A long-awaited summit intended to bring Ukraine into Europe's mainstream foundered when the European Union said it would not sign a landmark political and trade deal until Kiev resolved the case of jailed opposition leader Yulia Tymoshenko.
All technical questions for an association agreement had been solved, but the pact would remain unsigned and so unratified until Tymoshenko's jailing was resolved, visiting EU leaders said.
Though President Viktor Yanukovich emphasised that EU membership remained a long-term aim, the outcome of the Dec. 19 summit raised uncertainty about how the ex-Soviet republic would confront a looming balance of payment crisis.
The government, having balked at raising the price of household gas to plug a budget deficit, has failed to persuade the International Monetary Fund to resume a $15 billion loan programme.
Ukraine had reasoned that if it could get a lower price from Russia - its main supplier of natural gas - it would be spared from raising the price that consumers pay at home.
With political tension high over Tymoshenko's jailing and a parliamentary election due next October, raising prices would be tantamount to political suicide since the vast majority of Ukraine homes are heated .
So Mykola Azarov, Yanukovich's dour, hard-nosed prime minister, has been pressing Russia to bring the price down from a high-end $400 per thousand cubic metres to plug the deficit. However, he and Russian Prime Minister Vladimir Putin failed to achieve a breakthrough in talks on Dec. 21.
On Dec. 22 the Ukrainian parliament reluctantly approved a 2012 budget based on an unchanged pricing formula for its gas imports.
There is a constant drumbeat from Russia that it is ready to offer Ukraine an easier relationship in the shape of cheaper gas if it binds its economy more closely to Moscow. But so far Kiev is resisting entreaties to join a Russian-led customs union.
Despite refusing point-blank to raise household gas prices during talks with the IMF, Kiev faces a balance of payments crisis and little investor appetite for its debt.
That means it will need a fresh slice of IMF cash soon unless the global economy quickly improves or Russia comes up with an acceptable offer for cheaper gas.
Azarov now concedes that the global slowdown will have a major impact on vital export industries. He has cut his government's forecast for economic growth next year to about 4 percent from an earlier estimated 5.5 per cent.
Ukraine's economy is dominated by steel exports, making it volatile to changing global demand, and the EU, which might be heading towards recession, is one of its main export markets.
Trying meet the IMF half-way - by reducing the bloated pensions sector, raising the retirement age for women and implementing a more rigorous tax regime for small and medium-sized businesses - has brought anger from large sections of the population.
One person died in the large mining town of Donetsk in late November when police broke up a tent sit-in by survivors of the 1986 Chernobyl nuclear accident who were protesting over cuts to their special pensions.
The IMF's stand-by programme is a big factor in allowing Ukraine to borrow on the international debt markets at a relatively low price.
Under the deal with the Fund, Ukraine is to receive credits worth $15 billion over two and a half years, which could be a valuable spur for renewed investor interest. The programme is key to the government's efforts to revive its economy after a 15 percent contraction in 2009.
What to watch:
- Will the government, after all, raise energy prices for households?
- Possible resumption of talks with the IMF.
- Signs of a New Year gas agreement with Russia.
- Signs of strain on the economy because of high gas prices under the current agreement.
- Renewed pressure by Moscow for a gas merger between Russia's gas giant Gazprom and Ukraine's state energy firm Naftogaz.
- Pressure from Moscow over control of Ukraine's gas transit pipeline structure.
THE TYMOSHENKO EFFECT
The prosecution of former prime minister Tymoshenko for exceeding her authority by brokering the 2009 gas deal with Russia, has turned into a PR disaster for the Yanukovich team.
Tymoshenko, whom Yanukovich narrowly beat for the presidency in 2010, was sentenced to seven years in prison in what she described as a "lynch" trial.
Despite pressure from the EU and the United States Yanukovich has refused to intervene to secure her release and prosecutors have been piling up more and more charges against her for alleged misdeeds going back to the 1990s.
At the Dec. 19 summit in Kiev, European Council President Herman Van Rompuy told Yanukovich: "Our strong concern is primarily related to the risks of politically motivated justice in Ukraine. The Tymoshenko trial is the most striking example."
Yanukovich's opponents say the Tymoshenko trial shows that old-style authoritarianism is on the rise under his rule. The EU and the United States have urged him to honour his pledges to defend democracy and a free press.
On Dec. 22 she abandoned her appeal against the conviction, a court case her lawyers branded a "farce". What to watch:
- After international pressure, will Yanukovich relent and bring about Tymoshenko's release from jail?
- Could her plight stir mass protest like that of the Orange Revolution of 2004 ?
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