A tug-of-war over Ukraine

By bne IntelliNews October 30, 2013

Mike Collier in Riga, Ben Aris in Moscow -

The EU's summit in Vilnius on November 28-29 has been billed as a "game changer" for relations between the EU and the countries to its east, including Russia. The surprising thing is that for once it is not the Lithuanians themselves who are talking up the chances of a history-forging couple of days in their lovely baroque capital.

"This is not just the Vilnius summit, this is a summit in Vilnius, I am always saying. We share ownership and we will share success after that - it's not the end of the game," says Lithuanian foreign Minister Linas Linkevicius.

Such uncharacteristic restraint from the Lithuanian side should not be too surprising, given that Vilnius' recent form regarding major summits is not encouraging. At the last major summit in Vilnius, the Council of Baltic Sea States in 2010, the two headline acts, Russia's Vladimir Putin and Germany's Angela Merkel, both cancelled at the last moment, creating yet another international anti-climax and another flaccid joint declaration that even its authors have probably forgotten by now.

This time promises to be different, as the Vilnius summit will be all about the "Eastern Partnership countries" - a grouping created by the EU four years ago to strengthen ties with six countries to the east of the EU: Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine. And Russia has been leaning heavily on those countries in the run-up to the summit in an attempt to derail their gravitation toward the bloc.

Eastern Partnership

There are two threads to the summit. The first is economic: the EU is worried about Russia's attempt to build the Eurasian Economic Union (EEU) as a counterpoint to the EU, which Russia is unlikely to join anytime soon - if ever. So Brussels' idea is to create a borderless space in the east to enable the free flow of goods, services and capital, which allows everyone to cash in on their comparative advantages and get that much richer than they could on their own.

The second thread is political: former US secretary of state Hilary Rodham Clinton slapped the Kremlin in the face last December by saying that Russia was doing nothing more with the EEU than trying to rebuild the Soviet Union under a new name. "There is a move to re-Sovietise the region," Clinton told a news conference in Dublin just hours before going into a meeting with her Russian counterpart, Sergei Lavrov. "It's not going to be called that. It's going to be called a Customs Union, it will be called Eurasian Union and all of that," she said, referring to the various iterations of Moscow's plan to deepen economic ties with its neighbours.

Whatever its final name and form, Russia has been very aggressive in trying to pressure the countries in its former backyard into joining the Customs Union. Kazakhstan and Belarus are already members, while the impoverished Kyrgyzstan and Tajikistan have little choice but to apply for membership, as no one else is likely to lend them more money. So ahead of the EU summit, Russia has been badgering, cajoling and threatening

the EU's Eastern Partnership countries also into joining its trade bloc.

Armenia surprised everyone by announcing in September that it would give up its European ambitions - but that was after the Kremlin threatened to increase arms exports to its belligerent neighbour Azerbaijan. Plucky Moldova refused point blank to join the Customs Union - and immediately saw its wine barred from Russia, its biggest export market. It and Georgia are looking to finalise Association Agreements, including Deep and Comprehensive Free Trade Areas, in Vilnius. But all of these countries are a sideshow to the main event: Ukraine and the signing of its free

trade and association pact with the EU.

Neither the political nor economic aspects of the Eurasian Economic Union make much sense without Ukraine, which is the fourth largest European country in terms of population after Germany, Russia and Poland. Russia has been wooing Kyiv with offers of cheap gas and threatening it with claims for a $7bn unpaid gas bill and a trade embargo, which would cripple the already wobbly economy. On the other side of the fence the EU has promised to accelerate the association agreement benefits like open up its markets quickly to Ukrainian goods as well as promising hundreds of millions of dollars in short-term loans to see the country through the winter.

It has all become a bit unseemly and if the EU had any doubts about the cost of bringing a corrupt economic basket case into its fold, those have now been forgotten as both sides try to snatch Ukraine out of the hands of the other. The summit has been transformed from a relatively routine, albeit high level, discussion of trade issues, into the venue for a geopolitical struggle and a clash of ideologies.

The edge

Over the last few years Ukraine's president, Viktor Yanukovych, has been doing the one thing he is really good at: playing one side off against the other. However, about a month ago he had to finally choose and has publicly come down on the EU's side - although knowing Yanukovych, he is bound to maintain his "will he, won't he?" approach to signing a full trade and association pact with the EU right up until the very last minute.

