Ukraine says no to the EU and yes to Russia

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In a surprising move that could effect all industries, including travel and tourism, The Ukraine will “restore an active dialogue” with the Russian lead Customs Union and the CIS, as economic and foreign ministers proposed Ukraine, Russia, and the EU create a tri-party commission to improve and strengthen trade relations.

Facing its most important economic crosswords since the collapse of the Soviet Union, Kiev has aligned itself closer to Russia, and has suspended preparations to sign an EU trade deal.

Russia has warned a step west towards Ukraine would be “trade suicide” and result in billions in lost trade revenue and that joining the Russia-led Customs Union is more beneficial.

President’s spokesman Dmitry Peskov said Russia welcomed Ukraine’s decision to actively develop ties with Moscow, and Putin added he wasn’t completely against Ukraine’s association with EU.

Putin said he supports the idea of trilateral trade talks, but only up until Ukraine signs an association agreement with the EU.

“We favor this, but only before decisions are made. How can we hold negotiations on issues that have already been agreed upon and endorsed? What is our role in such negotiations? It’s equal to zero, but we are surely prepared for such a discussion if it is substantial,” Putin said Wednesday in Moscow.

Initially, the signing of the Association Agreement between Ukraine and EU was schedule to take place at the Vilnius summit on November 28, but on November 21 the parliament rejected a bill that would allow Tymoshenko to travel abroad for treatment.

On Thursday Ukraine failed to pass a law that would free former Prime Minister Yulia Tymoshenko – the key stumbling block in the negotiations on Kiev’s signing the association trade agreement with the EU.

However, President Yanukovych said he still had his eye on integration with the EU.

“We still have a bit to go to the top. We do not fear difficulties and are confident that we will continue towards European integration,” Yanukovych said on Wednesday.

“If there is no deal in November, Putin will have won a resounding psychological victory – most everyone in the EU would want to prevent that, and Yanukovych counts on it,” Dimitry Trenin told RT ahead of the decision.

Prison break deadline
The deadline for Ukraine to meet all criteria necessary to join the EU trade association was initially set for November 18, and then was later moved to November 21.

Ukraine had hoped to act as a “bridge” between Russia and the EU, President Viktor Yanukovych said many times publicly.

Russia made it clear there will be no “bridge” if Ukraine stepped west; they would have to give up their “exclusive relationship” with Russia.

An EU envoy has been in Kiev all of November preparing conditions for Ukraine to enter the EU trade association at the Eastern Partnership Summit in Vilnius, but the deal seemed less and less likely as the former Prime Minister remained in prison.

The failure to release Tymoshenko would block Ukraine from joining in Vilnius, as it’s a signal the country isn’t ready to improve their justice practices to a European standard.

Tymoshenko was jailed in 2011 for a gas deal she brokered with Russia in 2009 and is seen as politically motivated.

Putin’s Customs Union
Ukraine’s sizable economy ($156 billion) and resource-rich land had both Moscow and Brussels courting for exclusive trade deals.

If Kiev chooses to pursue EU membership, it will foil Russian President Vladimir Putin’s great plan to create a trade block to rival the EU, which so far includes Belarus and Kazakhstan. Armenia has also expressed its intentions to join Russia’s trade orbit.

Both deals are appealing. By siding with Russia, Ukraine continues to foster good relations with its neighbor that imports nearly 25 percent of Ukraine’s exports.

Moving west to Europe would save Ukrainian exporters nearly $490 million over 10 years, as 95 percent of goods would have zero customs duties, according to the European Commission.

Europe has been courting Ukraine into an associate trade membership for the past four years, and has created a geopolitical battle with Russia, who has punished Ukraine for its move west.

EU ministers were supposed to decide on Tuesday if they will sponsor Ukraine’s EU trade association membership, and a special EU envoy has been in Kiev this last month

Much political brinkmanship has been executed leading up to the trade deal. Ukraine threatened to stop buying Russian gas, and Moscow stoked speculation there would be another gas war between the two neighbors, which would leave Ukraine without enough natural gas to last the winter.

Gas
Ukraine complains about high prices for Russian gas, that average around $400 per 1,000 cubic meters, one of the highest prices in Europe. Ukraine currently imports more than half of its gas from Russia, but both countries are making efforts to cut down on business.

Over the last decade Ukraine and Russia have been trying to sever their complicated gas relationship. Gazprom has been building a maze of pipelines to circumvent Ukraine to delivery gas to Europe, and Ukraine has been wooing foreign companies in joint ventures in shale and offshore reserves.

After Naftogas, Ukraine’s state-owned oil and gas company, said it was cutting ties with Gazprom, Yanukovich contradicted the statement saying he “hoped for a comprise” with Russia.

Former Ukraine Prime Minister Yulia Tymoshenko signed a ‘pre-pay’ contract with Gazprom in 2009 and was later jailed on charges of abuse of power.

Since the ‘pre-pay’ contract was established, Ukraine has complained of ‘expensive’ gas prices.
Ukraine’s was close to signing a EU trade association agreement in Vilnius in late November, a move which could have triggered a new series of trade and gas wars with Russia.

Russia and Ukraine waged two gas wars over prices in the winters of 2006 and 2009 (which lasted 3 weeks) over a claim Ukraine was late in paying.

Debt and Downgrades
Ukraine’s depreciating currency reserves and massive deficit have put it close to economic collapse, and an IMF bailout of between $10-15 billion seems more and more likely.

Ukraine’s government reserves are so depleted they may no longer be able to keep Naftogaz afloat, and may be forced to find a foreign buyer.

The worsening outlook has prompted the big three rating agencies to downgrade their outlook on Ukraine.Fitch downgraded Ukraine’s long-term foreign local currency issuer default rating to ‘B-‘ from ‘B’ following S&P’s downgrade of its debt rating to ‘B-‘ to the same junk level as Greece and Cyprus. Moody’s cut its rating to Caa1 from B3 in September putting them at “very high default risk”.

US money manager Franklin Templeton has picked up $5 billion of Ukraine’s international debt, nearly a fifth, the Financial Times reported.

Russia holds a significant portion of Ukraine’s sovereign national debt.