In 2022, the Russian invasion of Ukraine renewed discussions about Ukraine’s bid to join the European Union. The last two years have seen unprecedented progress in the accession process. As early as February 2022, Ukraine applied for the candidate status, which was officially granted in June 2022; on 14th December 2023, the European Council initiated the accession procedure. Undoubtedly, EU membership might kickstart Ukraine’s economic development. The opportunities lay clear; research on the 2004 expansion of the bloc has shown a 2.7% increase in the new member states’ per capita growth rate (Cieślik and Turgut, 2021).

However, Ukraine’s case is quite different from the accessions seen before. Its economy is much more reliant on agriculture and extraction than the A8 countries that joined in 2004. Additionally, the war with Russia has seriously damaged its potential output and shaken its social structure. Thus, understanding potential impacts of Ukraine’s accession in the medium-run requires a detailed, country-specific analysis. For the sake of simplicity, this article assumes the optimistic scenario where Ukraine preserves its pre-war territorial structure.

Reconstruction and recovery

One of Ukraine’s key economic challenges will be post-war reconstruction. It is estimated wartime damage and losses have already surpassed $400bn (WB, 2023), a figure that can only keep growing as the conflict continues. Thus, if EU accepts Ukraine as a member, it will likely play a big part in rebuilding initiatives. Financing of the investments would take place through the Ukraine Facility, which would include grants and donations from other member states.

Kiev School of Economics

The main focus of the platform would be infrastructure and housing investment. However, EU representatives have also stated the need to accelerate Ukraine’s energy transformation, with the idea of “building back better” at the top of their spending agenda. At the moment, Ukrainian economy is nearly three times more carbon-intensive than the EU (UNECE, 2023); its National Recovery Plan estimates that to complete the zero-carbon transition, it will need $114bn over 2024-32. Besides making Ukraine greener, this spending would help it become more economically independent and reduce its energy costs, supporting future development.

However, the bloc’s ambitious plans regarding decarbonisation might backfire on the Ukrainian economy. If green transformation remains included as a criterion to unlock more funds, the pressure to complete the Green Deal might compromise the country’s economic recovery. The outcome of those efforts, therefore, will depend on how much financial support the EU offers to Ukraine.

Foreign direct investment

Besides obtaining financing from the EU institutions, Ukraine will also need to attract investment from private companies. A recent GMFUS report estimates that over the next 15 years it will need $180bn of foreign direct investment (Eisen et al., 2023) – with the average yearly inflow in 1992-2022 being only $3.3bn, European integration could play a significant role in Ukraine securing those funds.

Ever since gaining independence, Ukraine has faced major issues with attracting business from abroad – companies have been reluctant to invest there due to the unstable political and regulatory environment, unfavourable economic conditions and prevalent corruption. Investment inflows have fluctuated with events such as the 2006 parliamentary crisis, the 2013-14 Maidan Uprising and the onset of the Covid-19 pandemic. Additionally, investment has been purposefully prevented by Ukrainian legislation – for instance, from 2001 to 2021, sale of agricultural land was forbidden. To this day, the ban remains in force for foreign companies.

As its western neighbours who joined the EU in 2004 and 2007, Ukraine possesses advantages that could attract FDI. Its cheap labour (only one EU member – Croatia – has a lower nominal labour cost),¹ abundant land (it is the largest European country after Russia) and wide underserved consumer market offer great profit opportunities to potential investors. Gaining access to the European Single Market would allow Ukraine to harvest these advantages, significantly affecting foreign investment – for the existing EU members, bloc membership has increased their FDI inflows by 60-83% (Bruno et al., 2020). In case of Ukraine, such improvement could be a make-or-break for its economic recovery. Given that savings made up barely 13.1% of Ukraine’s 2021 GDP – much below EU average of 26.2% (World Bank, 2023c) – additional FDI would provide the country with the funds necessary to boost its capital expenditure and fuel growth.

