Russia will use $15 million from its Wellbeing Fund to buy Eurobonds issued by Ukraine’s Ministry of Finance. Issuance of these bonds will presumably be staggered – albeit it is unclear over what time period. 

Russia agreed to an addendum to the 2009-2019 gas price agreement offering to cut gas prices paid by Ukraine to $268 per 1,000 cubic meters. On 2013 import volumes we estimate that this could save around $3 billion annually. 

Russia agreed to lift various trade restrictions which were imposed in the run up to the Vilnius summit. 

Russian President Vladimir Putin has signaled that the agreement is not linked to any commitments related to Ukraine’s signing the Customs Union with Russia, Kazakhstan and Belarus. No conditionality has been revealed, albeit President Viktor Yanukovych has agreed to hold a press conference on Dec. 19 in Kyiv.

It will be interesting to see how the agreement now plays in terms of domestic political stability. Yanukovych will argue that he considered the various options between the European Union and the International Monetary and Russia and took the best deal for Ukraine, ensuring the stability of the hryvnia, the banking sector and the broader economy. The opposition will argue that he sold Ukraine’s European aspirations for a Russian bail-out and to ensure his continued stay in office. 

There must now be a question mark over the future course of street demonstrations, and how the administration will handle these. Today’s announcement might just harden the resolve of the opposition as they could consider that their chances of ensuring regime change are now, rather than waiting for presidential elections in 2015. Yanukovych remains vulnerable as long as mass demonstrations persist, and the risk of violence remains latent. As recent experience has, however, shown any use of force by the regime will likely prove counter-productive, and provoking even bigger demonstrations and possibly even sanctions. 

Much of the market was caught short by today’s announcement, and Ukrainian asset prices have rallied hard – Ukraine 23$ rose six price points on the day, tightening by over 100bps to yield around 8.9%. With few bonds trading the question now is whether there will be a further short-squeeze or whether the opposition reaction/revealed conditionality will take the shine off the deal and bond prices.

Timothy Ash is an analyst with the Standard Bank in London.