Russia Offers Ukraine A Financial Lifeline

MOSCOW, Russia -- Playing a trump card in his diplomatic contest with the West over Ukraine, President Vladimir V. Putin said Tuesday that Russia would come to the rescue of its financially troubled neighbor, providing $15 billion in loans and a sharp discount on natural gas prices.

President Viktor F. Yanukovich of Ukraine (L), and President Vladimir V. Putin during a signing ceremony Tuesday in Moscow.

It was a bold and risky move by Russia, given the political chaos in Ukraine, where thousands of anti-government protesters remain encamped in Independence Square in Kiev, the capital.

For the moment, however, Mr. Putin seemed to gain the upper hand over Europe and the United States in their contest for influence.

There was no discussion of what Russia might receive in return for its assistance.

Protesters in Kiev have been deeply worried that President Viktor F. Yanukovich would cut a secret deal to join a customs union that Russia has established with Belarus and Kazakhstan.

That would largely preclude any possibility of reviving the accords with Europe, but Mr. Putin said the subject had not come up.

In Independence Square, where the large crowd was bolstered by people coming out of work, the initial reaction appeared to be a mix of fury and dismay, with people chanting, “Out with the crook!”

Leaders of the three opposition parties who are coordinating the protest said the demonstrations would continue.

They also voiced suspicions about what Mr. Yanukovich had offered in exchange for a Russian bailout.

“Free cheese is only found in a mousetrap,” Arseniy P. Yatsenyuk, the leader of the Fatherland coalition in Parliament, said in a speech.

He asked for the patience of protesters — a tired and haggard lot now after 17 days of occupying the square, with a tent encampment and fires burning in barrels to keep people warm.

Mr. Yatsenyuk asked the protesters to persevere, and said he was sure they would not give up.

Addressing the Russian president, he said, “Dear Vladimir Vladimirovich, this time you mistook my people for yours.”

Mr. Yanukovich, whose political fortunes have appeared bleak in recent days, praised Mr. Putin’s leadership.

“I will say openly: I know that this work wouldn’t have been done at this optimal speed if not for the Russian president’s political will,” he said.

While the implications for the protest movement were not immediately clear, Mr. Putin’s announcement, at a meeting at the Kremlin with Mr. Yanukovich, substantially alters the political landscape.

It throws Mr. Yanukovich an economic and political lifeline that will spare him for now from negotiations with the International Monetary Fund, Europe or the United States.

Ukraine, a former Soviet republic of 46 million people, has long been caught in the middle of battles between greater powers to the East and West.

Mr. Yanukovich has repeatedly sought to play each side against the other, often infuriating both and coming across as a vexing and untrustworthy partner.

The country has been grappling with a deepening financial crisis that only worsened after Mr. Yanukovich announced abruptly last month that he would not sign political and free-trade agreements with the European Union that had been in the works for years.

Mr. Putin said that the money to aid Ukraine would come from Russia’s hefty reserve funds, and that the price of gas sold by Gazprom, the state-controlled energy behemoth, would be dropped to $268.50 per 1,000 cubic meters — less than the $380 Western Europe pays for Russian gas — from between $395 and $410, saving Ukraine $2 billion a year.

For Mr. Putin, outmaneuvering the effort by European leaders to draw Ukraine westward is the latest in a string of deft foreign policy moves that have served to re-establish Russia as a major power.

These include Russia’s proposal to disarm Syria of chemical weapons, which precluded an American military strike.

At the same time, Mr. Putin’s ability to announce a major bailout of Ukraine highlighted the contrasts with the West, where a rescue plan on such a scale would typically require protracted debate and negotiation.

In Russia, it is a decision that Mr. Putin, in consultation with a close coterie of aides, can make himself.

But there are risks for Russia in the deal, and the possibility remains that Mr. Putin may come to regret his decision.

Should the Ukrainian economy continue to deteriorate, the country might find itself facing default again in the not-to-distant future, experts say, confronting Mr. Putin with an even larger headache.

The exposure of Russian banks and other businesses to the Ukrainian economy is estimated at some $40 billion.

But those potential problems were not on the agenda Tuesday in Moscow, where Mr. Putin stressed the differences in approach between Russia and the West, which he often accuses of meddling.

“With the goal of supporting the budget of Ukraine, the government of the Russian Federation made the decision to issue in bonds from the Ukrainian government part of its own reserves from the National Welfare fund in the amount of $15 billion,” Mr. Putin said, seated next to Mr. Yanukovich.

