It's not Putin, Yanukovych, or even the EU. It's the Ukrainian people.
- By Anders Aslund<p> Anders Åslund is a senior fellow at the Peterson Institute for International Economics and author of How Ukraine Became a Market Economy and Democracy. </p>
Vladimir Putin’s Dec. 17 meeting in Moscow with Ukraine’s politically besieged president, Viktor Yanukovych, must be viewed as quite a victory for Putin. The Russian president’s first feat was to tie financially troubled Ukraine to the Kremlin by offering a $15 billion and a significant discount in gas prices, luring it away from the European Union. The second victory was one of authoritarianism over democracy, and the third of corruption over European legal reforms. As far as political wins go, this was the equivalent of pulling a rabbit out of a hat, magically solving several problems at once. Moreover, it didn’t cost Putin anything.
Yet this deal can also be seen as a victory for Yanukovych, personally. The EU had tried to persuade him to opt for the rule of law and democracy — freeing his prime opponent from prison, for example, in return for limited financial assistance and access to Europe’s market. But Yanukovych strung the EU along, pretending to be serious about negotiating accession before turning abruptly to Moscow for the international financing he needs to sustain Ukraine’s debts until the presidential elections scheduled for March 2015. Now, with Ukraine temporarily stable financially, he and his family can afford to indulge in increasingly authoritarian rule and the practice of siphoning off corrupt payments.
The main losers in this deal, clearly, are the Ukrainian people. A vast majority of Ukrainians wanted Yanukovych to sign the extensive European Association Agreement, expecting to gain from access to its markets and job opportunities, but most of all to reinforce democracy and the rule of law in Ukraine. He promised repeatedly that he would do so, for example saying in Kiev on Nov. 6: "By choosing to get closer to the European Union, we are making a pragmatic choice for optimal and rational modernization." But when the moment arrived for a decision on Nov. 29, he did not sign anything at all with the EU. The key question today is whether the Ukrainian people will accept this treatment, or whether they will be succeed in their demand that the unpopular Yanukovych is forced to resign.
The large opposition has camped out peacefully for over three weeks on the Maidan, the Independence Square in the center of Kiev. Braving cold temperatures, hundreds of thousands of protesters seized Kiev’s main public square and clashed with security police, embarrassing the government and causing it to apologize for the use of force. Tensions have mounted — though the protests are expected to remain peaceful if the government does not overplay its hand. The opposition’s immediate goal is to attract a sufficient number of defectors from Yanukovych’s faction in parliament so that they can oust the government. On Dec. 19, they counted 217 opposition deputies, but they need nine more defectors to reach a majority.
If the opposition fails, Ukraine may enter the sad authoritarian path of Belarus and Russia, consigning it to a bleak economic future, dependent on Russia and hobbled by a corrupt system that enriches Yanukovych’s cronies. The joint announcement made by Putin and Yanukovych at a news conference at the Kremlin on Dec. 17, encompassed no fewer less than 14 bilateral agreements which took the West by surprise. After all, these two men have not agreed on anything since April 2010, when Yanukovych prolonged the Russian lease of the naval base of Sevastopol until 2042 for an illusory reduction of the price of the gas Ukraine imports from Russia.
So far, only one insubstantial agreement has been published. Both sides have maintained great secrecy about the negotiations and the details of their agreements, leaving the Ukrainian opposition to fear that its president has all but given up sovereignty to Russia in one way or the other. One suspicious agreement concerns a bridge over or tunnel under the disputed Kerch Strait at the Azov Sea.
Details will continue to emerge, perhaps pulling the bigger picture into focus, but right now it appears that this deal is heavily one-sided and greatly favors Russia. Yes, Moscow’s sovereign wealth fund is supposed to buy $15 billion of Ukrainian bonds. But this is not a grant, it’s merely a line of credit that will have to be repaid; the terms are not concessionary. Russian Finance Minister Anton Siluanov has stated that Russia intends to purchase two-year Ukrainian Eurobonds for $3 billion with a yield of 5 percent. International Monetary Fund loans are much cheaper and last longer, so it is clear that Ukraine’s motive was political more than economic. Presumably, this means that the Russian government will sell some of its U.S. treasury bills, whose two-year yield is 0.34 percent, in order to finance the loans. Yes, Russia’s risk increases, but many fund managers do deals that tap low-cost funds from one source and make money from charging higher rates on loans.
Russia has also agreed to abolish various trade sanctions against Ukrainian exports to Russia from railcars and steel pipes to chocolate. This would represent a gain for Ukrainian producers seeking Russian markets but cut off from them by the sanctions. According to World Trade Organization rules, however, the Russian-imposed sanctions were illegal and it is a shame that the United States and the EU did not act more forcefully within the WTO on behalf of Ukraine.
Russia also cut the price of its gas exports to Ukraine for the first quarter of 2014 by one third to $268.50 per 1,000 cubic meters, providing considerable cost savings for Ukraine’s energy-dependent producers and consumers. But this is not a gift either; in fact, it’s an approximate market price. By insisting on inflated prices, Gazprom has lost large sales to the Ukrainian market. Not surprisingly, Gazprom’s shares rose on the news of this price cut. Yet, the price is to be revised each quarter — and, given prior experience, it’s far from clear that this level will hold.
Finally, a few agreements were concluded on production cooperation involving large Antonov transportation airplanes, shipbuilding, and construction of space rockets. Ukraine has valuable industrial assets, but advanced manufacturing requires cooperation with their old Russian partners, who had been instrumental in setting up production lines. Such cooperation should have occurred long ago, but Russia was more interested in punishing Ukraine than in mutual cooperation like this.
Presuming that Ukraine does not default on its bonds, Russia has not, and more likely will not, lose anything on this deal. It has only eliminated some trade sanctions against Ukraine, a step that costs Moscow little and could benefit Russian consumers. In the end, Putin’s successful hardball strategy has come at very little cost and very significant gain. It has blocked Ukraine from orienting its economy toward the West and enhanced Russian power and prestige in its former territories. For Yanukovych, it’s a win, too. While he might be hated on the Maidan, he’s now free to continue to rule in a manner that is both corrupt and authoritarian. The big losers are the Ukrainian people, whose future he has jeopardized. The question remains whether they will tolerate being treated like this.