First, President Viktor Yanukovych confirmed in a TV address yesterday
that he will travel to the Eastern Partnership Summit in Vilnius, Lithuania, but
that he would only sign the association and free trade agreement when it was
economically right for Ukraine to sign.
The line was that Ukraine might sign “soon or not so soon”!
He highlighted that the costs of aligning with the European Union would
be 20 billion euros a year, and he put the total costs at 170 billion through 2017.
I am not sure how the figures add up. I am not sure how/where he came up with
these estimates, but the tone was clearly one of trying to explain why he might
not sign.
__________________________________________________________________
Editor’s Note: Join top government officials, leading industry CEOs, business owners and other experts to discuss Ukraine’s future after the Vilnius Summit at this year’s Kyiv Post Tiger Conference, which will be held on Dec 3 in Premier Palace Hotel. The guests and speakers will assess the effects on Ukrainian political and economic life of not signing an association agreement with the European Union at the Eastern Partnership Summit in Vilnius, Lithuania, on Nov. 28-29. Register now or find out more here
__________________________________________________________________
Second, Yanukovych overall was pretty critical of the EU, arguing that
despite the high costs as noted above, the EU had promised very little in terms
of financing. He mentioned the 610 million euros in financial support for
Ukraine, which the EU has now dangled for two years without release, but
conditional on Ukraine signing an IMF deal.
On the issue of the IMF, Yanukovych was even more critical arguing that
the fund had set out unfair conditions on Ukraine, i.e. gas price hikes, fiscal
consolidation including wage/pension cuts, which he as president was unwilling
to do. The message seemed to be that talks with the IMF have now come to an end.
Third, on the issue of EU and IMF financing, several ECU officials have
also made fairly strident comments overnight, to the effect that the EU should
not be viewed by Ukraine as a cash/financing cow to cover budget deficits –
this is not what the association agreement and free trade deal is about.
And, herein there seems to be a chasm in perceptions between the Yanukovych
administration and the EU about what the deal is about.
The Ukrainian government’s side seems to think that this is a money
printing press, and that the EU is somehow so desperate to secure Ukraine’s
signature that it is willing to offer cash with no conditionality attached.
Experience with previous association and trade agreements across the
region, and with prospective new members, should have been revealing for the
Ukrainian side.
The EU, and in fact most of the countries negotiating these deals, have
seen these as an opportunity to cement EU integration on a path to eventual EU
membership.
Indeed, a country such as Turkey, with huge geopolitical and strategic
importance to Ukraine, which has been negotiating a EU membership for a decade,
as a candidate member state, has seen little in terms of direct cash
support/financing from the EU.
Fourth, both the Ukrainian and Russian sides have confirmed that no
agreement has yet been reached on a gas/financing deal from Russia to Ukraine,
and that negotiations herein will only get under way in early December.
Our expectation now is that these negotiations could prove difficult,
and long drawn out.
Fifth, there have been various opinion polls doing the rounds on support
for the association agreement and free trade agreement with the EU vs. the
Russian-led Customs Union and opinion does seem quite fluid – remember the poll
last week which had a 57-14 split in favor of the EU.
However, www.ceemarketwatch.com) is reporting KMIS as detailing a 38=38 tie in terms of
respective support for participation in the two blocs.
Predictably the young and those in western Ukraine tend to back EU
integration over the Russian-led Customs Union
The same agency reported a 41-35 split in favor of the EU back in
September – perhaps trade sanctions imposed from Russia have had something of a
sobering effect.
Nevertheless, if this poll is accurate, I guess this goes to explain the
fact that Yanukovych is struggling to figure out a strategy at this stage, and
is increasingly appearing to be caught on the fence.
The market has been working on the assumption of some form of agreement
for Ukraine around Vilnius, either with the EU or the IMF or Russia. A deal at
Vilnius is still possible – I would not rule anything out – but it seems clear
that the IMF and EU are not going to provide significant financing without real
and substantive reform commitments from the Yanukovych administration.
At this stage, the administration appears unwilling to push forward with
these reforms, but obviously the situation is fluid, the Yanukovych administration
seems to be trying to keep its options open, and ongoing street demonstrations
still have the ability to be a game-changer in terms of momentum behind
European integration.
Without a EU or IMF agreement at Vilnius, Yanukovych will have to fall
back on negotiations with Russia around cheap gas and cheap financing. But with
his negotiating position much weakened, he will be on the back foot and may
well have to give major concessions – such as membership in the Customs Union
or Russian ownership of gas pipelines required to get Russian support.
Yanukovych may have miscalculated all around, and end up, post-Vilnius,
with nothing – which would be a political and economic disaster for Ukraine, as
a “muddle-through” scenario brings with it immense risks for a fragile economy
at this stage.
Timothy Ash is head of emergency market research at London-based Standard Bank.
