The Ukrainian and Russian parliaments ratified an agreement, at the end of April, to create a free-trade Unified Economic Area (UEA). The pact, tying the two fast-growing economies more closely together, has forged the European Union of the east.

The agreement is the latest in a long line of attempts to more closely integrate the economies of eastern Europe, starting with the creation of the Commonwealth of Independent States (CIS) by Boris Yeltsin shortly after the death of the Soviet Union.

But the CIS and its successors, such as the Customs Union, have met with little success. This time round the participating counties are more optimistic.

“Yeltsin started out with a similar idea at the start of independence with the CIS, but relations quickly got bogged down by fighting over gas prices,” said Alexei Moisseev, head of Renaissance Capital’s recently launched Ukrainian research desk. “The jury is still out on this latest initiative, but [President Vladimir] Putin is clearly serious about building better economic ties with the former Soviet republics.”

The presidents of the four participating countries – Russia, Ukraine, Belarus and Kazakhstan – signed off the agreement in September, but the UEA had little meaning until ratified by Russia and Ukraine, by far the two largest economies in the group.

Quiet apart from their shared Soviet-legacy, Russia and Ukraine’s fate has become closely intertwined since the early 1990s. Russian companies are big investors in Ukraine’s economy, which surged by 9.3% in 2003 and 11.8% in the first quarter. Ukrainian companies export one-third of their goods to Russia and the UEA will further boost trade.

The UEA unites the customs territories of the member countries and allows the free movement of goods, services and capital. The participating countries hope the increase in trade will more than compensate for the loss of customs duties; trade turnover between Russia and Ukraine was already up by one-third over the first three months of this year.

“There will be certain expenses in the budget and they won’t be insignificant,” Russia’s Mr Putin said in May at a meeting with Ukrainian Prime Minister Viktor Yanukovych. “However, the effect of expanding co-operation will be sufficiently positive as to cover the budget losses.”

The UEA is just a first step for Russia in building a closer economic alliance with Ukraine, clearly modelled on the European Union. The agreement also includes proposals for common external trade agreements, as well as coordinated tax, monetary and exchange rate policies.

However, there is still a lot to do as relations between Kiev and Moscow remain prickly. Russia’s main oil and gas export pipelines to western Europe run through Ukraine and have been the subject of constant bickering between the two countries. Ukraine also depends on Russian gas for its energy needs, but has run up huge unpaid bills during the transition. Under Mr Yeltsin, the Kremlin regularly used the bills to hold Kiev to ransom for political goals.

Mr Putin says that he is working to smooth out Russia’s relations with Ukraine. Since he took over as president in 2000 Russian foreign policy has made a sharp turn towards conciliation with its former vassal states, as Mr Putin tries to pull the countries of the former Soviet Union together into an economic bloc that will counter the power of the EU, Russia’s biggest market.

Russia has been working through the issues one by one. In April the state-owned gas giant Gazprom announced it was close to an agreement with the Ukrainian national oil and gas company, Naftohaz Ukrainy on the transfer of $1.4bn worth of Eurobonds as payment for outstanding energy bills.

And the timing is perfect as Ukraine apparently throws off the economic misery that has plagued the country for the last decade.

“There is a lot of opportunity there,” said Mr Moisseev. “We believe that Ukraine is going to follow the same path of rapid growth as Russia, but is currently only at the same stage of development as Russia in 1999.”

The leaders are due to meet again at a Crimean summit planned for the last 10 days in May that will bring an end of the first stage of building the eastern common market.

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