As Ukraine starts its formal talks to join the EU, one of the thorniest issues that needs to be dealt with is Ukraine’s entitlements to agricultural subsidies under the Common Agricultural Policy that by itself accounts for a third of the EU’s entire budgetary spending.

Ukraine’s agricultural sector is huge and able to swamp the rest of Europe’s agricultural businesses due to the fertility of its chernozem (black earth) soil and the cheapness of its labour.

According to one estimate, Ukraine will be entitled to €186bn in subsidies if it becomes a member, with aid for the agricultural sector making up the lion’s share. That will drastically alter the makeup of the EU’s budget and result in countries like Poland and Hungary going from being net beneficiaries of EU spending to net contributors. As bne IntelliNews reported, Ukraine cannot join the EU unless CAP is reformed.

“All member states will have to pay more to and receive less from the EU budget; many member states who are currently net receivers will become net contributors,” concluded the paper by the secretariat of the EU council, as cited by the Financial Times.

The power of Ukraine’s agricultural exports has already been demonstrated after Poland and several other Central European countries banned imports of Ukrainian grain after they collapsed the local grain markets in April and made many Polish farms loss-making.

Poland has already proposed blocking Ukrainian agricultural exports to the EU for 20 years after Ukraine joins the EU, Poland’s Deputy Minister of Agriculture Michal Kolodziejczak said in an interview on December 17.

"Ukraine’s accession to the EU is not beneficial for Polish farmers, we must protect our interests and say that agricultural products from Ukraine should not enter Poland for, for example, 20 years after Ukraine’s accession to the EU.”

A new study by the Institute of German Economics (IW) has put a lower estimate on the cost of bringing Ukraine into the CAP scheme. IW suggest that after joining the EU, Ukraine could receive agricultural subsidies ranging from €70bn to €90bn, but even that would make it the largest recipient of agricultural support in the EU.

To put that into context, the current Extended Fund Facility (EFF) from the International Monetary Fund (IMF) is a four-year funding package worth $15.6bn. Likewise, the current EU macroeconomic stability support programme is worth a total of €18bn a year. And the latest Kyiv School of Economics (KSE) estimate of the physical damage done after almost two years of war with Russia is about $150bn, slightly less than the estimated nominal value of Ukraine’s GDP in 2023 of $173bn, according to the EU. Potentially, the CAP subsidies will be enormous.

“The financial implications of Ukraine's potential full membership in the EU, encompassing the Multiannual Financial Framework (MFF) for 2021-2027, are projected to be in the range of €130 to €190bn. The exact figures depend on assumptions regarding the extent of arable land and the country's population,” IW said. “A substantial portion of this funding, between €70 and €90bn, is earmarked for agricultural subsidies, while an additional €50 to €90bn is allocated to cohesion policy.”

If the accounting works out like this then the amount of financial support headed Ukraine’s way would mean it overtakes France as the biggest recipient of EU funds, currently the largest beneficiary with €65bn a year, according to IW.

“The prospect of Ukraine becoming the primary recipient raises concerns among some EU member states, with Hungarian Prime Minister Viktor Orban expressing apprehension. Orban fears that the admission of Ukraine into the EU could lead to a redirection of Central European aid, potentially leaving countries like Hungary with reduced financial support from the bloc,” IW points out. Several other countries that joined the EU in 2003 are also apprehensive of losing their benefits. Part of the reason Poland has flourished since it became a member of the EU is that it has received between €9bn and €11bn every year since from the EU coffers and that would end after Ukraine becomes an EU member.

The practical upshot of these calculations is that the EU budget, the cohesion funds and the CAP payments will almost certainly be reformed to redistribute the burden more evenly amongst the member states. At the same time, it is likely that an extensive system of subsidies will be trashed out to ease the pain on those countries that are currently net beneficiaries. And this process of difficult negotiations is expected to take years to complete.

The other two EU candidates that have recently been set on the accession path, Moldova and Georgia, are both small, not very populous and have small agricultural sectors. It is Ukraine’s size that makes its membership so daunting.

“Given these sums, the EU should be ready to reform. Only in this way can the political decision to bind Ukraine more closely to itself with the prospect of accession be credible,” IW concludes. “A shift in the EU budget could help provide the necessary financial resources.”

IW highlights reforming the cohesion policy first – money given to countries to upgrade their infrastructure to EU standards. Since a primary goal of European cohesion policy is to support less developed regions, a redeployment would be logical if it expands to include Ukraine. IW suggests narrowing the definition of who is entitled to cohesion funds and in effect ruling that the more advanced like Germany have “finished” their investments. The MFF is due for review anyway ahead of setting the new programme for 2028 to 2034.

“If European cohesion policy were to shift to a concentration model, where cohesion spending is limited to poorer member states, around €140bn in funding would be available over the seven-year period of the current MFF,” IW says. “A reallocation of cohesion policy would therefore make a significant contribution to covering the costs of Ukraine joining the EU.”

Despite all the justified criticism of a concentration of European cohesion funds, it is important to take this potential into account, for example when drawing up the next opportunity during which an enlargement of the EU could occur.