Russian-Ukrainian action plan 'provides President Yanukovych and his government with breathing space' - expert

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Gazprom will sell gas to Ukraine at 268.5 dollars per 1,000 cubic meters, Russian President Vladimir Putin said on Tuesday. Also, Russia will convert 15 billion dollars worth of its National Welfare Fund - a rainy day fund - into Ukrainian securities to help it stave off financial crisis. The deal was signed after talks in Moscow between Mr Putin and his Ukrainian counterpart Viktor Yanukovych. The issue of Ukraine joining the Customs Union was not discussed during the talks. The two presidents met in Moscow to chair the Russian-Ukrainian inter-governmental commission. Our source discussed it with Lilit Gevorgyan, Commonwealth of Independent States and Russia analyst at UK-based economic organization IHS Global Insight.

President Putin said today that Russia will sell gas to Ukraine’s Naftogaz energy company for $268.5 per 1,000 cubic metres. Also, Russia will convert $15bln worth of its National Welfare Fund into Ukrainian securities to help it stave off financial crisis. Can you comment on this deal reached during today’s talks between Putin and his Ukrainian counterpart Viktor Yanukovych? How will this deal contribute to the current political situation in Ukraine?

To deal with the first part of the question, in terms of the economic significance of the Russian aid, it really kicked the edge off of the short-term decrease that Ukraine was facing. It really means that Russia will extend that much needed financial aid without pre-condition that the IMF and EU were pushing for. Also, the gas price discount, though I have to say that there are reports that this discount might be temporary, it will also take off the pressure from Ukrainian public finances. So it really provides President Yanukovych and his government with a breathing space.

In terms of the political aspect of the deal, as you mentioned, there haven’t been any invitation that Ukraine is clearly committed to joining the Customs Union. At the same time, this means that the deal with the EU is unlikely to make a significant progress, as the focus now will shift from seeking a deal using diplomatic manoeuvring and bringing the EU against Russia and vice versa to really focusing on calming down the economic situation, calming down the market, easing Ukraine’s access to capital market, and then really President Yanukovych will probably try to already launch his beat for the election in 2015. Of course, there is the issue of the reaction of the opposition and protesters on the street to the deal. The opposition will be very keen to find out what actually has been promised in return for this really generous support. We have to see what would emerge in detail.

How is the deal going to affect the Ukrainian economy, now that Naftogaz will be buying gas at $268.5 for 1,000 cubic metres, well below the current level of more than $400?

I think it will be great news for the government and the pressure that the public finances have come into, this will be good news for the Central Bank because now there will be less pressure on its international currency reserves. Ukraine already has quite generous gas price subsidies, so really we are talking about government being less pressurized. I think there will be indirect impact for ordinary Ukrainians and that is that the Ukrainian government doesn’t really have to make social spending cuts. They will be able to afford this spending specially in the pre-election year that’s quite important for any president campaigning for re-election. I have to say that long-term Ukraine’s problems are not going away, they are serious economic issues that have to be addressed. The Russian aid is more of a bandage, rather than a serious attempt of reform.

What about Russian-Ukrainian relations? Will they get a boost in light of the new deal?

Obviously, President Yanukovych will use this deal as a victory, his opposition will present it as a defeat. I think we are going to see further polarisation of the political scene. If before Yanukovych was trying to appease all sorts of pro-European voters, now we will see a clear division between pro- and anti-European sentiment. What will really dominate the debates in the coming months depends on the details of what Ukraine has agreed to give up in return for the Russian support. In terms of political campaigning Yanukovych will basically shut himself out of the pro-European camp and he has to really maximize his influence on those slim voters who have to be convinced that for now the Russian deal was the best deal.

Russia will invest a whopping $15bln in Ukrainian bonds. Does it mean that this will prevent Ukraine from turning to the IMF for financial aid?

We still don’t know what the details of the Russian-Ukrainian deal are. I think it’s probably too early to assess its full economic impact. The EU could have actually extended a similar scheme or a similar credit line. The impact would have been sort of similar, with the exception of the gas price discount, of course.

In light of the new Russia-Ukraine deal, do you think that the EU-Ukrainian association agreement is still relevant?

The bargaining that the Ukrainian government has been conducting in the past year is not over yet. I would imagine that the Ukrainian government will try to keep some of the processes with the EU alive. This is because it will be very difficult for any Ukrainian government to sell the Customs Union membership, especially when emotions are so high. There is really a strong opposition to the deal.