Free trade

Membership in the European Union is typically associated with access to its free trade area. However, Ukraine has already experienced most benefits of trade liberalisation with the EU. Since the start of the Deep and Comprehensive Free Trade Agreement in 2016, tariffs on the EU-Ukraine border have been gradually lifted by both sides: as of 2020, the EU has removed 98.1% and Ukraine 99.1% of their respective import duties (EC, n.d.-a).

However, EU accession can still benefit Ukrainian exporters and importers. Firstly, it would impact trade through abolishing technical barriers– the so-called “red tape”. Harmonising quality standards in production of goods (in particular industrial goods) would allow more of them to be freely exchanged. Secondly, liberating the trade of goods that are still under tariffs – agricultural goods² – would mean a big boost for Ukrainian exports. In 2021, Ukraine exported $7.7bn in farm produce to the EU (USDA, 2022) – abolishing tariffs would dramatically increase this.

While the EU accession might prove helpful in boosting Ukraine’s exports, it must be remembered that it is not a necessary criterion for Ukraine to liberalise trade with the bloc. The same effect can be achieved through free trade agreements, such as the DCFTA or the currently negotiated ACAA deal, which aims to reduce non-tariff barriers for trade in industrial goods.

Common Agricultural Policy

Lastly, Ukraine would be heavily affected by joining the EU’s agriculture support scheme. The (in)famous Common Agricultural Policy supports the Union’s primary sector through three channels: intervening in commodity markets to prevent price fluctuations, providing income support to farmers and donating funds to rural development programmes. All of those would mean significant inflows into Ukrainian agriculture. However, it is specifically income support – the largest part of the CAP budget amounting to €43.81 billion in 2019 (EC, n.d.-b) – which would have the greatest impact on the new member’s economy.

Distribution of payments in CAP income support is based on each country’s and firm’s total acreage – it is divided proportionally, which tends to benefit large agricultural producers. This means that Ukraine, often dubbed “the breadbasket of Europe”, would become the single biggest beneficiary of the CAP. It has nearly twice as much arable land as France, EU’s current agricultural leader. Therefore, Ukrainian farms would receive billions of euros in income support – but from the microeconomic point of view, the scheme could have a devastating impact on the country’s market structure. A lion share of proceeds from the programme would go to three Ukraine’s oligopolists: Kernel (558,000 ha), Ukrlandfarming (470,000 ha) and MHP (368,000 ha) (BrandStory, n.d.). Needless to say, additional funds would allow them to consolidate their power, harming the free-market mechanism. Moreover, it could potentially cement Ukraine’s political system: all three companies are controlled by influential businessmen, commonly portrayed as the country’s oligarchs and accused of top-level corruption.

However, if Ukraine fulfils its ambition of joining the EU, it is unlikely that the CAP will remain in its current form. Its accession would mean a massive imbalance in the programme, diverting a major part of its budget away from other member states and forcing increased financial contributions. Therefore, the EU would be expected to reform the way CAP works, strengthening its focus on promoting sustainable farming and tackling rural poverty.

Conclusion

To conclude, securing the EU membership should be overall expected to benefit Ukraine. More complete access to the European Single Market, significant reconstruction funds from the bloc, improved incentives for FDI donors and donations from the CAP would stimulate the economy, supporting post-war recovery and unlocking previously restrained growth potential. However, the specific impact of each of those factors is difficult to estimate; they are also likely to bring some repercussions, such as increased risk of negative spillovers from developed economies. Similarly, the extent of positive changes would depend on other member states’ efforts, especially the level of their contributions to the reconstruction schemes.

It is also worth mentioning that the accession process might change the Ukrainian economy much more than the EU membership itself. To be accepted into the bloc, Ukraine first has to tackle some of its structural issues, including prevalent corruption, lagging financial sector and inefficient administrative procedures. In the process of addressing those problems, it will improve functioning of its private and public sector, which will translate to higher rates of economic growth. Therefore, Ukraine might benefit from the reforms long before joining the Union.

