KYIV BLOG: Ukraine heads for Bulgarian scenario after Russia deal

By bne IntelliNews December 19, 2013

bne -

Ukrainian President Viktor Yanukovych has recaptured the initiative with the deal struck with Russian President Vladimir Putin on December 17 and the protestors on Maidan Nezalezhnosti (Independence Square) are settling in for the long haul. That's bad news, as Ukraine looks set to follow the "Bulgarian scenario" of economic stagnation and endless protests until the next elections in 2015.

Other than the headline $15bn of investment into Ukrainian bonds and a 33% discount on the price of natural gas, little else is known about the terms of the Russo-Ukrainian deal.

Everyone assumes there is more. Specifically: it is widely assumed that Yanukovych promised not to join the EU and instead opt for the Russian-led Customs Union, probably after the 2015 elections. It could also be possible that he has agreed to let Russia into the ownership of Ukraine's gas pipeline network. And a new more permanent deal on Russia's right to keep its Black Sea navy fleet at Sevastopol is very likely.

The terms of the deal "are a big secret", wrote Ukraine's leading independent publication Ukrainska Pravda in a widely quoted editorial. "The only free cheese is in a trap," opposition leader Arseniy Yatsenyuk added, in a quote that everyone in the western media seems to have got independently, including US Senator John McCain.

However, the deal is a game changer and removes one of Yanukovych's biggest weaknesses - the dire state of the economy. Ukraine has been teetering on edge of collapse for months. Specifically, the ballooning current account deficit means that the government has bled money and foreign reserves fell to just two months of import cover, well below the minimum that economists say is necessary to maintain the stability of a currency.

The Russian deal not only plugs the hole in the budget for about 18 months (ie. until after the next presidential election), but also goes a long way to nixing the cause of the problem: the high price it had to pay for Russian gas. Now those prices have fallen from over $400 per 1,000 cubic metres to just over $260, the state will have a lot more resources to play with.

As long as the country stood on the edge of economic crisis, Yanukovych was forced to negotiate with one of the two rivals: the EU and Russia. Now the deal is done and the political capital spent, Yanukovych can step out of the limelight and get on with the business of marshalling his administrative resources to "ensure" he wins re-election in 2015.

This puts the opposition in a bind, as they will now be shouting at someone that no longer needs to talk back. The end of these negotiations also removes all the points of leverage and photo ops to embarrass Yanukovych in the local and international press. If he is clever, he should retreat to his palace and send out minions to announce some good news like new social projects and pay hikes for teachers etc.

The main problem the opposition faces is that as Yanukovych remains a democratically elected leader, they have no mechanism to remove him. Things like corruption investigations or charges of abuse of office that were used to put former prime minister Yulia Tymoshenko in jail could clearly be used on Yanukovych as he is clearly guilty of both, but those only become available if and when the opposition comes to power.

So it looks like Ukraine is headed for the :Bulgarian scenario": Bulgarians have been on the streets for more than six months in protest against their inept and allegedly corrupt government. Bulgaria just came in last amongst EU members in the latest Transparency International "Corruption Perceptions Index" ranking in 77th place out of 177 countries surveyed (Ukraine is worse in 144th place, making it the most corrupt country in all Europe).

Bulgaria's situation is almost identical to that in Ukraine - except the country is already in the EU. And actually Bulgaria's experience is a good argument against Ukraine joining the EU.

"Bulgaria's economy was something of an investor's darling in the middle of the last decade, as optimism linked to EU accession in 2007, pro-business reforms and broad appetite for emerging market assets stimulated growth," the Financial Times wrote recently. "The global economic crisis hit the country late, but hard, and since a deep recession in 2009 there has been little growth. The eurozone's difficulties have acted as a drag on exports and investment, while incomes and consumer confidence remain low."

If anything, the anti-government sentiment in Bulgaria is even stronger than that on the Maidan. A recent poll found that 80% of Bulgarians want early elections, whereas a survey of just the protestors on Maidan found 80% wanted the government out, but the national figure will be pulled down by Yanukovych's big support in the Russophile east of the country.

However, despite the commitment of the protestors on Maidan, the demonstrations look set to rumble on without result. The government continues to ignore them without penalty. That is the problem with democratic elections: if the people vote snollygosters into office and only discover afterwards they are robbing the country blind, there is little the electorate can do except to wait for the next elections.

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