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.

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.