economy, and the corresponding Party organizations were dissolved, right down to local level. The privileges of Party officials were, to a great extent, abolished. If they were to survive as a political class, they had to change from being an arm of central government to become critical spokesmen for their region in dealings with Moscow. The separatist tendencies which arose in the Union Republics and Regions as a result of these constraints, and exacerbated by growing supply difficulties, later took on nationalist overtones.

1.4. From the second half of 1989 onwards, the collapse of the socialist system accelerated. From August 1989, the communist governments in Central and Eastern Europe began to collapse after Gorbachev withdrew his direct support. In March 1990 Lithuania became the first Republic of the USSR to declare its independence. Parliamentary elections were held in the Soviet Republics. With the election of Boris Yeltsin as Speaker of the Parliament of the Russian Republic and the declaration of Russian sovereignty, the struggle to decide the fate of the Soviet Union shifted up a gear. Russian sovereignty meant that the Union now existed in name only. By the end of 1990 the remaining Republics had all declared sovereignty in one form or another. In order to secure the survival of the Soviet Union, not least for economic reasons, Gorbachev proposed a union of sovereign states. The draft Union Treaty was approved by a referendum in March 1991. But the signing of the Treaty, planned to take place on 20 August 1991, was aborted by the putsch of 19 August. In early September 1991 the Soviet parliament set up an interim government to manage the transition to a union of sovereign states. A few days later Ukraine announced that it would not participate. On 16 November 1991 Yeltsin, who in mid-June 1991 had been elected President of the Russian Federation, issued ten statutes by which Russia took over former functions of the central government.

1.5. Ignoring these declarations and without consulting their parliaments, a few days later, on 8 December 1991, the representatives of Russia, Belarus and Ukraine signed an agreement in the Belovesha forest establishing a Federation of Independent States. The agreement made it clear that the laws of the former USSR were henceforth null and void. At the same time the three Presidents pointed out that their states had in 1922 initiated the foundation of the USSR. The same states therefore had the right to dissolve the USSR. On 21 December 1991 a document entitled The end of the Soviet Union and the establishment of the Commonwealth of Independent States (CIS) was signed in Alma Ata by all the former Republics of the Soviet Union, except the Baltic Republics and Georgia. This declaration on the establishment of the CIS states that cooperation between the members is to be on the basis of equality. The CIS is neither a state nor a supranational structure.

2. The reform processes in Russia, Belarus and Ukraine

2.1.

Russia

2.1.1. With the collapse of the Soviet Union, Russia and the other Republics inherited the political structures of the communist social system. Russia's Supreme Soviet had been elected while the Soviet Union still existed. There was no clear majority and voting varied according to the matter under discussion. A determining factor was that the deputies primarily represented the aspirations of specific territories rather than social interest groups. As the reform plans progressed, the differences of opinion between the President and the Supreme Soviet grew. This can by no means be interpreted merely as a struggle between a President bent on reform and a parliament opposed to it, although there were plenty of opponents of reform in the parliament. Rather, the dispute was over the path the reforms should take. The questions discussed were many and various: should the path to reform be rapid, ignoring social frictions, or should a more socially acceptable road to the market economy be followed? Should a foreign market model be adopted or a Russian variant developed? Emerging conflicts over redistribution exacerbated the problem. Interest groups and individual deputies squabbled over their share in the historically unparalleled privatization of state property (in the form of real estate, production facilities, housing and land) which was often let go at less than its true value, or even free. A confrontation developed between the representatives of the powerful state enterprises, the new private businessmen, farmers and the general public. Not the least controversial of questions was which social groups should be the beneficiaries of inflation and which the losers. This struggle over re-distribution was interrupted on 21 September 1993 by the dissolution of parliament. It was a tragedy that no satisfactory solution had been found by then to any of the burning issues which had stoked the flames of the conflict.

2.1.2. The parliamentary elections of 12 December 1993 were the first multi-party elections in Russia. The elections were to the State Duma (lower chamber) and the Federation Council (upper chamber), representing the administrative regions. The outcome of the elections was a setback for Yeltsin's reform policy. The level of participation and the results of the election show that broad sections of the population do not support the course of reform followed so far. The rejection of the attempts at reform can be attributed mainly to the fact that the people have already had to shoulder a heavy burden without any tangible improvement. It is also confirmation that the old parliament, dissolved on 21 September 1993, did indeed faithfully reflect the mood of the people and the political situation in Russia. The election result is thus in this sense not fortuitous. No-one could realistically expect the new, democratically elected parliament to be less fractious than its predecessor. Whether, and to what extent, the quarrels will flare up again depends on the nature of future reform measures. A further factor to consider is that, in continuing his reforms, the President now also has to consider the wishes of the army, whose help was enlisted in ending the 'bloody October' 1993 putsch. The President places increasing faith in the 'strong ministries', the Army and the security apparatus. It is not yet possible to assess the accurate consequences of this for the development of democracy and a parliamentary system. So far at least a modus vivendi has been maintained. Clearly parliament is aware of the need to restructure Russia. There has so far been no deliberate confrontation. Admittedly the new bodies constantly being established, such as the social chamber attached to the President or the coordination commission provided for in the Treaty on civil peace, can be interpreted as evidence of the President's mistrust of Parliament and existing institutions.

2.1.3. Following the election the distribution of seats in the State Duma is as follows: the democratically orientated reformist parties obtained a bare quarter of the total 450 seats. Their direct opponents, the conservative, anti-democratic forces, obtained about a third as did the independents and various small parties. The main focal points are the reformist block, Russia's Choice, with 65 seats, and the right-wing extremist Zhirinovsky's Liberal Democratic Party, which with 64 seats is the second strongest party. Admittedly, the relations between the parties and voting blocks are unclear; moreover the allegiance of the independents to the right or left of the political spectrum is in many cases uncertain and they may not vote as expected. And electoral alliances may not last. It is difficult to predict how the Federation Council (178 members) will behave. It consists of two representatives of each of the constituent elements of the Federation (Republics, Regions). The majority of its deputies were members of the Supreme Soviet.

2.1.4. The draft constitution submitted by Yeltsin was confirmed by the constitutional referendum carried out at the same time as the parliamentary election, with more than 50 % of voters participating and more than 50 % of the votes being in favour of the draft. This formally ended the long drawn-out dispute over the new Russian Constitution and the powers of the President. However, 19 of the 89 administrative areas (9 Republics and 10 Regions) rejected the draft Constitution. The Constitution is tailor-made for the President. It gives him the de facto right to decide on all major issues and, in the event of dispute, to rule without parliament. Given the composition of the democratically legitimate new parliament and the economic problems remaining to be resolved, this could well soon happen. The President enjoys a dominant position. He has a decisive say in the composition of the government, and appoints ministers, and subject to the approval of the State Duma, the prime minister. He alone can accept the government's resignation and dismiss individual cabinet members. The Constitution's guidelines on the division of powers give the President a decisive say in external and domestic policy. The President can dissolve parliament, but may only be removed by decision of both chambers of parliament and the constitutional court, and then only on grounds of high treason. The Constitution clearly settles the power struggle in favour of the central government. The proliferation of parallel executive and legislative state bodies at the various levels of the federation is to be ended by the new Constitution. Clearly defined power structures are to be introduced. Thus the text of the Constitution ends the distinction between federal entities (Republics, Regions, etc.), which had differing rights. The extent to which the Constitution can actually be implemented will depend not least on these federal entities. This clear bias towards a presidential system could one day prove to be disadvantageous, should Yeltsin be replaced by a representative of the extreme right-wing or nationalist forces.

2.1.5. Even in the days of the Soviet Union, Union laws were duplicated in the Russian Federation by Russian legislation. Since 1991 numerous additional laws and edicts have been adopted to ensure the rapid transformation of the economy: the Enterprise Act (29 December 1990), the Privatization Act, the Act on competition and the control of monopolistic activity on goods markets, the Acts on banks and their activities, and on goods markets and market trading. In addition to these, a multitude of presidential edicts and decisions of the Supreme Soviet, of statutes of the Council of Ministers and directives of the state bodies at federal level have also entered into force. The main disadvantage of this kind of legislation lies in the lack of certainty in legal relations. Edicts can be amended at short notice or suspended, and this creates further uncertainty as to the progress of the reforms. There are frequent attempts to regulate specific aspects of economic life, in the form of countless authorizations for specific groups or authorities, instead of first laying the foundations of a social market economy and setting up a viable overall economic framework.

2.1.6. Against this background, it is hardly surprising that reform has so far been inconsistent and sporadic. The many programmes and proposals for reform reflect the differing views of their authors and groups but do not form a basis for economic policy. The government has made its views clear in individual plans and executive acts. There is however no coherent and balanced programme for reforms. Electoral 'bribes' were distributed by the President and the government on the very eve of the parliamentary elections (December 1993). Minimum wages, unemployment benefits and pensions were increased. Miners and steel workers, who were threatening to strike and who had not been paid for months, were once again promised their wages. The new 'financial entrepreneurs' were to be protected against foreign competition. Agriculture would be allowed to use for investment the resources released by restrictions on imports of cereals. The industrial giants would be granted their wish to form financial-industrial conglomerates on the Asian model. Over the last few months President Yeltsin and Prime Minister Chernomyrdin appear to have found common ground for further action. Official government statements have taken the line that the priority is to implement the August 1993 government programme rather than set new objectives. However, there is still a danger that the transformation of the system will be slowed down by inconsistent economic policy and failure to implement declarations of intent.