Lastly, on a pessimistic note, the fact that Ukraine has started the accession procedure does not necessarily mean that it will complete it successfully. While it is currently enjoying almost unequivocal support from the member countries, there is still some significant opposition from the Hungarian government led by the Victor Orbán. As time passes, it is becoming more and more likely that other countries will join the boycott – resentment towards the Ukrainian case will build up as the voters start to see its (real or imaginary) downsides. Moreover, with the Western support wavering, the risk of Ukraine losing its defensive war against Russia increases – this poses another, very tangible threat to its prospects of EU membership.

So what future awaits the Ukrainian economy? Time will bring us the answer.

ARC2020 (April 3, 2023). Ukraine Joining the EU – An Elephant in the Room. Available online (accessed 29 Dec. 2023).

Aris, B (June 23, 2023). The history of Ukraine’s FDI. Available online (accessed 29 Dec. 2023).

Boyarchuk, D. (2023). Economic priorities in post-war Ukraine. Available online (accessed 29 Dec. 2023).

Brand Story (n.d.). Latifundists 2021*. Ukraine’s TOP 20 Largest Agricultural Holdings. Available online (accessed 29 Dec. 2023).

Cieślik, A. and Turgut, M.B. (2021). Estimating the Growth Effects of 2004 Eastern Enlargement of the European Union. Journal of Risk and Financial Management, 14(3), p.128. doi: here.

Eisen, N., Kirkegaard, J., Kleine-Brockhoff, T., Rudolph, J. and Stokes, B. (2023). New Ideas and Recommendations Toward for Ukraine a Marshall Plan. Available online (accessed 29 Dec. 2023).

European Commission (n.d.-a). EU-Ukraine Deep and Comprehensive Free Trade Area. Available online (accessed 29 Dec. 2023).

European Commission (n.d.-b). Common agricultural policy funds. Available online (accessed 29 Dec. 2023).

European Commission (n.d.-c). The common agricultural policy at a glance. Available online (accessed 29 Dec. 2023).

ILOSTAT Explorer. Mean nominal hourly labour cost. ISIC-Rev.4: Total. Available online (accessed 29 Dec. 2023).

Kiev School of Economics (2023). During the year of the full-scale war, the total amount of damages caused russia to Ukraine’s infrastructure has reached almost $143.8 billion. Available online (accessed 29 Dec. 2023).

Luca, R., Nauro, B., Campos, F. and Estrin, S. (2020). The Effect on Foreign Direct Investment of Membership in the European Union. Available online (accessed 29 Dec. 2023).

Moens, B. (June 22, 2023). Inside Ukraine’s First Day as an EU Member. Politico. Available online (accessed 29 Dec. 2023).

National Recovery Council (2022). Ukraine’s National Recovery Plan (presentation in English). Available online (accessed 29 Dec. 2023).

NationMaster (2021). EU Arable Land Area.NationMaster. Available at: https://www.nationmaster.com/nmx/ranking/arable-land-area.

United Nations Economic Commission for Europe (2023). Rebuilding Ukraine with a Resilient, Carbon-Neutral Energy System. Available online (accessed 29 Dec. 2023).

United States Department of Agriculture (2022). Ukraine Agricultural Production and Trade. Available online (accessed 29 Dec. 2023).

World Bank (2023a). Ukraine Rapid Damage and Needs Assessment February 24, 2022 – February 24, 2023 (RDNA2). Available online (accessed 29 Dec. 2023).

World Bank (2023b). Foreign direct investment, net inflows (BoP, current US$) – Ukraine. Available online (accessed 29 Dec. 2023).

World Bank (2023c). Gross savings (% of GDP). Available online (accessed 29 Dec. 2023).

Cover image: Evgeniy Petkevich from Pexels.

1. Data for EU countries comes from 2022; due to the lack of newer entries, data for Ukraine comes from 2018. ↩
2. At the moment abolished, but only temporarily (as a part of EU’s wartime support scheme). ↩