The indications are that Ukraine will indeed sign on the dotted line, but with such a devotee of brinkmanship as Yanukovych at the helm, there's always a chance there will be some last minute flim-flam.

Yet the simple fact is Kyiv has little to lose by signing other than a place on Vladimir Putin's Christmas card list, and plenty to potentially gain. The obstacle presented by having former prime minister Yulia Tymoshenko in prison on partially politically-motivated charges - her release had become a pre-condition to doing a deal in Vilnius - is shrinking by the moment, as the unintended effect of Moscow's aggressive pursuit of Kyiv is to make the EU realise that springing Tymoshenko from jail might not be all that important as it once seemed.

As Steven Pifer of the Brookings Institution in Washington pointed out in an October op-ed for the US-Ukraine Business Council, Yanukovych is likely to be thinking rather more of his own job prospects than whether Ukrainian sausages will be labelled in accordance with EU regulations when the fateful fountain pen is placed in his hand. "Integration is popular with average citizens, and 'I brought Ukraine into Europe' could prove a powerful theme for his expected re-election campaign [in 2015]," says Pifer.

Tymo time

Far from being a boulder blocking the road to EU accession, the Tymoshenko case is, in the words of one Ukrainian ambassador who was speaking to bne, "the small stone in our shoe". In fact, by now it may even be a nice smooth bit of tarmac. With everyone talking about whether or not Tymoshenko will be sprung from jail, no one is bothering to ask much about Ukraine's kleptocratic government, its economy on the edge of the abyss and its stalled $15bn bailout with the International Monetary Fund (IMF), its corrupt court system, the vast amounts of dodgy cash being laundered by Ukrainian businesses (often with the help of Ukraine-connected banks based not a million miles away from Vilnius) and a range of other issues that should be of even more concern to EU citizens than whether the iconic Tymoshenko is eating too much porridge. "The Ukrainian leadership is specifically addressed to find a solution to that criminal case, but at the same time a positive resolution can be found only on the grounds of the Ukrainian constitution and Ukrainian law," Ukrainian Foreign Minister Leonid Kozhara tells bne.

"We understand the importance of the Mrs Tymoshenko case, but it is even more important that the relationship between 46m Ukrainian nationals and 500m European nationals should not depend on any single criminal case," Kozhara insists, adding that Tymoshenko might help her cause if she agreed to actually attend court occasionally.

The likeliest scenario is that Ukraine will sign its free trade and association pact in Vilnius while allowing Tymoshenko out of the country for medical treatment. Then around the end of the year, some sort of presidential clemency will be declared so that Tymoshenko can emerge back onto civvy street while continuing to protest her innocence, and Yanukovych can look statesmanlike while saying it all shows how the legal system works and he didn't just buckle to an EU ultimatum. (Although she will probably remain a convicted felon, which in theory prevents her from running in the 2015 presidential race.)

Senior Party of the Regions MP and presidential advisor Hanna Herman has already signalled such an outcome as likely, saying on ICTV on October 1: "I believe that having signed the association agreement, and having found our feet, the president of Ukraine, who is looking for ways out of this situation, will find a solution and ease the fate of his opponent."

At that point the EU will congratulate itself on its wonderful diplomatic prowess and naive editorials will appear testifying to the importance of soft power - at least until everyone realises that despite signing up for the EU, Ukraine will carry on playing footsie with both the EU and the Customs Union. There is a big difference between signing an Association Agreement and the long, hard work of actually implementing it in any meaningful way, a fact that seems lost on Brussels in its eagerness to gazump Russia for Ukraine's betrothal.

There's also that stalled IMF bailout to consider. Ukraine needs some sort of deal and soon. With hard currency reserves dwindling at an alarming rate, economists say the economy will crash within a matter of months unless some new sources of financing are found. Borrowing on global markets has already become more expensive and analysts such as Capital Economics have pencilled in a 10% devaluation against the dollar by the end of 2014, with the chance of something far more dramatic in the wings.

