Ukraine's Dangerous Game

Yanukovych is trying to get Russia and the EU to compete for his affections.

Ukrainians have taken to the streets over the last few days in massive protests against their government’s abrupt about-face on closer ties with the European Union. The protests recalled the Orange Revolution almost a decade ago, when tens of thousands rallied in Kiev’s central square for weeks to protest a flawed election.

Protests have been held daily in Ukraine since Ukrainian president Viktor Yanukovych backed away last week from an agreement that would have established free trade and deepened political cooperation between Ukraine and the EU in favor of reopening talks with Moscow on its Eurasian customs union.

The EU agreement, long in the works, was to have been signed in Vilnius last Friday. Instead, disappointed European leaders lamented Ukraine’s sudden U-turn and cast blame on Russia for bullying its former fellow Soviet republic.

The EU is now under criticism for mishandling negotiations with Yanukovych, who had previously rejected European terms for closer association. Washington, distracted by other issues, was late to the game.

So, why Ukraine’s last-minute reversal on the EU deal?

Yanukovych seems to have been playing a risky geopolitical bargaining game, pitting the EU against Russia to see who would offer the better financial package.

At first, it looked like he simply lacked courage and had bowed to Russian pressure and threats. However, when he showed up at the Vilnius summit demanding cash, his brinkmanship was revealed.

Yanukovych derided the EU offer of over $800 million in financial assistance as “small candy in a pretty wrapper” — far short of the $20 billion per year he said was needed to upgrade Ukraine’s faltering economy to EU standards. He also asked for three-way talks between the EU, Russia, and Ukraine on trade — a demand that was quickly rejected by the EU.

Ukraine initially began to pursue a path towards closer cooperation with the EU after Russia refused to offer a cheaper price for gas. The Ukrainian public supported the turn to the West — opinion surveys show that more than half of Ukrainians support closer integration with the EU.

Yanukovych, a wily politician from eastern Ukraine, is hoping to win reelection in 2015 and must balance several constituencies.

He was elected in part based on his promise to improve relations with Russia. Until Vilnius, he was able to portray himself as pursuing closer ties with the West while also maintaining good relations with Russia. At Vilnius, he could no longer avoid making a choice. In the end, he apparently did not think the short term sacrifices of EU partnership — including political, judicial, and economic reforms and fiscal austerity — were worth the long term benefits.

Closer cooperation with the EU is also likely seen by Yanukovych’s powerful oligarch “family” as a threat that could expose their insider deals to the greater transparency required by the EU and force them into competition with other firms.

Yanukovych also balked at the European demand that Ukraine release his charismatic political opponent Yulia Tymoshenko from jail. Tymoshenko had led the protests against Yanukovych in 2004 and was narrowly beaten by him in 2010; she was jailed the following year on charges of abusing her office while she was prime minister.

Russia played a large part in Ukraine’s reversal. Russia, which sees Ukraine as an integral part of its own history, made its disapproval of the EU agreement clear and did all it could to derail the deal. It brought its considerable pressure to bear by banning some Ukrainian imports, imposing trade sanctions, and threatening Ukraine with large gas bills.

Ukraine knows all too well what Russian pressure feels like. A 2009 dispute between Kiev and Moscow on gas prices resulted in a three-week cutoff of gas to Ukraine — a painful (and cold) period that no-one in Ukraine wants to repeat.

EU leaders accused Russia of bullying Ukraine into ditching the deal so that the former Soviet republic would stay locked in Moscow’s orbit. But the EU has been ambivalent about Ukraine, with some members reluctant to forge closer links with the troubled and corrupt economy.

Ukraine is an attractive trading partner for Europe, with a large land mass bordering four EU member states, an educated population of 45 million, and significant economic potential. However, its economy is currently in dire straits; its foreign reserves are running out and it needs to meet high gas bills and debt repayments. It is also now facing a currency crisis.

Yanukovych complained that the EU had not offered enough in financial incentives to win him over. He said a financial aid package should include macroeconomic assistance, reestablishing a working relationship with the International Monetary Fund and the World Bank on “acceptable terms,” a review of EU limitations on some Ukrainian exports, and help with modernizing Ukraine’s vast gas pipeline network.

EU leaders countered that the ditched trade pact would have boosted Ukraine’s economy and would have saved Ukrainian businesses millions of euros a year in import duties. EU leaders also held firm on the IMF’s stipulation that it would not lend new money without gas-price and other reforms.

Despite publicly voicing disappointment in unequivocal terms, some of the EU nations may be relieved not to have to bail out another failing economy. And it may be convenient for them to now blame Russia for their defeat.

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