2.2.

Belarus

2.2.1. A plethora of parties and movements has emerged in Belarus since 1991. On 10 March 1993 a total of 497 were registered. The strongest groups in the Supreme Soviet include the Communist Party, the Communists of Belarus and the National Rebirth movement. The reformers and the deputies elected while the Soviet Union still existed have different ideas. But discussions are far less vituperative than in Russia. By opting for compromise and caution, the government has succeeded to a great extent in maintaining political stability. This basic assessment remains valid even after the election of the new President in July 1994. One senses however that there is far less evidence of a change for the better in ways of thinking and in society than, for example, in Russia. The government administration and social groups and political parties are still wedded to the old way of thinking. Major projects are repeatedly postponed. The new Constitution was finally adopted at the beginning of March 1994. Weighty reasons, such as lack of raw materials, increased division of labour, unfavourable geopolitical circumstances and the legacy of the Chernobyl disaster are cited as justification for the striking lack of decentralization. The country's dependence on Russian energy sources and on exports to Russia is already causing some groupings to consider the possibility of reunification with the Russian Federation. Even before the election the new President, Alexander Lukashenko, was advocating closer ties with Russia. The original objective of a monetary union with Russia on the basis of a treaty on Belarus' accession to the Russian monetary system has however been abandoned for various reasons, not least Moscow's lack of enthusiasm. Instead, at the beginning of 1995 treaties were signed with Russia on the liberalization of trade, a customs union, measures to achieve reciprocal convertibility of the two countries' currencies, the formation of joint industrial-financial groups and the development of trade and other economic relations. At the same time treaties were concluded allowing the Russian radar station at Gantsevichi and submarine control centre at Vileyke to continue operating. It is also Belarussian policy to develop cooperation with the other CIS republics.

2.2.2. The Republic of Belarus declared its sovereignty on 27 July 1990. Only a few weeks later the Supreme Soviet of Belarus adopted a two-year programme for transition to a market economy. This includes a specific blueprint for achieving economic independence by restructuring the economy. Other objectives are privatization, the dismantling of monopolies and the creation of new infrastructure. None of these objectives have so far been attained. The economic and political events in other states of the former Soviet Union, in particular the neighbouring Republics of Russia and Ukraine, and fears of a still sharper fall in production and the impoverishment of the population, have caused the government of Belarus to proceed hesitantly in adopting concrete measures to achieve a market economy. In view of the catastrophic economic situation, on 30 September 1994 the government adopted an emergency programme. Its main aim is to stabilize the general economic situation. Radical reforms are not planned although privatization is to be accelerated, on the basis of the existing programme. It is doubtful whether the ambitious aims of the emergency programme can be achieved. The tight deadlines and inadequate economic incentives give grounds for scepticism. Whilst the international organizations support the present course aimed at surmounting the present economic difficulties, they also urge concrete and determined progress towards a market economy. At home too more and more voices are calling for a more consistent policy of reform.

2.2.3. Over the last three years the legislative bodies of Belarus have, admittedly, adopted major laws paving the way for a market economy system. These include, rules for leases, banking, goods exchanges, company law, business insolvency and restrictions on monopoly power. Some of these legal provisions are, however, still incomplete, whilst others are hardly applied, or are no longer relevant because requirements have changed.

2.2.4. Dirigistic methods continue to be applied in a bid to transform Belarus into an independent industrial state and to adapt its completely distorted economic structures to current conditions. The programme for the restructuring of industry approved by the Presidium of the Supreme Soviet in May 1993 is the result of three years of industrial policy planning and provides for the specific development of individual industrial sectors. The overall objective of the programme, intended to run for about eight years, is to make major manufacturers internationally competitive. It is hard to imagine how the objectives and methods of the programme, which is in parts very detailed, can be reconciled with the introduction of market economy regulatory mechanisms, and in particular with the decision-making autonomy of enterprises. The economic crisis and lack of finance have so far prevented a start being made on the programme. Structural reorganization of the economy is not to begin until completion of the emergency programme, which runs until mid-1995. The main problem is coordinating the macroeconomic stabilization policy with the reform of firms, which, in addition to small-scale privatization and the conversion of large state enterprises into joint stock companies, is to provide more efficient systems of incentives, for management too. It remains to be seen whether the planned management contracts merely entrench central control or whether they actually give rise to independent entrepreneurial decision-making.

2.3.

Ukraine

2.3.1. The efforts to establish an independent national state at first concealed differences among the reformers as to methods and short and medium-term economic policy objectives. Economic problems were to a great extent ignored. Crimea's separatist aspirations constantly exacerbate the domestic and external political situation. The people have so far been disappointed by the attempts at reform. Real reform has been prevented by the constant tensions between reformists and their opponents, above all the directors of the large combines and nationalist and Moscow-orientated groups. As in the other independent Republics of the former Soviet Union, the government's ability to act has been severely impaired by disputes with parliament. Most recently, in September 1993, diverging views on economic policy, and the President's edict on compulsory measures to stabilize the economic and political situation in Ukraine, led to the resignation of Prime Minister Kuchma. Kuchma had put his signature to the Treaty on closer economic cooperation with Russia, in the realization that, without such cooperation, it would scarcely be possible for Ukraine to develop into an independent national state. The Treaty also secured vital supplies of crude oil in the short term.

2.3.2. In the presidential elections completed on 10 July 1994 the former Prime Minister, Leonid Kuchma, beat the incumbent President, Leonid Kravchuk. His victory was achieved in eastern Ukraine, which has heavy industry and a higher proportion of ethnic Russians than other parts of the country. Here public opinion favours closer and more balanced ties with Russia. In western Ukraine there is more support for nationalist movements. President Kuchma has so far succeeded in pursuing a balanced policy towards Russia and in defusing a number of contentious issues, without however compromising Ukraine's independence. The Black Sea fleet issue is no longer seen as an obstacle to businesslike cooperation between the two countries. Ukraine's participation in the inter-state economic committee of the CIS Republics and cooperation between the armed forces on security policy are important steps towards normalization of bilateral relations. In signing the nuclear non-proliferation treaty Ukraine took another step towards improving the international climate and laid a solid foundation for more intensive cooperation with international organizations.

2.3.3. Differing views have been responsible for a lack of direction in economic policy. While the Soviet Union still existed (November 1990) a plan for transition to a market economy was drawn up and adopted. This was followed six months later by a package of exceptional measures to tackle the economic crisis, and in October 1991 an outline economic policy for an independent Ukraine was confirmed. In January 1992, the urgent economic measures plan was adopted. This set out to place the economy on a commercial basis. More than sixty laws, covering the whole economic and social development of the country, and a multitude of other legislative acts covering the most diverse areas of the economy, were adopted in the space of a year. At the same time the cabinet was given special powers to establish the legal framework. However, it was becoming clear that the early exclusion of the state from economic activities was not feasible. From December 1992 onwards a number of laws had to be redrafted or rescinded. The reason for this was probably the dramatic proliferation of regulations, which were almost impossible to keep track of, let alone comply with. Ukrainian businessmen and foreign investors constantly run the risk of inadvertently contravening laws. Over the last two years, eight emergency programmes have been adopted but none of them have been implemented. President Kuchma has promised reforms. He intends to develop the economy under 'state supervision'. A comprehensive restructuring of the economy is urgently needed. In order better to implement the necessary restructuring processes, the President appointed himself Head of Government and made the regional and local administrative chiefs directly responsible to him. Parliament is to relinquish a number of its governmental responsibilities which date from Soviet times. The President intends in particular to push the delayed privatization programme. Various new tax laws are also to be introduced.

3. Joint Declaration on the partnership and cooperation agreements

3.1. After years of difficult negotiations the Joint Declaration was signed by the European Community and the Council for Mutual Economic Assistance (Comecon) (). The Committee described this Declaration as a decisive step towards a long overdue normalization of relations with the individual Comecon states. The Community obtained acceptance of its two-track policy; in parallel with the official relations between the EC and Comecon, every member will be free to decide whether to establish bilateral relations and negotiate on trade issues with the European Community. It was decided not to set up the EC-Comecon umbrella organization which had repeatedly been called for. Only three years later - almost to the day - the Eastern European economic alliance was dissolved. The 46th and final Plenary Session (held at the end of June 1991) formalized the collapse which had begun as early as the mid-1980s. For the whole period intra-Comecon trade had been shrinking. German reunification deprived Comecon of one of its main supports. When, in January 1991, its members decided that they would in future transact their internal trade in dollars rather than convertible transfer roubles (the common currency for transactions), this was tantamount to dissolution of Comecon.

