Ukraine is battling with economic recession and needs immediate remedies, which EU appears not in the position or willing to offer. This mostly involves financial assistance, which IMF is refusing to grant. Meanwhile the EU has not been keen on nudging the Fund to take a milder position on Kiev. On balance, Ukraine’s economic interests and indeed those of its many top businesses lie with closer economic relations with EU. Despite recent tensions, Ukraine and Russia are already close commercial partners. But in the long-term Ukraine needs economic convergence with EU, however pressed with economic woes right now Kiev is least interested in long-term gains.
In the next few days perhaps the details of the Russian offer would emerge, and chances are they are more relevant to Ukraine’s current financial needs than those offered by the EU. In addition, the ambitions of the current president Viktor Yanukovych to get re-elected in early 2015 clash with EU demands of releasing the former Prime Minister and a potential rival in 2015 elections. Another clash-point with EU is the political damage that the president would incur if he were to compile with IMF-EU financial assistance precondition to significantly increase domestic gas prices. Hence politically, Russia could be in a better position to meet the Ukrainian president’s political needs as well.
The latest decision by the Ukrainian government before the summit, effectively puts EU in a difficult position – as it either has to come up with a more flexible position and potentially with an immediate financial support, most likely with IMF. Alternatively, Brussels will have to suffer yet another humiliation, the second one in the last three months, following Armenia’s sudden turnaround on its EU Association deal in favor of the Russian Customs bloc.
EU, Ukraine: not seeing eye to eye
The final act of the talks was never going to be an easy issue and the disagreements were certainly not a simple matter of the former prime minister’s prison term.
Aside the Russian desires and some pressures to see the deal fall through, there have been a number of serious outstanding issues between EU and Ukraine. Thus, Ukraine, despite a revolutionary change of government, has done little to build strong political and economic institutions to get out of what appears to be quick cycles of economic crises. Neither the Orange Revolution government nor the current one have been earnest in their efforts to reduce the role of government-linked large businesses in the overall economy, corruption or invest in improvement of business environment.
Rather populism has been a strong guiding force for political forces on either aisle of the political scene. EU has been increasingly aware of the political and economic costs of populist politics for Ukraine’s economic development. The bloc has been mindful that by sealing the Association Agreement it would have less leverage on Ukraine to see through these reforms.
In addition, Ukraine’s closeness to EU could also mean increased financial burden for the European bloc, as well as a potential disruption of energy supplies to EU from Russia via Ukraine, had Russia- Ukraine relations deteriorated in the aftermath. The European bloc has already promised USD825 million in aid to Kiev in case the deal was signed, which is of course very little to make any significant difference for Kiev’s financial troubles. The European bloc has been aware that it will be under pressure from Ukraine to seek an IMF deal with less stringent demands. However the EU too had decided to link its financial assistance to Kiev’s willingness to meet the IMF demands, which is likely to be another reason for Ukraine looking elsewhere for help.
Furthermore, some EU leaders have been adamant on Tymoshenko’s release, and compromising on this matter for some of them could be difficult to justify in front of their domestic audience.
It appears that EU is not willing to bargain with Ukraine but instead wants to see strong commitment by Kiev to abandon its populist policies and finally make an effort to unlock that economic potential that is much spoken about but yet has to be fully seen.
The trouble is that the European bloc has been facing a rival in Russia all along this process. If the European bloc is keen to gain Ukraine’s association and increase its influence over the members of Eastern European bloc member, it has to agree to a bargain deal with Kiev. From a geopolitical perspective, any delay of the agreement with Ukraine – especially after the sudden loss of Armenia to Russia’s Customs Union –will be a serious setback for the EU’s diplomacy.
Russian bid
Much like EU, Russia too would like Ukraine to be part of its emerging customs bloc but again, it is a matter of overlapping interests. The widespread impression that Russia is in a absolutely strong position to coerce Kiev to abandon the EU deal, as it did with Armenia, is not entirely correct. Ukraine too holds leverages over Russia, not least for being a key transit country for EU- bound Russian energy supplies in the medium- term. Ukraine is an important market and investment destination for Russia and any trade restrictions by Russia can be reciprocated, ultimately hurting Russian commercial interests too.
Moscow has long realized that it will not be able to apply the template of subsidies and slight coercion to Ukraine in the same way it applied towards Belarus and, especially Armenia. Ukraine’s financial assistance needs are significantly larger than those of Armenia or Belarus. And suggestions that Russia could replace IMF for Kiev are not realistic. Price discount for Russian natural gas will only involve 30% of the total cost, which is the export tax that can be scrapped providing Ukraine joins the Customs Union. Meanwhile, Russian potential part-ownership of Ukraine’s aging gas transit system could also be problematic as it requires significant investment in a country proven to be politically unstable. Many in Russia believe that this investment should go into a Russian pipeline bypassing Ukraine all together.
Vilnius is most likely going to prove that the parties were not ready and circumstances were not conducive to the deal. But the good news is that diplomatic efforts can be resumed if EU and Ukraine wish, although they may need years for the momentum to build up. Since the collapse of the Soviet Union, Ukraine has not shun away from standing its ground and not joining Russian-led blocs, or revisiting the deal after initially signing agreements. Should Ukraine indeed join the Customs bloc, it still can revisit its political and economic associations, especially when it is more energy sufficient and economically stronger.
Lilit Gevorgyan is a senior economist at IHS Global Insight in London.
