Ukraine's relations with the European Union have deteriorated under President Viktor Yanukovich while his rapprochement with Russia has failed to yield any tangible benefits for the former Soviet republic's economy.
The EU shelved agreements with Ukraine on political association and free trade after the conviction last October of former Prime Minister Yulia Tymoshenko, Yanukovich’s fiercest opponent.
A number of European leaders snubbed a regional summit in Ukraine in May, prompting Kyiv to put off the event. They also called for a political boycott of the European soccer championship which Ukraine co-hosts in June and July.
Russia, meanwhile, has refused to review a gas supply deal with Ukraine which, according to Yanukovich’s government, sets an exorbitant price for the fuel.
Instead, Moscow has put pressure on Kyiv to join its customs union with Belarus and Kazakhstan and pressed ahead with new gas pipelines bypassing Ukraine, diminishing its importance as the main transit agent between Russia and Europe.
IMF, GAS AND ELECTIONS
Ukraine’s agreement with the International Monetary Fund, signed half a year into Yanukovich’s term which began in February 2010, has been on hold since early 2011 after his government refused to raise gas and heating prices for households for fear of losing public support.
Analysts say Kyiv may raise prices, paving the way for renewed IMF lending, only after parliamentary elections in October because doing so earlier would be political suicide.
In March, Ukraine jolted the debt market by saying it wanted to restructure $3 billion in IMF loans falling due this year, although the government has since discarded the idea.
In a de facto launch of the election campaign, Yanukovich announced a $3 billion spending package in March which his government says will boost domestic demand to compensate for deteriorating external conditions.
The package includes increases to pensions and other handouts, subsidised mortgages and compensation to depositors of the Soviet Union’s state savings bank whose wealth was wiped out by hyperinflation.
However, some observers have questioned the government’s ability to finance additional expenditures at a time when macroeconomic forecasts are likely to be revised downwards.
What to watch:
– How will Yanukovich’s Party of the Regions fare in the October elections?
– How will Western monitors assess the poll?
– Signs of a new gas agreement with Russia and concessions attached to it such as Gazprom taking over Ukraine’s gas transit pipelines or Kiev joining the Moscow-led customs union.
– Will the government, after all, raise energy prices for households?
The lack of IMF financing makes Ukraine, whose economy depends heavily on exports of commodities, more vulnerable to external shocks such as a potential euro zone meltdown.
Economic growth has already slowed down significantly, with gross domestic product rising just 1.8 percent in the first quarter, down from 5.4 percent in the same period of 2011.
Businessmen in Ukraine complain about increased pressure from tax collectors who no longer allow companies to carry forward previous years’ losses, defying commonly accepted international practice.
Analysts are also questioning the idea of a luxury tax suggested by the government, saying it is unlikely to fetch significant sums with most private wealth sheltered by offshore companies.
What to watch:
– Possible resumption of talks with the IMF.
– Indications that the government is having trouble meeting its borrowing plans, which could translate into debt repayment issues.
The prosecution of former prime minister Tymoshenko for exceeding her authority by brokering the 2009 gas deal with Russia, has turned into a public relations disaster for the Yanukovich team.
Tymoshenko, who lost narrowly to Yanukovich 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 piled more and more charges against her for misdeeds they say go back to the 1990s.
European leaders have warned Yanukovich his country risks isolation and German Chancellor Angela Merkel has called Ukraine a dictatorship, likening it to long-time political outcast Belarus.
Europe’s outrage was further fuelled by Tymoshenko’s allegations that prison guards had beaten her in April, a charge authorities deny.
Hearings into Tymoshenko’s appeal against the abuse-of-office conviction and sentence are set to resume on June 26.
Tymoshenko was moved from prison in the city of Kharkiv to a state-run hospital in the same city where she is being treated for chronic back pain under the supervision of German doctors following a deal between Berlin and Kiev.
But one of the doctors has said a lack of privacy could jeopardise the treatment.
What to watch:
– Will the court overturn Tymoshenko’s conviction in a surprise ruling?
– What other means of pressure could the West use against Yanukovich?
– How will Ukraine react to barrage of criticism?