3.2. The new phase of political and economic contacts between the European Community and the Comecon countries rapidly led to the establishment of official relations. By March 1991 numerous trade and cooperation agreements had been signed. The Committee is convinced that all these steps are essential components of the process of political and economic integration. They strengthen inter-state consultation, deepen European political cooperation (EPC) and provide medium-term economic support for the political reform processes in eastern Europe. An agreement on trade, commercial and economic cooperation was signed with the USSR on 18 December 1989 and entered into force on 1 April 1990. The focal points of this agreement are the granting of most-favoured nation (MFN) status in cross-border trade and the Community's undertaking to make every effort to phase out specific quantitative restrictions on the basis of Regulation (EEC) No 3420/83 (). The European Community had introduced these 'autonomous' import restrictions since the mid-1970s, after the bilateral trade agreements between the EC and Comecon Member States concluded in the period up to 1973 had expired at the end of 1974 and Soviet opposition had, except in the case of Romania, aborted new bilateral negotiations at Community level (). The parties to the agreement decided to promote, in accordance with their respective economic policies and objectives, the broadest possible cooperation in a wide variety of fields, including industry, agriculture, environmental protection, energy and transport. The Committee described this agreement as an important signal of political and economic confidence building in the framework of East-West cooperation. It is indicative of the dynamic process of rapprochement which was taking shape that as early as December 1990 the European Council, at its meeting in Rome, requested the Commission 'to explore with the Soviet authorities the idea of a major agreement between the Community and the USSR, encompassing a political dialogue and covering all aspects of close economic cooperation and cooperation in the cultural sphere' (). With this decision, as the Committee pointed out in an earlier Opinion, the European Council was clearly calling for something more than the existing trade and cooperation agreement. The discussion of future economic and commercial relations was however delayed by the violent political and economic upheavals of 1991 which culminated in the fragmentation of the Soviet Union. The Commission was now obliged to talk to twelve independent Republics.

3.3. The transformation of the political and economic landscape in the former USSR has caused the European Commission to develop a new type of agreement, mid-way between a trade/cooperation agreement and a Europe agreement. The aim is now to conclude partnership and cooperation agreements with the independent states of the former Soviet Union (). These non-preferential agreements, which are of a hybrid nature and consequently require ratification, are designed to define a broad range of political, economic and commercial relations between the contracting parties and to replace the 1990 trade and cooperation agreement with the former Soviet Union. Bilateral discussions with Russia began at the end of 1992, and with Ukraine a little later. Both sets of negotiations were completed in the first half of 1994. Negotiations with Belarus were completed in December 1994.

3.4. The partnership and cooperation agreements are similar to the Europe agreements in structure, although different in content:

- Preamble;

- General principles;

- Political dialogue;

- Trade in goods;

- Business and investment;

- Payments and capital;

- Competition, intellectual, industrial and commercial property protection, legislative cooperation;

- Economic cooperation;

- Cooperation on prevention of illegal activities;

- Cultural cooperation;

- Financial cooperation;

- Institutional, general and final provisions.

The following comments by the Committee refer to the treaty signed on 25 June 1994 between the European Community, its Member States and the Russian Federation. Where the earlier (14 June 1994) partnership and cooperation agreement with Ukraine differs significantly, the Committee will, where necessary, comment separately on these passages. As the partnership and cooperation agreement with Belarus was initiated only on 22 December 1994, it is not dealt with in this Opinion.

3.5. With hindsight it is clear that the discussions with Russia on individual issues were more prolonged than the Community had expected. This was partly because of Russian internal problems, and because Russia escalated its demands, but it was in many cases also partly because the Community had difficulty in reaching a consensus. On trade (improved market access) for example, the EC Member States were reluctant to go much further than allowed by the negotiating mandate of 5 October 1992. With regard to the right of establishment and services on the other hand, the eastern European negotiating partners were not noted for their willingness to compromise. The two additional directives (5 April and 9 November 1993) for the negotiations on the partnership and cooperation agreement with Russia, and an extension of the mandate in the case of Ukraine, are sufficient proof of the Community's good will and its efforts to bring negotiations with its Eastern European partners to a successful conclusion.

3.6. The Committee cannot understand the reasoning behind the protocol declaration in the extended mandate of 5 April 1993, which states that the directives apply exclusively to Russia. Only at a later stage do the Council and the Commission intend to investigate the possibility of extending some or all of the provisions to other successor states of the Soviet Union. The Committee tends to the view that the partnership and cooperation agreements should, in framing relations, from the outset treat the independent Republics essentially equally and that a distinction between the European and Asiatic Republics should be avoided. This would of course not exclude the possibility of special arrangements for specific Republics. It became clear early on that some of the independent Republics would try during the bilateral negotiating rounds to obtain partnership and cooperation agreements with the Community and its Member States which are comparable in content to that between the Community and Russia. (See Ukraine's call at the beginning of last year for clarification of the European Community's initial negotiating stance).

Preamble

3.7. The Committee unreservedly welcomes the determination of the parties to work together to strengthen the political and economic freedoms which constitute the very basis of the partnership. The Committee also shares the parties belief in the paramount importance of the rule of law and respect for human rights (particularly those of minorities), the establishment of a multiparty system with free and democratic (secret) elections and economic liberalization leading to a market economy. At the same time the Committee endorses the link established by the parties between the implementation of partnership and the continuation and accomplishment of Russia's political and economic reforms. The parties deserve unqualified support for their declaration endorsing the commitments made under the CSCE process, above all full implementation of the principles and provisions of the Helsinki Final Act, the concluding documents of the Madrid and Vienna follow-up meetings, the Charter of Paris for a New Europe and the CSCE Helsinki document on the Challenges of Change. The reference to the concluding document of the CSCE Bonn conference of 11 April 1990 is extremely important. But the Committee suggests that the very general references to final acts and documents in the preamble be clarified and expanded, e.g. by incorporating key passages from the Bonn document on economic cooperation in Europe. The Committee also hopes that the numerous declarations of intent will be translated into everyday political action and fully reflected in the constitutions of the signatory states.

3.8. The Committee considers the parties' statement that Russia is no longer a state-trading country, but rather a country with an economy in transition, to be a political compromise. The future will show to what extent this assessment is economically realistic and viable, and it will depend on whether policy can in practice continue to satisfy the requirements of reform. Ukraine on the other hand continues to be classified as a state-trading country, though the signatories recognize the country's 'efforts, aimed at transition of its economy from a state-trading country with a centrally planned economy into a market economy'. The Committee feels the different classification of the two countries to be difficult to justify. It can probably be attributed mainly to the fact that Russia is a stronger negotiating partner and often better able to get its views reflected in the treaty than the other independent Republics.

3.9. The Committee has repeatedly criticized the absence from later agreements of the commitment to social justice which first Europe agreements laid down as the basis of association. The same criticism applies to the partnership and cooperation treaties. The Committee cannot understand why the preamble makes no mention of social justice. It is particularly difficult to understand since the concluding document of the CSCE Bonn Conference (1992) and the CSCE Helsinki Summit Agreement (1992), both of which are referred to by the parties, show that sensitivities of this kind are not an issue for the Heads of State or Government - including the European Community and its Eastern European treaty partners. On the contrary, they regard social justice as a common and irrevocable objective. They stress unanimously that wide-ranging trans-frontier cooperation, involving human contacts, is needed to overcome economic and social inequalities and to pave the way for social and economic development. The negotiating partners should be sufficiently aware that the processes of transformation initiated in the independent Republics of the former Soviet Union are associated with huge social upheavals which in many cases are causing real, and often severe, human misery. As the Fund for Democracy and Development pointed out at the beginning of 1994, if these effects are not mitigated, they will one day burst out of the confines of these countries and inundate other countries, endangering prosperity and security (). They may ultimately mean democracy and the market economy being rejected by the people, as the social and human cost is seen as too high (). These possible chains of cause and effect should be considered. Only if it proves possible to match and underpin the basic market economy system with a corresponding social order will the desired panEuropean economic area attain political, and above all, ethnic and social stability. The Committee's call has repeatedly been countered with the argument that social justice does not need to be written into the preamble as the agreements include several passages of a social nature - e.g. with regard to cooperation on health and safety, and on employment and social security. The Committeefeels that the Commission's argument is wide off the mark.

3.10. In this context, the Committee urges that the partnership and cooperation agreements speak not merely of a market economy, but of a social market economy. The Committee does not accept the objection raised by some Central and Eastern European politicians, that in their countries the word 'social' is equated with socialist, and that a socialist market economy is the last thing they want. On the contrary, the politicians' argument only highlights the young democracies of Central and Eastern Europe's continuing need for information and clarification on political systems and processes. In the framework of the various programmes, the European Community and its Member States need to provide more advice, which in the early stages of political and economic reform is often just as important as material support.

3.11. In contrast to the Europe agreements so far concluded with six Central European countries, the preamble of the partnership and cooperation agreements does not hold out any prospects of accession. However when the Agreement was signed, the former Ukrainian President, Leonid Kravchuk, announced in principle his country's candidacy for eventual accession to the European Community. 'This prospect is among the Ukrainian government's priorities.' Only a few weeks previously the Russian Prime Minister, Viktor Chernomyrdin, had also articulated his country's claim to membership. Under Article O of the Treaty on European Union any 'European' state may apply to become a member of the Union. There is of course no clear definition of the word 'European'. As the Commission rightly says, the expression embraces geographical, historical and cultural elements which contribute to the European identity. It would therefore appear neither possible nor desirable to lay down once and for all the borders of the European Union, which will need to emerge gradually over an extended period of time (). At the same time it should be made clear to would-be members that as intra-Community integration progresses, it is becoming increasingly difficult to cross the entry threshold. These countries must realize that their road to the European Community will be a long and arduous one but the Community too will need to adapt, e.g. via CAP and financial reform. The Committee therefore cannot understand why some politicians are calling for rapid enlargement towards the East and mass accessions with no strings attached. It would be disastrous if the intra-Community consolidation process were to fall victim to political opportunism or if it were to be delayed or even watered down by hasty, and possibly ill prepared, enlargement.

