Violence flares again in Ukraine as Russia offers new cash

By bne IntelliNews February 18, 2014

bne -

Violence is flaring once more in Ukraine, as the government looks to press home the advantage it senses it holds, and Russia offers new cash in encouragement.

Fresh fighting between protestors and police was reported to have broken out around midday on February 18 in the areas of Kyiv close to the government quarters after a stormy session in parliament. With protest marches taking place around the city, the ruling Regions party is reported to have blocked opposition demands for a return to an earlier version of the constitution, which would reduce the powers of the presidency.

The opposition is reported to have blocked the parliament rostrum in protest. The heightened tension then appears to have spilt out into the street, where police apparently responded with tear gas and rubber bullets.

Several thousand protesters clashed with police near the parliament, torching a police truck and hurling stones in the first real violence in Kyiv in more than three weeks, reports Reuters. There is fighting on Institutska Street and Shovkovychna Street which are close to the Rada as well as the ruling Party of Regions headquarters. At least four officers had taken rooftop positions on 17/5 Institutska street, reports the Kyiv Post with claims they have been throwing tear gas grenades down on the crowd.

According to local reports there is no fighting on Hrushevskoho Street, the scene of most violent clashes, however, protestors have relit bonfires of tyres and black smoke is once again billowing over the city. Other reports claim the police have been firing rubber bullets into the crowd and one woman was reportedly injured and taken away for medical treatment. A Kyiv Post reporter said protestors were digging up paving stones to use as missiles to lob at the Party of Regions HQ.

The outbreak was sparked by the crowd's frustration after a meeting in the Rada this morning failed to accept a motion to debate Ukraine's return to the 2004 constitution, that would strip the president of many of his powers. The opposition leaders have been calling for the change as one possible way of ending the conflict with the government.

Russian return

The end of the détente on the streets comes less than 24 hours after Russia said it is to hand Ukraine a second tranche of its $15bn bailout this week. The resumption of that suspended programme comes as President Viktor Yanukovych pushes to appoint a Russian-friendly government, which is the next major milestone in what is clearly still an extremely fluid situation.

The Kremlin's move to resume its bond purchases comes in the nick of time for the Ukrainian economy. Russian Finance Minister Anton Siluanov said Moscow will buy $2bn worth of Ukrainian bonds "this week." The purchase, to be made through the Irish exchange, will be the second of a $15bn programme promised to Kyiv in December. A Ukrainian government source said it expects the money to arrive on February 19, reports Euractiv.

The deal with Russia, announced alongside a promised discount on gas prices, only served to infuriate the opposition, with protestors having come out onto the streets in November after Yanukovych refused to sign a pact with the EU. The first Russian purchase of $3bn worth of bonds was made a week after the Ukrainian president met counterpart Vladimir Putin.

However, with the stand off on the streets turning to pitched battles across the country, Russia suspended the bailout last month, as former prime minister Mykola Azarov headed for the exit. Moscow claimed that Kyiv's $3.3bn in unpaid gas bills was to blame, but also noted it would not dispense any more aid until a new government is formed.

Political strings

The sudden announcement of another $2bn on the way comes as Yanukovych looks to be pushing back opposition demands and pressing home a new Moscow-friendly cabinet. At the same time, Kyiv announced a UAH11.1bn ($1.25bn) recapitalization of national gas company Naftogaz on February 14, suggesting it could pay off some of its gas bill soon.

"While Russia has denied that any political strings are attached to its support for Ukraine," points out Tim Ash at Standard Bank, "clearly there are very strong political interests being managed and played out here." Indeed, it appears little coincidence that the resumption of the bailout comes as Yanukovych's Regions party seeks to retake the upper hand against the pro-Western opposition.

However, paying off the gas bill will do little to help Ukraine, which remains teetering on the edge of economic collapse. The hryvna has lost more than 10% since the start of the year and is trading at just under UAH9/$1. Despite a bump in growth in the final quarter of 2013, economists predict zero growth for this year.

Retail sales, one of Ukraine's few economic drivers, already slumped by a third in January, according to preliminary reports. Hard currency reserves have almost halved from a year ago to $17.7bn, or less than 2.3 months of import cover. The state has a heavy debt redemption schedule this with over $6bn of short-term securities coming due just this year, and it simply doesn't have the cash to pay its debts. Some analysts have warned that even with Russian help the country is perilously close to defaulting on its obligations.

The three-month-old crisis has also weighed on the economy directly. According to local reports, the government has moved much of its spending over to fund extra policing.

Ash hints that the Russian bailout may in fact be something of a trap for whoever comes out on top of the ongoing struggle for power in the country. "Ukrainian sovereign debt amortisation is already looking very heavy in 2015 at in excess of $15bn," he writes, "and likely unmanageable for any incoming administration. An extra $2bn of short-term borrowing will hardly help this equation. Indeed, a new administration will have to think outside the box in terms as to how it will cover these liabilities, including perhaps putting the gas transit system up for sale, with Russia appearing as the only likely bidder."

No compromise candidate

The street violence had died down over the past fortnight, since the government offered the opposition an olive branch in the form of a general amnesty for demonstrators. The deadline on that offer, which insisted in return that protestors leave occupied government buildings, ran out at the start of February 17. It passed peacefully enough, but tension was always likely after the two-week hiatus as both sides need to see progress.

The make up of a new government is now the main focus.The real test will be to see whom Yanukovych offers as the new prime minister. There are various compromise candidates in addition to the opposition leaders, but the clever money is on acting PM Serhiy Arbuzov, who is very close to the the president's "family". If he does get the nod, this would indicate Yanukovych has no intention of seeking further compromise with the opposition, who would reject Arbuzov out of hand.

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