That makes it far better for Ukraine to go cap in hand to the EU for cash than Russia. Not only will an EU Association Agreement help get the IMF back onside, but the EU doesn't have a habit of asking for control of major industrial and infrastructure assets in return for propping up someone else's economy, whereas Russia does (just ask Belarus). And if the EU doesn't want to pick up the tab, Ukraine can always "do an Armenia" and start making apologetic noises while facing due north.

And all the others...

On which note, it should be remembered that the Vilnius Summit is supposed to be about five other Eastern Partnership countries as well as Ukraine. Of those, Armenia is already a test case for whether it is possible to be involved in both the Customs Union and European integration following its September 3 decision to sign up to the former - despite finishing negotiations over the shape of its own EU Association Agreement just two months earlier.

"We consider these processes not as mutually exclusive but complementary to each other," said Armenian PM Tigran Sargsyan ahead of that bombshell. If he can make that stick, it really would open up a new option for countries such as Belarus and even archenemy Azerbaijan, which have little appetite for core EU reforms but have no objection at all to being part of a free trade zone encompassing both the EU and CIS countries.

Much as Armenia's decision to sign up with Moscow was tut-tutted in Brussels, it should be remembered that not that long ago the EU itself was known as the European Economic Community (EEC), a group of countries with free trade as their main reason for clubbing together. All the talk about shared values and common identities was bolted on some time later. In that context, the Customs Union may not be quite the Trojan horse that Russia-bashers habitually assume it must be.

At the other end of the euro-spectrum from Armenia are Moldova and Georgia - two countries that have jumped through ten-times as many hoops as Ukraine in their efforts to join the EU, but which find themselves still trailing in its wake. At Vilnius they will be allowed only to initial their Accession Agreements when Ukraine gets to sign up properly. Understandably, they are started to feel decidedly miffed, like two polite and hardworking students who have been buying flowers and chocolates for months only to discover that the cheerleader they've been wooing has run off with the school's quarterback because he has big muscles.

Natalia Gherman's official job title in the Moldovan government is Minister of Foreign Affairs and European Integration, a clear indication of the primacy Moldova attaches to joining the EU. Initialing Moldova's own Accession Agreement will be "an important step" she tells bne, while admitting it would have been nice to sign in full in Vilnius.

She would like greater recognition of the way her country's entire government programme from visa reform to peacekeeping duties to tackling the frozen conflict with breakaway region Transdniester (without much help from Ukraine) is based on a "profound commitment" to doing exactly what is asked for by Brussels. "We have managed to integrate with the EU in a very advanced way. That makes us different to some of the other Eastern Partners because the commitment is taking a practical form now," she says.

According to Gherman, what is needed is clear "differentiation" between the Eastern Partners so that EU wannabes like Moldova and Georgia are no longer bracketed with geopolitical mercenaries like Belarus and Armenia willing to sell their loyalty to the highest bidder. "There is no real differentiation between the partners at this point in time from the European Union. I therefore advocate that the EU treats all Eastern Partnership countries separately on the basis of clear distinctions and differentiation between the countries that want to integrate into the EU, are eligible and deserve it by virtue of their commitment to reforms, and the countries that clearly even today say they don't have this ambition to integrate," says Gherman. "One size fits all will not be possible after Vilnius. It takes a tailor-made approach and the principle of 'more for more' - the more you reform, the more support you receive."

In any case, even the closest of ties with the EU give no guarantee of immunity from Russian influence. The Eastern Partnership countries could do worse than ask their hosts in Vilnius. An EU and Nato member since 2004, Lithuania in October saw Russia impose sanitary controls on its dairy products and increase border checks on Lithuanian truckers. The effect was immediate and sent milk prices plummeting across the Baltic states (Latvia and Estonia both send milk to be processed in Lithuania). If you want access to Europe's fastest-growing consumer market, it's best not to moan about its government too much.

By the time Riga plays host to its own summit during Latvia's presidency of the EU in 2015, the chances are there will be no such thing as the Eastern Partnership in its current form. Rather, there will be a series of eastern partnerships with individual countries: some wanting to join the EU, some not, some having enacted reforms to their political and legal systems, some not.

Russia will still be there and will still be the EU's largest provider of energy - so maybe getting the biggest, richest and most influential eastern neighbour of all into some sort of partnership should be the EU's real priority instead of building up a buffer zone of half-in, half-out countries between the two spheres of influence.

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