Ukraine Goes West…Or Does It?

Posted: November 19, 2013 in Eurasia 650

ukraine-euOn November 14th The Ukrainian parliament, the Verkhovna Rada, closed its session without taking a vote on a bill that would have allowed jailed opposition figure Yulia Tymoshenko to go abroad for medical treatment.  Although the government of Viktor Yanukovych has demonstrated flexibility by abandoning its previous refusal to even consider such leniency it will not consider any measure that would lead to her rehabilitation in time to stand in the 2015 elections.  The urgency in reaching an agreement is because of Ukraine’s desire to sign a Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU at its Vilnius summit on November 28th-29th which would reduce trade barriers and open the bloc to Ukrainian public procurement, laying the foundation for eventual EU membership.  The EU has made the agreement was conditional on reforms to Ukraine’s legal and judicial system to eliminate so-called “selective justice”, of which Ms Tymoshenko is the most prominent victim.

The inability to reach an agreement has surprised both Ukraine watchers and EU diplomats, who have said they still expect to sign the DCFTA in Lithuania.  The surprise is acute because Ukraine’s often riotous parliamentary procedure and normally irreconcilable political parties have given way in recent months to a sense of national unity over the president’s decision to improve relations with the EU.  This is in no small part due to Russian attempts to prevent Ukraine signing the DCFTA and convince it to join its own Customs Union together with Belarus and Kazakhstan.  At times the Russian strategy has been pure blackmail involving enforced delays and checks at the border across which 30% of Ukraine’s exports move, and banning key Ukrainian exports in hopes of pressuring Ukraine’s oligarchs to force Yanukovych’s hand.  This pressure has had the reverse effect, uniting the president, the opposition and the oligarchs who want access to EU investment and technology.

But is Ukraine committed to integration with the EU?  Despite the assurances of EU officials that all is on track and statements by Prime Minister Mykola Azarov that Ukraine would do whatever it takes to appease the EU, I doubt many observers recognise what kind of pressure Viktor Yanukovych is under.  It is not just Ukraine’s geopolitical future that is at stake but his own political survival.  With USD 60bn in international obligations coming due in mid-2014, large quasi-fiscal liabilities at state corporations and a commitment to a strong hryvnya to control inflation, Ukraine is standing on the edge of a fiscal precipice.

While there are undoubtedly economic advantages to western integration and the EU has pledged financial support, the effects will likely not be felt for some years.  The economic levers at Russia’s disposal can inflict a much more precipitous kind of pain, especially natural gas.  Absent the subsidies it used to enjoy Ukraine now pays USD 421 per m3 for Russian gas, the source of 95% of its imports, more than the EU at USD 400 per m3.  The government has also steadfastly refused to increase gas prices for either inefficient industries or for consumers, still feeling the affect effect of the 2008-09 recession.  With presidential elections due in 2015, and the 2012 contest demonstrating failing confidence in his leadership, Mr Yanukovych urgently needs to find the funds to avoid devaluation, maintain subsidies and probably hike wages.

The most likely scenario remains that the parliamentary session due to open on November 21st will pass a quick law allowing Ms Tymoshenko to go abroad and the DCFTA will be signed in Lithuania, but the threat of Russia’s response could yet be enough to forestall the agreement.  Mr Yanukovych was secretly in Moscow on November 9th, and I wouldn’t be surprised if he was there to express to Russian President Vladimir Putin his continual friendship and his lukewarm commitment to eventual and permanent Ukrainian-EU integration.  He is acutely aware his political future rests largely on Russia’s next move and although polls show a majority of Ukrainians currently support EU integration, that could easily change if economic conditions deteriorate.

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