3.12. The (associated) Central European countries have had a concrete prospect of accession since the Copenhagen European Council (June 1993) decided that under certain conditions they could become members of the European Community. What is needed is institutional stability as a guarantee of democracy and the rule of law, maintenance of human rights, and respect for and protection of ethnic minorities. A functioning market economy and the ability to withstand market forces are essential. Moreover, the commitments entered into in connection with accession must be wholehearted, as must the objectives of Political, Economic and Monetary Union. The European Commission argues that the 1996 EC Intergovernmental Conference must lay the institutional foundations for maintaining the EC's ability to take decisions.

3.13. The partnership and cooperation agreements provide a solid foundation for closer cooperation between the European Community and the independent Republics of the former Soviet Union. The European Community has on a number of occasions made it clear that for reasons of principle membership of the EC can - at least in the foreseeable future - hardly be considered. The accession of the independent Republics would require such wide-ranging agreement on major political, economic and social conditions that these states would be hampered in their independent development. Moreover, the CIS economic area would become even more fragmented, giving a new impetus to the worrying process of disintegration. The Committee feels, however, that this does not exclude the possibility of enhancing and developing the partnership and cooperation agreements by specific forms of political cooperation. In due course ways of achieving still closer cooperation should be discussed with those successor Republics of the former USSR which have passed the point of no return for democracy and the market economy.

General principles

3.14. The Committee considers the general principles laid down to be highly unsatisfactory. It is true that respect of democratic principles and human rights, as enshrined in particular in the Helsinki Final Act and the Charter of Paris, is described as a guideline for the domestic and external policy of the parties, and as an important component of partnership and of the agreement. But this is insufficient. Above all, the Committee regrets the Community's failure to make the introduction and maintenance of market economy principles an integral part of the agreement with Russia. For the Committee this is incomprehensible, not only because the Council's original negotiating mandate specifically defined market economy principles as an integral part of the agreement, but also in view of the agreement to set up within the next few years a free trade zone between Russia and the Community. The Commission should have realized that dropping this element would give a false political signal, certainly discouraging for Russia's market-orientated reformers. If Russia insists - as the negotiating rounds have clearly shown that it will - on no longer being treated as a state-trading country, it is essential, with a view to a successful process of economic reform, to lock in market principles as an essential, and not merely declaratory, component of the future agreements. In addition, the Committee reiterates its view that the maintenance of basic social rights and minority rights should not just be referred to in the preamble but should be a separate and substantive part of the agreement. The agreements with Ukraine inspire greater confidence: there at least market economy principles, as defined for example in the Bonn CSCE document, are an integral part. It is to be welcomed that in the event of sustained breach of these provisions the Community can unilaterally, and with immediate effect, suspend the agreements. The Commission feels that in this way the Community has obviated the slow and complex procedures laid down in the Vienna agreement on treaty law.

3.15. The Committee attaches importance to the evolution clause under which a joint study is to be carried out in 1998 to establish whether the economic preconditions (e.g. basic market economy structures) have been fulfilled in Russia (or Ukraine), thus enabling negotiations to begin on the establishment of a free trade zone. Not least in view of the need for confidence building, the Committee would have preferred a more precise wording; in particular the arrangements for the beginning of negotiations should have been more clearly defined. Differences of opinion between the EC Member States prevented a clear wording being adopted; once again in the field of trade policy rhetoric and action were at odds. It is also regrettable that there is no evolution clause in the agreements with Kazachstan, Kyrgyzia and Moldova. The different forms of treaty heighten the danger of renewed and intolerable strain on the Eastern European economic area and of lasting damage to the process of regional cooperation between the successor states of the former USSR repeatedly called for by the European Community. This applies not least to the September 1994 decision by the Heads of Government of the twelve CIS states to establish close economic cooperation and set up an inter-state economic committee. Too often we fail to realize that the introduction of free merchandise trade with the states of the former Soviet Union, even going as far as the establishment of a free trade zone, is in the interests of all the parties. It is a truism to say that if internal economic development in the reformist Eastern European countries receives effective external support, new export markets will be created and the Community will in the long term gain new and significant outlets for its investment and consumer goods. The precondition for this, however, is that the maxim 'aid through trade' be taken seriously and put into effect. It would be more than inconsistent were the West to commit large amounts of financial aid to the Central and Eastern European reformist states but deny them access to its markets and thus the opportunity to earn their own foreign exchange. 'What we really need', as the Prime Minister of the Czech Republic, Vaclav Klaus, put it, 'is the free exchange of people, ideas and, most importantly, goods. And in a form which is of benefit to both sides.' ()

Political dialogue

3.16. The Committee welcomes the inauguration of a regular political dialogue, which will be structured similarly to that laid down by the Europe agreements. The Committee has repeatedly described political dialogue as a key element of, and pointer for, pan-European integration. Political dialogue will encourage rapprochement between the parties, support political and economic change in the Eastern European countries and contribute to new types of political cooperation. The parties feel that this dialogue should enhance security and stability by ensuring closer coordination and convergence of views. To be welcomed is the plan to work together on questions concerning respect for basic democratic principles and human rights and to consult - whenever necessary - with a view to optimum realization of these principles. It is regrettable, however, that the rights and opportunities for development of minorities are not specifically mentioned as part of the political dialogue. The Committee considers this to be evidence of a credibility deficit which should be dealt with as rapidly as possible.

3.17. In the framework of political dialogue regular meetings are to take place - in principle twice a year - between the Russian President and the Presidents of the EC Council and the European Commission. At ministerial level political dialogue will be conducted mainly via the Cooperation Council, at parliamentary level via the Parliamentary Cooperation Council. In addition, other procedures and mechanisms are to be developed, either making full use of diplomatic channels, or via meetings of senior officials or in other forms, the aim being to help consolidate and develop political dialogue.

3.18. The Committee would once again voice criticism of the failure to mention the essential contacts between the social groups in the countries concerned. With reference to the independent Republics of the former Soviet Union, it should be possible to achieve consensus in the Community that 'there is no chance at all of creating a pan-European economic area if economic and social interest groups are kept in the background'. They are the pillars of social and political culture in Europe, they make changes in the political and economic balance transparent and serve to balance the interests of the various social groups. Particularly at a time when these groups are becoming established and are organizing themselves in the successor Republics of the former USSR, making contact with democratic forces is more necessary than ever, and they need to be integrated as closely as possible into pan-European structures. In this context the Committee would remind the Member States of the agreement on the European Economic Area (EEA), which institutionalizes cooperation between the economic and social partners in the EEA advisory committee; in the case of Hungary the setting-up of a joint advisory committee is being seriously considered; in other Europe agreements the parties to the treaty have agreed in a joint declaration to have the relevant Association Council look into the possibility of establishing a consultative body made up of members of the EC's Economic and Social Committee and corresponding groups from the Central European partner states. The Committee has welcomed the joint declarations as an important step in the right direction; it expects amended declarations to be incorporated in the partnership and cooperation agreements. Over the past months Committee members have had various discussions with representatives of social groups from Russia, Ukraine and Belarus and have noted not only a great need for information but also a desire for further contacts. Sporadic consultations will not be enough. Rather, an on-going and intensive dialogue is needed on common locations, objectives and priorities. Another aim should be to make know-how available for efficient problem solving - which is in the interests of both parties. The partnership and cooperation agreements are to be reviewed three years after their entry into force. If the partners, Russia and/or Ukraine, should become members of GATT/WTO earlier, however, revision is to take place at this time. The Committee proposes to the EC that during the first revision of the treaty it clarify jointly with the Committee whether the time has come to institutionalize contacts between the members of the ESC and the members of corresponding bodies in the Eastern European partner states via a consultative body. This could be organized similarly to the proposed joint advisory committee of the EC's economic and social interest groups and those groups assembled in the Hungary's national council for the balancing of interests.

Trade in goods

3.19. Although Russia and Ukraine are not yet members of the GATT, some passages in the agreements are to a great extent in line with the relevant GATT provisions. By GATT the European Community and its Eastern European partners mean the agreement signed in Geneva in 1947, as subsequently amended and as applied by the partnership and cooperation agreements. In the section dealing with trade the signatories grant each other general most favoured nation (MFN) status within the meaning of Article I of the GATT. As MFN treatment was already enshrined in the trade and cooperation agreement between the European Community and the former USSR, the provisions of the agreements with the successor Republics are in a sense a back-up. Any bilateral advantages which Russia or Ukraine grant neighbouring countries in areas covered by the partnership and cooperation agreements are excluded. Also excluded are any advantages which certain countries grant developing countries in accordance with the GATT or other international agreements. At all events, as early as 1 January 1993 the CIS states were brought into the Community's Generalized Scheme of Preferences (GSP). The Committee feels that this was entirely justified. Research shows that on average the relief from customs duties enjoyed by the CIS states is less significant than for the developing countries granted preferential treatment (); under the GSP the latter are relieved of an average of about one third of their customs liabilities (). The reason for these variations in relief is to be found in the dif2ferent structure of exports. CIS exports were - at least in the year preceding inclusion in the GSP - dominated by oil and other commodities which are either subject to low rates of customs duty or entirely exempt ().