“I want to bring your attention to the fact that it is not connected with any conditions, not connected with the increase, decrease, or freezing of any social standards, pensions, subsidies, or salaries. And I want to calm everyone down, today we did not discuss the question of Ukraine’s accessions to the customs union.”

It was not immediately clear if Russia’s investment in Ukrainian debt would be legal, under Russia’s own requirements for the management of its sovereign funds.

The Ministry of Finance, in a description of the National Welfare Fund, stipulates that foreign issuers of debt “must have a long-term credit rating no lower than AA by Fitch or Standard & Poor’s.”

Ukraine’s is now rated B- by each of those agencies.

Mr. Putin’s description of the rescue package provided a stark contrast to the I.M.F., which had offered help to Ukraine but was in turn demanding major macroeconomic reforms, including a reduction in domestic gas subsidies and some tough austerity measures.

International financial experts have said those conditions were crucial to ensuring that Ukraine would be able to solve its economic problems and not need another bailout within a short amount of time.

Many of the conditions, however, were politically unappetizing to Mr. Yanukovich, who is expected to seek a second term in elections scheduled for a little more than a year from now.

The decision to help Ukraine, without immediately demanding any commitment for joining the customs union or any other evident quid pro quo, not only secured Russia’s continued sway but also positioned Mr. Putin to further chastise Western officials for their aggressive efforts to support the anti-government protesters.

Senior Western diplomats, including Victoria Nuland, an assistant secretary of state, the German foreign minister, Guido Westerwelle, and Catherine Ashton, the European Union’s foreign policy chief, have all been in Kiev in recent days and expressed support for the demonstrators.

They have urged Mr. Yanukovich to listen to the protesters’ demands and revive talks with Europe.

On Sunday, Senator John McCain, Republican of Arizona, whose strong views on what he has deemed Russian foreign policy aggression and human rights abuses draw close attention in Moscow, appeared onstage in Independence Square, where he told hundreds of thousands of demonstrators that the United States stood with them. 

Russia had maneuvered aggressively to derail Ukraine’s accords ahead of a European Union conference in Vilnius, Lithuania, last month, where Mr. Yanukovich was expected to sign them.

The Kremlin threatened draconian economic sanctions that could have devastated Ukraine’s already battered economy.

Mr. Putin and other senior Russian officials, however, had insisted that they were merely pointing out necessary steps that Russia would take to protect its own economic interests.

They accused Western powers of interfering in Ukraine’s affairs after refusing to accept that Russia had won by making a persuasive case.

European leaders were visibly angry with Mr. Yanukovich during the conference in Vilnius last month, with Chancellor Angela Merkel of Germany at one point telling him, “We expected more.”

Mr. Putin, too, has reportedly been irate with Mr. Yanukovich, apparently finding him untrustworthy and disapproving of his handling of the recent street protests, which seemed to swirl out of control.

On Tuesday, Mr. Yanukovich flew to Moscow from Ukraine, where protesters also gathered near the airport in a bid to remind the president of their preference for closer ties with Europe.

The unrest in Ukraine, which was further animated by a violent crackdown by the police on demonstrators on Nov. 30, has largely been driven by a sense of betrayal among protesters who had been assured by Mr. Yanukovich that their country was drawing closer to Europe politically and economically.

Mr. Yanukovich has insisted that Ukraine will ultimately move toward Europe and would even consider signing the accords at a later date.

But over the weekend a senior European Union official said those discussions had been cut off.

By offering Ukraine lower gas prices, Russia eases its neighbor’s immediate cash crunch, but also maintains the ability to cut off the help, almost literally with the turn of a spigot.

Mr. Putin acknowledged that gas prices remained a point of contention.

“We consider that this is also a temporary solution, having in mind that the long-term agreements should and will be reached,” he said.

“This concerns the delivery of gas to Ukraine. This concerns the securing of uninterrupted deliveries to our consumers in Europe.”

Source: The New York Times


Igor Skakovsky said…
The most likely scenario for pay back to Russia will be Ukraine's alliance with Russia on foreign policies, and selling 50% stake in Ukrainian Gas pipeline and allowing Russia to manage the Gas transportation system. Perhaps it is a solution but, if there is a chance to avoid such scenario Ukraine will be much better off in long run.