Ukraine halts EU trade talks, asks for three-way meeting with Russia

By bne IntelliNews November 22, 2013

Ben Aris in Moscow -

Ukraine shocked European officials on November 21 when Ukrainian President Viktor Yanukovych announced he was freezing negotiations with the EU and called for a three-way summit that includes Russia.

Tensions have been rising ahead of an EU summit due to be held in Vilnius on November 28 at which Kyiv is due to sign off on a free trade and association pact - something Russia is trying to prevent because it wants Ukraine to join its Customs Union. But Yanukovych has been accused of brinkmanship as he tries to squeeze more concessions and better offers out of the two competing trade blocs.

Ukraine's cabinet said in a decree that the decision to freeze talks with the EU was motivated by the need to consolidate economic ties with Russia and members of the Customs Union, which include Belarus and Kazakhstan.

"Ukraine government suddenly bows deeply to the Kremlin. Politics of brutal pressure evidently works," Swedish Foreign Minister Carl Bildt, a key advocate of the signing of the treaty with Ukraine, wrote on Twitter, adopting a line that many will agree with in the West.

In the east, commentators are taking a similar line, except they say it is the EU that has overplayed its hand by linking the release of jailed former prime minister Yulia Tymoshenko to the trade deal.

The head of the Duma's foreign affairs committee, Alexei Pushkov, wrote on Twitter: "The EU has overdone putting pressure on Ukraine: an agreement of dubious benefit for Ukraine was also contingent on political conditions. That was a major error."

It is looking increasingly likely that despite promising to side with the EU for months, Yanukovych will end up in bed with Russia and join its Customs Union after all. Indeed, bne has argued that it is possible that Ukraine never had any intention of signing the free trade and association agreement and only flirted with the EU to get a better deal from Russia.

In the last few days, Ukraine has appeared to do everything it can to sink a deal with the EU. The government has already said it is impossible to hike domestic gas tariffs - the International Monetary Fund's (IMF) cornerstone demand for a new stand-by loan to help stablise Ukraine's teetering economy. It has also failed to pass all the enabling legislation requested by the EU. And on November 21, the Rada rejected again a law that would have allowed Tymoshenko to leave jail for medical treatment in Germany - another cornerstone demand, this time of the EU.

Ukraine's government proposed November 21 the creation of a trilateral commission between itself, Russia and the EU to explore ways to deepen mutual ties. The proposal came only hours after the Kremlin said it was open to a summit meeting with the EU and Ukraine on the whole issue.

Kremlin spokesman Dmitry Peskov welcomed Ukraine's decision to build up cooperation with Russia. "We clearly welcome the desire of our close partner Ukraine to optimize and develop trade and economic cooperation," Peskov said.

The decree also ordered the resumption of an "active dialogue" with the Moscow-led Customs Union, which includes Russia, Belarus and Kazakhstan.

Putin has sought to downplay the fight, saying that Russia has no problem with Ukraine joining the EU's trade club because it is Ukraine's "sovereign right". "If they tried to join Nato, then we would really be against that," he reiterated November 21.

Another reason for the volte face is that Kyiv is already feeling the pinch from Russian trade restrictions, which would only get worse if it signs up with the EU. Prime Minister Mykola Azarov said trade with Russia is already falling at a time when the government is counting every penny it earns. "Trade turnover grew significantly in 2012, but in 2013 we have lost nearly one-quarter of our trade turnover with [Commonwealth of Independent States] markets," Azarov was reported as saying by Ria Novosti. "Those economic losses are significant for us, and Ukraine has been facing serious [financial] hardships lately."

Horse trading intensifies

As the deadline for the summit approaches, Yanukovych has already met secretly with Putin and more openly with European Commissioner for Enlargement and European Neighbourhood Policy Stefan Fuele. Clearly a lot of horse trading is going on.

But Yanukovych has made clear most of his demands. First, he needs cash, and fast, as the economy is close to collapse. This would mean a new IMF package, but it seems Kyiv is asking for one with no or few strings attached, something the IMF is balking at. The Russians, on the other hand, have no problem with this and would be expected to stump up billions in loans.

Second, Yanukovych wants trade concessions and full access to markets. This would come with the EU deal, but more specifically he wants some sort of protection or relief should Russia - the Ukraine's most important export market - impose trade sanctions or barriers on Ukrainian goods.

Energy Minister Yuri Boiko said Ukraine cannot afford to scupper trade ties with Russia, and that if the Kremlin does start a trade war, the EU will have to compensate Kyiv for the losses - something it has so far refused to offer. "We have not received a clear signal from our European partners that these losses, which we have been receiving over the past four months, would be compensated," Boiko said, reported Interfax. "The country cannot afford it; that is why this (government) resolution came into being."

Third, there is the issue of upgrading Ukraine's creaky gas pipeline system. Russia has already built the Nord Stream gas pipeline, which sends gas straight to the EU under the Baltic Sea, bypassing the main transit country of Ukraine. And it launched the alternative South Stream gas pipeline project that runs through Bulgaria in a threat to cut out Ukraine completely, but according to analysts this remains a feint and no real work is actually going on a the pipeline at the moment.

On November 21, Bulgaria said it intends to repeat the pre-selection procedure for the construction of the Bulgarian part of the South Stream gas pipeline, local media reported. In other words, there is no work going on at one of the main sections and none will start in the near future.

The battle to secure Ukraine's signature continues on all fronts.

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