3.20. The Committee welcomes the reciprocal abolition of quantitative import restrictions for goods originating in signatory countries - without prejudice to the special rules for textiles, ECSC products and nuclear material. This agreement confirms the European Community's abolition, from 1 August 1991, of specific quantitative restrictions. The same applies to the unilateral suspension of non-specific quantitative restrictions on imports from individual GATT member states and from the Eastern European partners. Russia and Ukraine will benefit from limited, temporary derogation clauses, in the event of the reintroduction of quantitative restrictions on a non-discriminatory basis under Article XIII of the GATT. These clauses will apply to young industries, to sectors in the process of restructuring, to sectors having to cope with serious (particularly social) problems, and, in the case of Russia, to where there is the danger of local companies seeing a drastic reduction in their market share. Russia has given assurances that it will not circumvent these provisions by increasing tariff protection of the goods in question. The Committee accepts the need for these derogations, as the economies of the independent Republics of the former Soviet Union are still weak, and have been confronted almost overnight with enormous challenges. Above all, deep-seated structural problems have to be tackled at the same time as stronger competition from imports. On the other hand, the Committee fears that the temptation may be growing to use these arrangements to put off the need for adaptation to market processes. Given the broad and imprecise criteria, these derogations could become the rule on major Eastern European markets. This would certainly do nothing to promote the necessary rapid intensification of economic relations between Russia, Ukraine and the Member States of the European Community.

3.21. A joint declaration stated that the safeguard clause in the event of market disturbances did not accord with the GATT's provisions on safeguard measures. Although the Eastern European negotiating partners had repeatedly called for the GATT rules to be applied, the EC Member States could not agree on treatment which would have been in conformity with the GATT. Admittedly, the part of the treaty dealing with criteria for the introduction of safeguard measures is based to a great extent on Article XIX of the GATT, but the decisive criterion for the triggering of the safeguard clause was watered down. In contrast to the GATT provisions which speak of 'serious' injury caused or threatened, the partnership and cooperation agreement merely refers to 'substantial' injury - however that may be defined by the Community. If quantitative restrictions are introduced pursuant to the agreed safeguard clause, the Russians (but not the Ukrainians) have the right to deviate from their obligations to the other party in respect of goods of substantially equivalent value. The Committee cannot see why this provision was included only in the agreement with Russia. What is clear, however, is that the right to discontinue concessions of equivalent value was included in the trade and cooperation agreement with the former USSR and that the successor states have taken over the rights and duties arising from the 1989 agreement. The possibility cannot be excluded that Ukraine might attempt to circumvent the procedure for justifying the introduction of quantitative protective measures, by increasing customs duties. Russia has undertaken by treaty to refrain from such practices. The Committee wonders, however, whether this Russian assurance has any practical value. As long as Russia and Ukraine are not members of the GATT/WTO they are free to set their own customs policy and to increase customs protection for whatever reason. The proposed consultations in the Cooperation Council on the customs policy of the Eastern European treaty partners are therefore to be welcomed, though they do not ultimately offer any effective protection against increases in customs duties by the Eastern European partners. It would have been better to agree from the outset to freeze the Russian/Ukrainian external tariff. The increase in Russian import duties on certain consumer goods in mid-1994 demonstrates the validity of the Committee's concern. The Committee considers it significant that the Community, in an exchange of letters outside the scope of the agreement, stressed that the entry into force of GATT 94 constituted a change in circumstances within the meaning of the partnership and cooperation agreement, which justified considering whether the agreement needed to be amended. The Committee suggests that this review be used as an opportunity to bring the safeguard clause into clear conformity with the relevant provisions of GATT 94. Only when more stringent criteria are applied to the triggering of safeguard measures will the safeguard clause in the agreements with Russia and Ukraine inspire confidence. GATT 94 also contains revised definitions of serious injury caused or threatened, and the Committee is glad that the proof required must be based on actual facts, and not on assertions, assumptions or remote possibilities.

3.22. In both agreements the anti-dumping or countervailing measures are based on Articles VI and XVI of the GATT and on internal rules which undoubtedly include the EC anti-dumping Regulation. Until definitive measures are introduced, the parties to the treaty intend to seek constructive, ad hoc, solutions to problems. The consequences of classifying Russia as an economy in transition and Ukraine as a state-trading country (which is incomprehensible in economic terms) are felt most clearly in the agreement's anti-dumping provisions. In particular, Article 2(5) of the anti-dumping Regulation, dealing with the determination of the normal value of imports from non-market economy countries, does not apply to Russia (). In determining the normal value of goods, appropriate account will also be taken of the natural comparative advantages enjoyed by the manufacturers concerned, such as access to raw materials, manufacturing procedures, proximity of manufacturing to customers and specific characteristics of the goods. Ukraine and the other Republics, on the other hand are without exception treated as having non-market economies. There is no indication that the natural comparative advantages of manufacturers should be taken into account. Instead, the Commission refers to a relevant judgement of the European Court of Justice of 22 October 1991/case C-16/90. These agreements also include a price clause, under which goods are to be traded between the parties at 'market-related prices'. Unfortunately market-related price is not defined, giving free rein to the imagination. The European Community has repeatedly asserted that it has sufficient instruments to protect itself against price manipulations. If this is in fact the case, the purpose of such a vague price clause is questionable. The Committee would once again argue that it would probably have been fairer to treat the independent Republics of the former Soviet Union equally on essential economic matters. The European Community should base the anti-dumping and countervailing measure provisions uniformly on GATT 94.

3.23. The opening-up of the Eastern European market presents the European Community's economy with an unusual challenge. This daring attempt to set up, when the time is ripe, a large free trade zone between the Community and a group of extremely low-cost countries, which have an industrial tradition and a skilled workforce, is the first of its kind - probably anywhere in the world. The Committee is convinced that integration of the Central and Eastern European markets into a pan-European economic area will temporarily increase the need for structural adjustment in the EC Member States and entail radical changes. The specific problems of individual sensitive sectors therefore make it necessary to agree supplementary transitional provisions. Temporary protective measures need to be included in the partnership and cooperation agreements to facilitate and provide a social safety net for the inevitable restructuring in the textiles and ECSC areas in particular. The European Community's longer term objective, however, must remain to agree the framework of a liberal trade policy with its treaty partners and to make sure that it is put into effect without restrictions in Eastern Europe. Article 110 of the Treaty establishing the European Community specifically requires the EC to work for a liberal trade policy in the common interest. The planned establishment in due course of a free trade zone is also subject to the condition that customs duties and other restrictive measures be abolished virtually across the board (by both parties) in their bilateral trade (Article XXIV 8b of the GATT). The need to fall into line with the GATT will mean that in the long run it will not be possible to exclude any sector (even agriculture) from the market-opening process.

3.24. A voluntary export restraint agreement on trade in textiles has been negotiated between the European Community, Russia, Ukraine and Belarus, and will remain in force until the end of 1995. By Decision of the Council of 20 December 1993, these bilateral treaties apply retrospectively as of 1 January 1993. In the preamble to the agreements the parties underline their desire to promote an unhindered and balanced development of trade in textiles. They stress their determination to take the greatest possible account of the serious economic and social problems facing the textiles industry. The Committee regards these agreements as a necessary step towards countering, when necessary, on a long-term basis the potential risk of market distortion. At the same time it calls on the Commission to enter into discussions with the European textiles and clothing industry on the content and extension of the voluntary restraint agreements before the treaties expire. On several occasions the Committee, in Opinions on the subject, has endorsed the Commission's view that the textiles and clothing industry has an important role to play in the Community (). This is true not only with regard to manufacturing, jobs and sales, but also accumulated experience and creativity. The structural challenges facing the European textiles and clothing industry require Community solidarity. This is all the more necessary, given that these sectors will continue - at least for the foreseeable future - to be of vital importance to certain regions of the Community.

3.25. Quantitative restrictions will initially continue to apply to products falling under the ECSC Treaty. Discussions on voluntary restraint agreements in respect of imports of certain steel products for 1995 and 1996 were successfully concluded at the end of 1994. The Committee in principle welcomes these negotiations, agreeing with the European Commission that political reasons alone mean that a treaty is to be preferred to the unilateral imposition of quotas, which is common practice. Until the end of 1992 steel imports from the former Soviet Union were limited in quantity via rules imposed by individual EC Member States - in the form either of official national quotas or else semi-official administrative practice. With the completion of the internal market the ECSC members agreed to standardize European Community import rules, so that as of 1 January 1993 EC quotas apply to imports of certain steel products from the CIS Republics. The measure was introduced initially for a year (1993) and was then extended to the end of 1994 (the quotas being increased by 3 %). With regard to the content of voluntary restraint agreements with Russia and Ukraine for 1995 and 1996, the Committee is concerned that:

- the increase in supply opportunities by 35 % in 1995 and another 15 % in 1996 compared with 1994 EC quota levels is very large;

- the system of regional distribution of steel imports within the Community was not retained.

The Committee welcomes the provision in the agreements for the setting-up of a contact group on coal and steel matters which will regularly exchange information of common interest relating to coal and steel. However, the Committee doubts whether the Commission and the representatives of the Eastern European partner governments will on their own be able to carry out an informed assessment of coal and steel industry trends in the areas covered by the treaties and also worldwide, and to draw up practical proposals (e.g. for structural adjustments). The Committee feels that it would be better to include representatives of the sectors concerned in the contact group from the outset and to treat them as equal partners in the discussion, rather than bringing them in only after the group's discussions. The Committee also hopes that these bodies will work more efficiently than the groups meeting, under the Europe agreements, to exchange ideas.

