KYIV BLOG: Is the EU preparing a better deal for Ukraine?

By bne IntelliNews December 11, 2013

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There is speculation that the EU is trying to engineer a last-minute deal to get Ukraine to sign an Association Agreement. However, Ukrainian President Viktor Yanukovych's decision to send the police in to clear protestors from the main square in Kyiv suggests it might be too little, too late.

The drama in the capital of Ukraine continued as the EU's top diplomat, Catherine Ashton, arrived for talks with the embattled Yanukovych. Ashton spent three and a half hours closeted with Yanukovych, before going for a walk on Maidan, the epicentre of the two-week popular protests that began after Yanukovych failed to sign a deal which would take Ukraine closer to the EU. She was greeted like a rock star, with a large crowd chanting "Catherine!" and "Europe!"

No word of the substance of their talks was released and Ashton didn't hold a press conference. But back in Brussels, European Commissioner for Enlargement and European Neighbourhood Policy Stefan Fuele said that the EU is ready to provide financial assistance to Ukraine for the implementation of the Association Agreement on the same day. "We stand ready to help and support Ukraine on its modernization journey, including through topping up [International Monetary Fund] IMF loans with macro-financial assistance; by stepping up the European Union's financial assistance programs to help Ukraine implement the Agreement, when it is signed, and helping to bring on board other international partners," he said at a plenary sitting of the European Parliament in Strasbourg on December 10 during discussion of the Ukrainian issue.

As bne has reported, it's all about the money . Yanukovych is in a bind. With about $1.6bn of debt redemptions due before the end of the year, another $2bn of unpaid Russian gas bills and some $10bn of debt redemptions due next year, but hard currency reserves of only $18.8bn that are shrinking fast, the country is desperately short of money.

Citigroup analysts Tina Fordham, Ivan Tchakarov and Matthew Dabrowski said in a note the same day (see in today's bne:Ukraine daily list, "Ukraine muddle through option no longer viable") that Ukraine has at very best six months before the situation is no longer viable. And with the nervous population starting to withdraw dollars from their accounts, a crisis could hit even sooner.

Fuele's comments are tantalising, because if the EU were to offer help on the order of $10bn, then it would still be possible to rescue the association and free trade deal. There is another Ukraine-EU summit scheduled for March, where a deal could be done, and a Ukraine meeting at the IMF next week, where a plan could be prepared.

Former president Leonid Kravchuk, who also met with Yanukovych together with the other ex-presidents, Viktor Yushchenko and Leonid Kuchma, said: "There is an agreement with the EU which will allow Ukraine to sign the agreement without losing its economic interests and development opportunities," Kravchuk said. "If the EU, in particular the European Commission, sticks to its commitments and promises, a (unilateral) commission will immediately get down to work... and the agreement will be signed in March."

Of course, none of this means anything unless the EU is willing to offer cash upfront. If there is no cash on offer, the protests are likely to drag on for months - or end in violence. The latter is more likely now that hundreds of riot police stormed the protest encampments in central Kyiv in the pre-dawn hours of December 11 and retook part of the main square.

The protestors certainly appear willing to hold out. According to a poll from the Ilko Kucheriv Democratic Initiatives Foundation and Kyiv International Institute of Sociology (KIIS) on December 7-8, over 70% of the protestors said they were ready to protest "as long as necessary" to remove Yanukovych from office.

At the same time the Kremlin has been reticent to make a counter offer and have not publicly or formally offered any money or a new gas deal - although there have been several statements by senior officials that a deal could be done.

The next date to watch is December 16 and 17. The IMF are due to hold a board meeting to discuss Ukraine on the 16th. Currently a new Stand-By Arrangement (SBA) is not on the agenda, but it is possible that following Ashton's discussions with Yanukovych on December 10 it could be included. Then on December 17 Yanukovych is due in Moscow to talk turkey and there too a concrete deal could be cut.

It seems an IMF deal could be a lot closer than many had thought. US Vice President Joe Biden has spoken over the phone to Yanukovych, expressing "deep concern" about the situation in Kiev and urged dialogue with the opposition. "[Mr Biden] noted that violence has no place in a democratic society and is incompatible with our strategic relationship," the White House said in a statement.

Ukrainian journalist Myroslava Petsa tweeted on December 10: "US [vice president Joe] Biden called me yesterday, said Ukraine almost got IMF loan, but we won't take it if we have to raise gas prices for people - #Yanukovych."

Given the strength of the protests and the Russian delay in offering any deal, Yanukovych may be willing to revisit the issue of quadrupling household gas prices - something the IMF has demanded. Until now he has refused to increase prices, because it would be politically unpopular ahead of the 2015 presidential elections. But with the centre of Kyiv occupied by tens of thousands of demonstrators who are promising to stay there all winter, surely he can't make the people any more angry than they already are.

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