The Ukraine-Russian trade deal puts Kiev firmly in the hands of Moscow

Viktor Yanukovich

On December 17, 2013, Russia agreed to give US$15 billion in economic aid to Ukraine and significantly cut the price on natural gas exported to Ukraine. The deal will have considerable political connotations and most likely draw Ukraine more closely to Moscow.

Ukrainian president Viktor Yanukovich made yet another surprising manoeuvre in signing a trade deal with Russia on December 17. This will probably not come as a complete surprise in European capitals considering the failure of the last round of negotiations between Brussels and Kiev. But it will nevertheless come as a personal embarrassment to Catherine Ashton, who gave her assurances to Russian Foreign Minister Sergei Lavrov that the potential EU-Ukraine trade deal would not undermine Moscow’s interests.

It is no coincidence that the deal between Kiev and Moscow came soon after the EU failed to reach an agreement with Ukraine. In economic terms, Europe was not ready to offer what Moscow was able and willing to give. It was an offer that Kiev could not refuse. Under the new circumstances arising from the Russia-Ukraine trade agreement, it is less important whether Yanukovich’s attempt to renegotiate the Association Agreement with the EU was only a manoeuvre to abate domestic political pressure, or an honest attempt to try to make the most out of both sides.

The Kremlin promised an immediate $15 billion in economic assistance to the faltering Ukrainian economy and slashed the price of natural gas, which much of Ukrainian industry depends on, from $400 to $268 per 1000 cubic meters. This is far below the price that any European country is paying for Russian gas, and it gives a good indication of how important a deal is for Kremlin.

The initial response from the markets was positive. The yields on Ukraine’s dollar-denominated note plummeted as a response and significantly reduced the potential default scenario and IMF bailout prospects, otherwise expected in the next six months. Moody’s rates Ukrainian government bonds Caa1, making them the lowest rated in Central and Eastern Europe. Continuous political protests that have now lasted for more than two weeks have caused the economy to deteriorate even further. Consequently, despite the short-term benefits from the money injection, the move will most certainly postpone the inevitable economic reforms that Kiev would have had to implement if the country was forced to ask the IMF for help. Simultaneously, the deal will also put a heavy burden on Russia’s finances.

The million-dollar question now is how this deal will affect both the future ties between Ukraine and the West, and whether Yanukovich will manage to take advantage of the economic benefits that will arise from this deal to calm down the rising domestic opposition, which is firmly against closer ties with Moscow.

Regardless of the fact that both Putin and Yanukovich denied Ukraine’s future participation in the Russian sponsored Eurasian Customs Union, it is highly likely that Russia’s economic help will come with a heavy price to Ukraine’s political and economic sovereignty, and inevitably make the country’s potential Euro-integration process much harder. Hard numbers will also make it more difficult for Ukraine’s opposition to continue with fierce public resistance to Yanukovich’s regime.

Time will tell whether Europe and the West missed their chance to draw Kiev closer, but Ukraine’s case shows yet again that the EU’s enlargement process with the stick and carrot approach has reached its limits. It is highly unlikely that both Washington and Brussels will risk their Moscow relations over Ukraine, and we can expect the West to abstain from any major political initiatives regarding Ukraine in the near future.

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Categories: Economics, Europe

Author:Dr. Ante Batovic

Ante is a foreign policy and energy analyst. Previously he was a lecturer in International History at the University of Zadar where he specialised in Cold War and East European history. He was a visiting fellow at the LSE IDEAS centre and the fellow of the Robert Schuman Foundation in the European Parliament. He holds a Masters degree in Global Politics from the London School of Economics and a PhD in History from the University of Zadar. He is an experienced researcher interested in foreign policy, political economy and energy.

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