3.26. The negotiations on trade in nuclear materials were for a long time coloured by differences of opinion between Russia and the European Community on the one hand, and between the EC Member States on the other. Underlying this dissension was the Community's fear that imports of enriched uranium from Russia could threaten the viability of the Community's own competitor industries and considerably reduce their share of the Community market. Hence the agreement not to submit the trade in nuclear materials to the same rules as the general trade in goods under the partnership and cooperation agreements. Instead, a special agreement, to be negotiated by 1 January 1997, is foreseen. Under consideration are a firm quota for imports of nuclear materials from Russia, a more flexible safeguard clause and a special price clause taking all costs into account, i.e. including the cost of environmental protection measures, permanent storage, reprocessing and safety standards. Until the separate agreement is concluded the trade in nuclear materials will be governed by interim rules based on certain provisions of the partnership and cooperation agreement and of the trade and cooperation agreement with the former Soviet Union. These include safeguard measures with a simplified trigger mechanism, as well as market-related pricing and an undertaking to conduct trade in accordance with the respective laws of the parties. The Community takes the view that these laws include the Treaty establishing the European Atomic Energy Community (Euratom), and in particular the provisions governing the rights, duties and responsibilities of the Euratom supply agency and the Commission. In an exchange of letters Russia expresses its intention of acting as a reliable, long-term supplier of nuclear materials to the Community. The Community in turn recognizes Russia as a separate supplier in the nuclear area. Further questions concerning civilian cooperation in the nuclear sector - e.g. nuclear fusion and nuclear safety - are to be dealt with in two supplementary agreements. In this connection, the Committee welcomes the jointly expressed wish to facilitate the process of nuclear disarmament by all available means.

Provisions on business and investment

3.27. As far as the labour market is concerned, the parties agree not to allow any nationality-based discrimination as regards remuneration, dismissal and other working conditions, and not to discriminate against the other party's nationals legally employed on their territory. The Committee can see no reason why the families of workers from both partner states, living and working legally in a Member State, should not be given access to the Community labour market. It may be true that the high level of unemployment and the very limited room for manoeuvre in the medium term mean that there is little likelihood of any significant demand for workers from non-member countries on the Community labour market over the next few years, but this has no bearing on the matter. The Committee therefore feels that it would be unwise to make undertakings which might give rise to a claim (even a political claim) for (cross-border) freedom of movement for workers. It should also be borne in mind that in existing agreements the Community has made concessions (second priority) which could further limit opportunities for immigration from Eastern European countries. The parties also intend to make joint efforts to control (Ukraine) or - as in the agreement with Russia - even prevent illegal immigration. The Committee welcomes this agreement. In its Opinions on the Europe agreements the Committee - rightly as daily experience has shown - repeatedly urged the Community to pay sufficient attention to the problem of illegal employment, which is closely connected with that of illegal immigration. Unfortunately, even in later Europe agreements, the Committee's call went unheard. It is therefore all the more pleasing to note that the Community now recognizes the problem and has for the first time made it a feature of partnership and cooperation agreements.

3.28. The Committee supports the parties' intention (which is already enshrined in the Europe agreements) of coordinating the social security rights of Russian and Ukrainian workers who are legally employed in the Community. Subject to the rules applied in the various EC Member States, this coordination will ensure that workers' periods of insurance, employment or residence are added together for the purpose of medical care and of retirement, invalidity and dependents' pensions. Any such pensions will be freely transferable at the rates applied by the relevant Member States. Russia and Ukraine intend to grant similar treatment to EC nationals legally employed within their borders.

3.29. The Committee has repeatedly argued that freedom of establishment will promote the transition to the market economy and help create a modern and competitive economy in the Eastern European partner states. In this respect, the rules negotiated for the establishment of companies cannot be fully endorsed. Russia and the Community grant each other reciprocal MFN treatment for the establishment of enterprises (subsidiaries or branches) on each other's territory, i.e. treatment which is no less favourable than that granted to any third country. However, this is inadequate to ensure unlimited market access, as domestic enterprises may well be in a more advantageous position. Ukraine on the other hand - unilaterally - grants firms from EC Member States the same treatment as national firms.

Subsidiaries are granted either national or, at their option, MFN treatment, whichever is the better, for their operations. Both treaty partners of course have reservations in certain areas, which will not be gone into here. The Community and Russia grant each other only MFN treatment in respect of the operations of branches of companies, whilst Ukraine grants them national treatment. The Committee feels that the right of establishment arrangements - at least as regards the Community and Russia - should be improved. It is welcome therefore that the parties intend to look at ways of achieving national treatment in a way satisfactory to both sides and on the basis of the recommendations of the Cooperation Council. This laudable intention is however incompatible with the Community's concession whereby Russia may subsequently restrict existing agreements on freedom of establishment, on the ground, to quote the Russian argument, that in certain respects and in certain areas the treatment of subsidiaries and branches of EC companies is often more favourable than that of Russian companies.

Without examining this argument in greater detail, it should be made abundantly clear to the Russian negotiating partners - even if only later in the Cooperation Council - that clauses of this kind will only deter investors. The Committee feels that a legislative and administrative framework based on continuity and predictability would be preferable, enable companies to plan ahead and encourage longer term innovatory and investment activity by Community companies. Three years at the latest after the signature of the partnership and cooperation agreement, Russia and the Community intend to examine in the Cooperation Council all subsequent changes to the right of establishment laws of the parties. Consultations are also provided for to settle disputes. If no agreement is possible the other party is free to make its own appropriate balancing adjustments. As the introduction of rules likely to discriminate against individual countries is not part of the EC Member States' policy or practice, further unilateral restrictions of the right of establishment are within the realms of possibility - although both parties intend to use their best endeavours to prevent this.

3.30. EC banks and insurance companies are also granted MFN treatment as regards the establishment of subsidiaries or national treatment with regard to their operations () but there are many waivers for banks in Russia. Particularly serious is the general ceiling (12 %) on foreign ownership of Russian banks. The limit on the number of branches of Russian subsidiaries of EC banks is also a brake on business development. Another problem is that subsidiaries have to be more highly capitalized than Russian banks. Trading in shares, and instruments convertible into shares, of Russian companies is prohibited. Russia has given assurances that certain waivers - not all of which are listed here - will be dropped after three or five years. For example, five years after the signature of the agreement, Russia intends to consider whether - in the light of the relevant monetary, fiscal, financial and balance-of-payments considerations - the rules placing a ceiling on foreign ownership of the Russian banking system and imposing higher capital requirements on Russian subsidiaries of EC banks can be relaxed. In conclusion, the Committee feels that the waivers agreed with the European Community will initially place EC banks at a competitive disadvantage on the Russian markets, and that these disadvantages must be eliminated rapidly, at all events more rapidly than currently planned.

3.31. The services markets are growing dynamically and increasing in importance worldwide. Initial estimates suggest that about one third of world trade is accounted for by services. But numerous exceptions, obstacles, subsidies and preference for national providers of services cloud the picture and everywhere distort the cross-border trade in services. In view of these tendencies, steps towards liberalization, however timid, cannot be valued too highly. This applies particularly to the cross-border trade in services with the Eastern European partner states. The Committee therefore welcomes the reciprocal MFN concessions laid down for a broad range of services in the agreement with Russia. In future the Cooperation Council will make recommendations for the further liberalization of the cross-border trade in services and at the same time take due account of the other international commitments entered into by the parties. It was logical therefore for the European Community to stipulate by treaty that the GATT provisions impinging on the agreement would be taken over on time. Once the GATS comes into force, no service sector or sub-sector falling under the GATS may be treated more favourably than agreed in the Uruguay Round. By making suitable adjustments Russia can restore the balance of concessions between the parties. In the agreement with Ukraine both partners undertake to phase in cross-border services on the basis of Cooperation Council recommendations. At the same time the European Community and Ukraine intend to work together to build a market-orientated services sector in Ukraine.

3.32. The agreements on cross-border transport services deserve general support. With regard to maritime transport, the parties undertake to apply effectively the principle of unrestricted access to the international market and traffic. This does not prejudice the rights and obligations arising under the United Nations Convention on a Code of Conduct for Liner Conferences. The parties also affirm their commitment to a freely competitive environment as being an essential feature of the dry and liquid bulk trade. All unilateral measures, administrative, technical and other obstacles which could constitute a disguised restriction or have discriminatory effects on the free supply of services in international maritime transport are abolished. The Committee considers the agreements reached with Russia on inland waterways to be inadequate. Only after the agreement has entered into force will steps be taken (by the end of 1996) to work out how inland waterways can gradually be opened up to international air-sea transport services provided by the shipping companies of a party to the agreement. The Committee suggests that an immediate start be made on the negotiations and that a definite timetable be drawn up for the reciprocal opening-up of inland waterways. On rail transport, supplementary bilateral and multilateral mechanisms will be used to create suitable conditions for, inter alia, guaranteeing and developing passenger transport between the EC Member States and Russia. As regards the market for communications services, steps are being taken to negotiate multilateral rules on satellite bearer services. The parties want to agree conditions for the supply of bearer services for the transitional period up to 2000. The imprecise wording shows that the Commission's original intention of concluding a Community agreement cannot yet be realized, as it is a matter for the Member States themselves. Every assistance will be granted to promote the cross-border trade in mobile satellite communications. In 1995 the partners intend to look at the possibility of granting each other MFN treatment in respect of satellite communications. The Committee considers it important that after the partnership and cooperation agreements have entered into force additional special agreements be concluded on reciprocal market access and the provision of services in the transport sector.

