Business New Europe: Ukraine’s game of high-stakes poker

(Business New Europe – bne.eu – November 14, 2013) Did Ukrainian President Viktor Yanukovych just outfox Russian President Vladimir Putin and make a complete fool out of the entire EU?

A string of events over the last week suggest that Yanukovych never had any intention of signing off on the free trade and association agreement at an EU summit in Vilnius at the end of November and always intended to join the rival Russia-led Customs Union trade club instead.

The trouble for Yanukovych was that going up against the hard-nosed Russians in any talks, the Ukrainian hand was incredibly weak. The dangers of throwing his lot in with the Russians are legion. Ukraine’s oligarchs are worried about being overrun by their richer and more powerful Russian peers. Russia holds all the trump cards when it comes to modernising Ukraine’s Soviet-era aviation and defence sectors. Russian banks are already big players on the local market. But worst of all, with the economy in recession and foreign exchange reserves plummeting, Ukraine is now possibly no more than a few months away from a financial crisis and sharp devaluation. In short: he wasn’t in a very good bargaining position.

However, Yanukovych has one extremely powerful trump card: Russia is desperate to set up an alternative trade club to the EU, his Eurasia Economic Union (EEU), which doesn’t make much economic sense without Ukraine’s participation. The Customs Union is the precursor to the EEU and came into being at the start of 2010, but is due to be replaced by the EEU in 2015. Currently Belarus and Kazakhstan are members, and Armenia and Tajikistan are in the midst of signing up.

Kyiv has tried to play the two sides off against each other for the last few years. But as the Vilnius summit on November 28-29 approached, Yanukovych made it clear he was going to go with Brussels, unleashing a torrent of threats from Moscow alternated with offers of enticements such as half-price gas supplies and major investment projects. Kyiv rebuffed all these offers. But as we go down to the wire, suddenly it seems the government is doing everything it can to scupper the deal.

Laws and arrests

The Rada passed most of the legislation demanded by the EU to underpin the expanded trade relations, but it has failed to agree to a couple of potentially deal-breaking points.

A new International Monetary Fund (IMF) stand-by deal is essential if the economy is to be bailed out, but on November 8 the Kyiv position on the issue suddenly hardened. “IMF demands to raise gas prices for households will not be accepted under any circumstances,” Yanukovych said, the presidential press service reported. “We will never allow measures which cause people to suffer and which adversely affect the financial state of our population.”

The same week, the Rada added a rider to the tax code that deem “permanent residents, or taxpayers, of foreign countries are defined as a person who is not living in Ukraine.” As opposition leader and world boxing champion Vladimir Klitschko has been a permanent resident of Germany for many years and pays tax there, these new rules effectively bar him from standing in the 2015 presidential election.

Then things took a strange twist. The lawyer of jailed former prime minister Yulia Tymosheko was arrested on November 11 for allegedly beating his ex-wife. Even if the accusations against Serhiy Vlasenko are true (and his ex-wife has suggested they are), the decision to arrest Vlasenko on exactly the same day as the EU mission were in town to make their assessment is a stunning piece of poor timing.

And to cap it all, the Rada on November 13 delayed a crucial vote on legislation that would release Tymoshenko and allow her to leave the country for medical treatment in Germany. Brussels has nailed its flag to the mast on this one and made Tymoshenko’s release a prerequisite to any deal signed in Lithuania.

Pat Cox of Ireland and Aleksander Kwasniewski of Poland, both Europe’s mediators in Ukraine, were in Kyiv on November 11-12 to assess Ukraine’s progress on delivering the benchmarks set for signing the EU association agreement. They reported at the conclusion of the trip that while “considerable progress has been made in seeking to fulfill the aforementioned conditions… we regret to observe that at this time we are not yet in the position to report full compliance.”

Clash of values

There are more subtle signs that Ukraine’s entry into the European fold was never going to work, as it has become increasingly clear there is a basic clash of values at the root of the negotiations.

Yanukovych jailed Tymoshenko because she is his main political rival in the next presidential election – a clear example of heavy-handed political expediency. For the EU, Tymoshenko’s jailing is an example of “selective justice” and runs counter to the EU’s most cherished principles.

Ukrainian Prime Minister Mykola Azarov has also made a series of blunt remarks over the last week. On November 11, he complained that the EU “has not provided any specific proposals concerning the reorientation of Ukrainian exports.” He went on to say that Kyiv was asking for access to Europe’s energy sector, transport and metallurgical sectors. A few days later, he added that the EU is not offering Ukraine compensation for any export business it might lose if Russia closes its borders following the Vilnius summit.

These comments exemplify the gulf between the two sides: the Ukrainians are talking business, while the Europeans are talking about values that underpin society. “Azarov is definitely ‘old school’ and does not quite get it that the EU’s Eastern Partnership project is very much about politics,” Tim Ash of Standard Bank said in a note to clients. “Trying to lock countries like Ukraine, Moldova, Armenia… Georgia, et al into the EU’s fundamental values, including democracy and respect for human rights, with the allure of a trade deal as the carrot. This is not a pick ‘n’ mix for the six states that have been offered these deals. The EU does not need the trade.”

Without the IMF deal in the wings to follow immediately after Yanukovych signs on the dotted in Vilnius, then the whole package starts to look a lot less appealing.

However, the Russians understand this sort of horsetrading very well. Yanukovych flew to Moscow at short notice on the weekend of the November 10 and had a three-hour meeting with Putin. This is the latest in a string of meetings with the Russian leader. Clearly, some serious bargaining has been going on. The Kremlin has said publicly that it is offering cheap gas, loans and an array of investment joint projects ­ if Ukraine joins the Customs Union.

“The apparent hardening of the [the Ukrainian government’s] position is all a negotiating ploy… to wring further concessions from the EU/IMF/US. Yanukovych and crew are all poker players and hope that someone in the EU has also heard of the game,” says Ash.

So Yanukovych has little to lose by continuing to bluff and hope the others at the table will keep adding more and more to the pot, because he is sure his trump ­ the decision to join one or other of the trade clubs ­ will beat any cards the EU or Russia can play. Not bad for a country that started the game with such a poor hand.