Payments and capital

3.33. The Committee welcomes the authorization of current payments connected with the bilateral movement of goods, services and persons in convertible currency. When the agreement enters into force freedom of capital movements will also be granted for direct investments, their liquidation and the repatriation of any profits. The agreement with Russia includes provisions for compensation for expropriation, nationalization or measures of equivalent effect. After a five-year transitional period the European Community and Russia intend that no further restrictions on cross-border capital movements should be introduced. If, however, in exceptional circumstances cross-border capital movements create serious difficulties for the operation of monetary or exchange-rate policy, the parties may take safeguard measures for a period not exceeding six months. Moreover, the Eastern European partners may, until the Russian/Ukrainian currencies become fully convertible, impose exchange restrictions on the granting or taking up of short and medium-term financial credits, provided that these restrictions are based on IMF recommendations. The parties also intend to facilitate cross-border movements of other forms of capital in order to achieve the objectives of the partnership and cooperation agreement. To this end consultations are to be held; in the case of Russia the emphasis is on further liberalization of capital movements with respect to portfolio investments, commercial credits and financial loans granted to Russian residents and business partners from EC Member States. The Committee supports these initiatives for the liberalization of capital movements. Without freedom of capital movements, liberalization in other economic areas will only be possible to a limited extent. The advantages in terms of location and specialization conferred by free movement of goods and services can be fully exploited only if there is cross-border freedom of movement for capital. The role of free capital movements as a 'discipline' for the economic, financial and monetary policies of the individual countries should also not be forgotten. Against this background the Committee calls on the parties to the agreements to promote the liberalization of capital movements between the Community and the Eastern European partner states with the final objective firmly in mind. The next steps will require the policy of economic reform to be consistently maintained, excessive regulation (e.g. for EC banks) curbed and economic disparities significantly reduced.

Competition, intellectual, industrial and commercial property protection, legislative cooperation

3.34. The competition arrangements are a weak point of the agreements. The parties do specifically stress their intention of removing competition restrictions affecting trade between the Community and the Eastern European signatory states. Russia and Ukraine are directly required to adopt and enforce laws on competition. But - compared with the Europe agreements - the provisions are so soft and non-binding that it is unlikely that any claims would arise, either for the signatories or for European firms. Something which is to be welcomed is the general agreement with Russia to refrain from subsidies in trade for exports to the Community which favour certain undertakings or the manufacture of products. Primary products within the meaning of Article XVI of the GATT, i.e. agricultural and forestry, fishery and all mineral products, are excluded. Russia has also agreed to introduce strict aid disciplines in its trade with the Community from the third year onwards. Ukraine also intends - without specifying a date - to give up state aid in cross-border trade, even in relation to services. Temporary derogations, above all for new and restructuring industries, which in Russia would justify the reintroduction of quantitative restrictions, also apply to measures which are inconsistent with the agreement to abolish export subsidies. From the third year (or in the case of Ukraine the fourth year) after the agreement's entry into force the parties intend to introduce a general prohibition on discrimination between nationals and firms from the signatory countries with regard to supply and sales conditions. The consultations intended to take place in the Cooperation Council could one day assume considerable importance for the implementation and further development of competition rules and for the dismantling of restrictions on competition. Systems of aid and specific instances of state aid are to be discussed there. The Committee endorses the Community's willingness to provide the Eastern European partners, at their request, with technical assistance in the drawing-up and implementation of competition rules. The extent to which the Community, in so doing, will draw on EC competition rules is an open question. The Committee assumes however that the Community is interested in recommending to the Eastern European partner states a competition regime based on EC principles.

3.35. Intellectual, industrial and commercial property protection is of great importance to the industries of the contracting parties. It not only promotes cross-border cooperation, it also favours international technology transfer. It is more than ever necessary to put a stop to the abuse of property rights worldwide. The Committee welcomes any progress in the area of industrial property rights protection - not least in relation to the Eastern European partners. Russia and Ukraine intend to develop the protection of intellectual, industrial and commercial property further with a view to achieving a level of protection 'comparable' with that of the European Community five years after the agreement's entry into force. This is to be welcomed, but it still leaves something to be desired, as 'comparable' can still mean a lower level of protection. The only important thing is that differences in the level of protection should be minimal. This is not stated in the agreement however; it would have been better to agree on an 'equivalent' level of protection. From the entry into force of the agreement the Eastern European partners grant Community firms and nationals MFN treatment in relation to the recognition and protection of intellectual, industrial and commercial property. Advantages granted to a third country on the basis of actual reciprocity are excluded. This restriction is not without its problems, as it would allow an agreement in which, for example, Russia and the USA granted each other much better conditions than allowed under the international conventions. There are already precedents with the USA (e.g. South Korea, Bulgaria). As this passage was absent from earlier drafts of the agreement, the Eastern European partners now also seem to be thinking about such possibilities. The Committee is also critical of the procedure agreed for the settlement of disputes arising from application of the agreement and the listed multilateral agreements. The procedure is ill defined, boils down ultimately to non-binding discussions and falls far short of the comparable GATT mechanism. The Committee feels that it would be a real gain for the industries of the contracting parties if the TRIPS provisions of the Uruguay Round were to be incorporated as soon as possible (after ratification) into the partnership and cooperation agreements - even if states in the process of moving from a planned to a market economy were granted a transitional period lasting until 2000.

3.36. Legislative cooperation is a necessary precondition for the deepening of economic and social relations between the European Community and the Eastern European contracting parties. Russia and Ukraine will endeavour to ensure that their legislation is gradually made 'compatible' with that of the Community. The Committee welcomes this statement of intent, but Community firms - and those of the Eastern European partner states too - are confronted almost daily with the problem of having to live with several legal systems. The same matter is often assessed and handled in contradictory ways. The earlier the various legal frameworks can be approximated therefore and legal certainty increased, the more favourable - as the Committee put it in its earlier Opinion - the environment will be for cooperation between East and West. On the other hand, the Community by no means fails to appreciate the serious difficulties which approximation of legislation poses for the Eastern European partner states. These will mean that these countries can approximate their legislation to the Community system only 'by the skin of their teeth'. It must also be borne in mind that established rights (of whatever kind) cannot be abolished overnight by a stroke of the pen.

3.37. The Committee agrees unreservedly with the European Commission that legal harmonization is an enormous task. A multitude of legal and administrative provisions are involved: civil law, banking law, company accounts and taxes, the protection of workers in the workplace, financial services, competition rules, public procurement, the protection of the lives and health of humans, animals and plants, environment, consumer protection, indirect taxes, customs law, technical regulations and standards, laws and other regulations governing the nuclear area, transport. In its Opinions on the Europe agreements the Committee repeatedly suggested that priorities be set. This suggestion was taken up by the Commission and incorporated in its report to the European Council in Edinburgh (). In this context the Commission suggests setting up, within the framework of the association committees, groups which would identify priority areas for approximation. The Committee feels that similar groups should also be set up within the ambit of the cooperation committees. Important areas for the list of priorities are: customs law, competition law, protection of industrial property, environment law and the regulations governing the protection of workers in the workplace. Also, the legal and administrative provisions governing nuclear technology should be speedily adapted and the adoption of the Euratom rules discussed as soon as possible. The Community has also agreed with Ukraine to provide technical assistance, e.g. seminars or exchanges of experts. The Committee regrets that the agreements contain no timetable for the legal adaptation measures. Given the parties' common wish to strengthen and develop political, economic and trade cooperation, it should also be in the interests of the Eastern European partner states to make an early start on the approximation of their laws.

Economic cooperation

3.38. The European Community, its Member States and the Eastern European contracting parties wish to foster economic cooperation, in order to cement and develop economic links. The necessary measures will be long term and will fully incorporate environmental considerations. The aim of these common efforts is to boost the growth potential of the economies, create a favourable international (economic) environment and integrate Russia into a pan-European economic area. It is particularly noteworthy that all the parties also consider it essential to contribute to a harmonious social development. Emphasis is also placed on the need to deepen cooperation between the CIS states and to ensure balanced development of the region. In this context, the contracting parties - as in the Europe agreements - offer a broad field of economic policy activity. As well as industrial cooperation, the need for promotion and protection of investment is also emphasized. Other areas of activity are: public procurement, standards and conformity assessment, consumer protection, mining and raw materials, science and technology, general and vocational training, agriculture and food, energy, the nuclear sector, space, construction, environment, transport, post and telecommunications, financial services, regional development, cooperation in the social area, tourism, SMEs, communications, information technology and infrastructure, customs, statistics, economics, money laundering, drugs and the regulation of capital movements and payments in Russia. The Committee does not dispute that cooperation in these fields is in principle desirable, and that in the fullness of time it could be initiated or improved. But it has strong grounds for doubting whether merely making a long list of unconnected policy areas will suffice to make, within an acceptable timeframe, an effective contribution to the overall economic policy objectives, which range from expansion of the economy to harmonious social development. There is virtually no sign of the intended division of responsibility between the economic operators, between firms and the state and between the Community and its Member States. We are not talking merely about one or two Eastern European partner states here; the associated Central European states, the Baltic States and the other independent Republics of the former Soviet Union expect similar support and cooperation. Given the limited human and financial resources of the Community and its Member States, this is an altogether ambitious undertaking.

3.39. The Committee feels that the most important thing is to draw up a list of economic priorities for cooperation between the parties to the agreements. This will require the partners to have as realistic and unadorned an image as possible of the everyday problems confronting European firms on the markets of the Eastern European partner states. Firms' attempts to gain a footing in these states are often an obstacle race over bureaucratic hurdles. The number of obstacles is great, but their size varies from country to country. The main problems are connected with the chronic lack of foreign exchange, persistent inflation and inadequate certainty in legal relations - particularly with regard to investment. Further obstacles are created by contradictory laws and decrees and in some cases their arbitrary interpretation (customs and taxes). There are complaints of opaque decision-making structures in government departments and wrangling between central and regional authorities. Domestic firms' lack of liquidity, declining standards with regard to payments and a growing tendency to renege on contracts are further hindrances to economic relations, as are unclear property rights and state meddling in firms' decisions. The spread of corruption and protection rackets are further deterrents. These difficulties and obstacles must be openly discussed in the Cooperation Council. The two sides need to get together to consider how suitable economic, financial and exchange-rate policies and legislative and administrative measures can be devised to dismantle the obstacles to the activities of European firms, and how cooperation with firms in the Eastern European partner states can be facilitated and made more efficient. The Committee considers this a political and economic challenge of great urgency.

3.40. In its Opinions on the Europe agreements the Committee identified other areas where there is a need for action. The Committee was concerned here with areas of policy which have an undisputed cross-border dimension and are relevant to the construction of a pan-European economic area. The great technical resources available must be applied to infrastructure throughout Europe. The need to establish and develop efficient trans-European networks in the fields of transport, telecommunications, energy and vocational training is beyond dispute (). The Committee welcomes the decision of the Corfu European Council (24/25 June 1994) to have a report drawn up on 'the extension of the Trans-European Networks to neighbouring countries (in particular to central and Eastern European countries and to the Mediterranean Basin)' (). The direction of the Community's future energy policy will play a decisive role in efforts - desired by all sides - to reduce significantly the safety risks of nuclear power stations in the Eastern European partner states, by retrofitting or final decommissioning (Chernobyl). To this end worldwide cooperation and solidarity are required. The most recent example of such cooperation is the European Energy Charter, which can also do much to ensure security of the Community's energy supply in conditions of greater ecological safety and economic efficiency. This will at the same time - as the Committee pointed out in its Opinion on the subject () - constitute a major contribution to economic and social stability in the Central and Eastern European countries. It is only logical that the contracting parties should, in pursuing their goal of developing and strengthening cooperation on protection of the environment and human health, take account of the European Energy Charter and the results of the 1993 Lucerne Conference. Environmental policy - considered as pan-European policy - is a cross-border challenge and cannot be successfully handled by any country in isolation. It must not be based on the lowest common denominator and must do what is ecologically and economically necessary. In certain regions environmental pollution has reached a level where it is beginning to have an impact on the economic performance of individual states.

Cooperation on prevention of illegal activities

3.41. In contrast to the Europe agreements, the partnership and cooperation agreement with Russia for the first time contains detailed arrangements for cooperation on prevention of illegal activities. The list of illegal activities ranges from illegal immigration and illegal presence of physical persons to illegal business practices (including corruption), illegal trading and illicit traffic in narcotic drugs and psychotropic substances. The Committee considers this agreement long overdue. The Committee would have liked to see money laundering dealt with separately - as in the agreements on economic cooperation - to highlight the fact that it is playing an increasing role in cross-border organized crime. The sharp rise in the illegal trade in highly toxic plutonium registered in recent months is already becoming a security risk of incalculable proportions. At their summit in Naples (8/9 July 1994) the Heads of State or Government of the seven main industrial nations discussed the worrying rise in cross-border crime and called for increased international cooperation on the combatting of organized crime. The summit's communiqué stated that organized crime was a worldwide problem which increasingly targeted countries undergoing transition. The Committee unreservedly endorses this declaration. It calls on the European Community to initiate the planned consultations and close interaction with Russia rapidly and to provide technical and administrative assistance without delay.

Financial cooperation

3.42. Properly planned assistance from the western industrialized states could permanently improve the chances of success of the reorganization and renewal processes in the Central and Eastern European countries. Left to their own devices, the Eastern European partner states will scarcely be able to stabilize the democratic and economic reforms process. It is in the West's own interests to provide effective assistance. Continuing contraction of the Eastern European economies, combined with political and social instability, would necessarily have a damaging impact on the European Community. By virtue of the partnership and cooperation agreements, Russia and Ukraine are to receive technical assistance funds under the Community's Tacis programme, the world's largest scheme for supporting reforms in the former Soviet Republics. In the first four years of its existence alone $ 2.25 bn were made available under the Tacis programme, of which - according to the Commission - the greater part went to Russia and Ukraine. It was also agreed that a guideline programme to be agreed between the parties will list the priority areas covered by financial assistance, and the various needs, the sectors' absorption capacity and the progress of the reforms will play a major role. The European Community is responsible for implementing the Tacis programme. The Committee welcomes the outline agreements reached and trusts that the European Court of Auditors' criticism that the Community's objectives would be achieved only slowly and to a differing degree from one country to another has now been proved unfounded.

3.43. In order to ensure optimum use of the available funds, the parties intend to coordinate the technical assistance agreed closely with contributions from other sources. The Committee supports this intention and assumes that this coordination will include all the financial aid intended to contribute to the economic reorganization of the Eastern European reformist states. Not only bilateral assistance from the EC Member States or other OECD states is planned; funds from international financial institutions (IMF, IBRD, EBRD, EIB) and from multilateral aid funds will also be involved. The use of the funds must of course be properly coordinated, transparency improved and firm evidence provided of the efficiency with which funds are used. In this context, the European Court of Auditors writes that the Commission must ensure that, for example, measures initiated by G-24 do not contravene any economic policy conditions set by other international bodies, e.g. the IMF. The Committee endorses this view, but has the impression that such conditions are extremely difficult to fulfil. How else can it be explained that - as the European Court of Auditors points out in its report for the 1992 budget year - at the beginning of 1993, in other words nearly four years after the decision of the Paris summit to entrust to the Commission the coordination of the actions and the establishment of a framework for aid commitments, the Commission still has no clear plan for the administration and use of these considerable counterpart funds in Central and Eastern Europe (). The situation may have improved by now, and yet this example clearly demonstrates the kind of timescale to which one should, to be realistic, work in such cases.

3.44. In purely quantitative terms, public-sector aid from the West is incomparably more significant than private foreign capital. Whilst it is true that capital inputs are on a rising trend, these are unevenly distributed between the various reformist states. Thus, in 1993 foreign investors put only about $ 750 m into Russian firms, i.e. considerably less than into the firms of smaller countries such as Hungary or the Czech Republic. The reasons for this distribution are, in the case of Russia, to be found mainly in the inadequate conditions for business activity outlined above. Whilst in other reformist countries conditions for foreign investment now to a great extent meet international standards, Russia has not yet succeeded in presenting itself as an attractive home for inward private capital. Admittedly, it is still more important for the process of reform to tap domestic sources of capital for productive investment. But, as recent studies have shown, inadequate progress is being made here. Indeed, private capital is flooding out of Russia. At the end of 1993 western lending banks reported assets owned by Russian investors of more than $ 16 bn - almost twice as much as two years previously. And, according to Russian sources, in mid-1993 illegal foreign assets amounted to some $ 20 bn. This trend continued last year. Foreign exchange transactions continue to be a major vehicle for illegal exports of capital, whilst capital inflows for direct and portfolio investment remain relatively insignificant. Both phenomena can no doubt be attributed in no small degree to domestic and foreign investors' lack of confidence in Russia's reform policy (). In order to reverse this capital inflow and attract more foreign investors Russian economic policy faces a considerable challenge: a consistent macroeconomic stabilization policy has to be established and at the same time effective and predictable conditions guaranteed for firms. General political conditions play an important part here and their influence on businessmen's decisions must not be neglected.

Institutional, general and final provisions

3.45. In the framework of the political dialogue, the Committee has proposed that, when the time is ripe, contacts between the members of the ESC, which of course consists of representatives of the various economic and social organizations of the EC Member States, and the members of corresponding bodies in the Eastern European partner states be institutionalized in the framework of a consultative body. In the interim period the Committee suggests that a second paragraph be added to Article 93 (Russia)/Article 88 (Ukraine), which deal with the establishment of special committees or working parties by the Cooperation Council. This paragraph should be worded as follows: 'During a transitional period beginning with the entry into force of the Agreement the Economic and Social Committee of the European Communities shall, with the agreement of the Cooperation Council, organize the dialogue and cooperation between the economic and social interest groups of the European Community and Russia/Ukraine. To this end joint meetings shall be held twice a year'. The 1989 trade and cooperation agreement between the European Community and the former USSR - drawn up at a time when there was no question of free, democratically legitimate organizations in the USSR - hints at this in its statement that the parties undertake to facilitate their cooperation by promoting contacts between economic associations in the Community and the USSR. This statement is absent from the partnership and cooperation agreements.

Done at Brussels, 25 January 1995.

The Chairman

of the Economic and Social Committee

Carlos FERRER

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() European Council, SN/428/90.

() I.e. Armenia, Azerbaijan, Georgia, Kazachstan, Kyrgyzia, Moldova, Russia, Tadjikistan, Turkmenistan, Ukraine, Uzbekistan and Belarus.

() A New Strategy for United States Assistance to Russia and the Newly Independent States. (Report from the Policy Panel of the Fund for Democracy and Development, a Washington-based non-profit institution devoted to assisting Russia, Ukraine and other newly independent states in achieving democracy and market-based economies) (10. 1. 1994).

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() Developing countries excluding ACP countries, Taiwan and the Mediterranean countries.

() Data drawn from studies, and based on customs duty payable under MFN conditions.

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