Ukraine’s Russian Deal: Not Really a Big Victory for Putin

Passions are flaring today – in the streets of Kyiv, and in government buildings across the European Union and in Washington – over yesterday’s announcement of Russian financial support for Ukraine. EU officials are issuing warnings that the deal is shortsighted and  will retard Ukraine’s modernization.

Ukrainian opposition politicians and leaders of its mass protest movement voice alarm over a sellout of Ukraine to Russia, a wholesale Russian takeover of Ukraine’s economy and the loss of Ukrainian sovereignty.

While all the contours of Ukraine’s deal with Russia are not known to us, amid today’s sturm und drang, it is worth separating the wheat from the chaff.

Some Basics

First, let’s forget all the background noise.  This is not a major victory for Russia or for those who are intent on pushing Ukraine into Russia’s sphere of influence by having it join the Russian-led Customs Union.

If Ukraine had entered into the association agreement it negotiated this year with the European Union (EU), it would have suffered some real short-term costs: EU$3-4 billion a year more in payments for gas from Russia, and an estimated decline of up to 1.7% per year in its gross domestic product (GDP), as a result of Russia imposing legitimate trade restrictions on Ukraine. Over its first year or two, an EUEU free trade agreement also would have deepened Ukraine’s trade deficit by $3 to $5 billion, because of new imports from Europe. All these costs would have eaten deeply into Ukraine’s already fragile $18 billion hard currency reserve. It would have taken three-plus percentage points off GDP off a Ukrainian economy that is mired in a new recession, in great measure because of the corruption and rent-seeking of its ruling elite.

On top of this, Russia’s $15 billion in loans, when fully financed at five percent, should save Ukraine a further $500-600 million per year on debt servicing without forcing Yanukovych’s government to pay the political price of a freeze on social spending and increased home energy prices that the IMF demanded as a condition for its aid.

Simply put, the EU association and free trade agreement – while great for Ukraine in the longterm – was deadly for President Yanukovych in the short term, especially given his already fading re-election prospects. This deal buys time for Yanukovych without closing the door to a future EU agreement with Ukraine in the long-term: most likely after new elections.

Importantly, Yanukovych cannot have delivered any secret, ironclad commitments such as entry by Ukraine into Russia’s Customs Union. Such commitments cannot be guaranteed except by treaty and I doubt the Rada, Ukraine’s parliament, would ratify such an agreement. Ukraine’s opposition parties would block such a step with support from the country’s billionaire oligarchs. The nearly month-long mass demonstration in Kyiv for closer ties with Europe could become  a nationwide uprising.

While the deal is a short-term victory for President Yanukovych, Ukraine’s business elite understands that the only long-term path to rapid economic growth is to wean the country away from Russia and sign a free trade agreement with Europe. As importantly, even President Yanukovych is not seeking to lurch away from the EU toward Russia. This deal buys him more time to play a waiting game. Keeping a European option is crucial to his own room to maneuver with Russia. And Europe should intelligently engage him in this game.

In this context, who are the winners and losers from the Ukraine-Russia deal announced yesterday?  Here is my scorecard:


President Viktor Yanukovvch: His political weakness at home enabled him to convince Russian President Vladimir Putin to extend a lifeline of emergency assistance. But if Yanukovych squanders this injection of cash through corrupt, rent-seeking schemes and does not introduce sound market practices, the economy will flag and he will face a renewed crisis on the eve of the 2015 presidential elections.

As importantly, if Yanukovych does not learn from the past month – if he wrongly concludes that he has overwhelming power and rejects calls from his moderates for a new reformist government of national consensus – he will pay a political cost for that overreach.

The Peace Party Within the Yanukovych Camp: As President Yanukovych held his talks with Putin Tuesday, he sat flanked on either side  by chief of staff Serhiy Lovochkin and Deputy Prime Minister Yuri Boyko. Both men, steady political hands, had been viewed as sidelined from key decisions in recent months as power had drifted to Yanukovych’s personal cronies. Now, with their boss’s survival on the line, Lovochin and Boyko had helped prepare and broker a major deal that had saved his skin.

Lovochkin had tendered his resignation (which was not accepted) after Yanukovych’s government conducted a brutal police crackdown against the pro-Europe demonstrations  in Kyiv. He now may be getting some breathing space, as the agreement with Russia — plus government victories Monday in four of five parliament by-elections — point to a political, rather than a repressive, path forward for the authorities.


U.S. and European Diplomats: The inability of Europe and the US to grasp the geopolitical importance of Ukraine, and to understand how crucial it is to Russia’s ambitions to reemerge as a world power, contributed to Yanukovych’s search for salvation from Moscow. Instead of pursuing a policy to woo Ukraine from Russia and then seek to reform it over the long haul, Europe and the US chose moralizing and hectoring without results.

While the European Union and the United States’ intentions were noble, their approach was milquetoast. It took hundreds of thousands of Ukrainians demonstrating amid the snow and ice of central Kyiv’s Maidan Nezalezhnosti (Independence Square) to reenergize these Western govenrments’ hopes for a modern, democratic Ukrainian future.

Opposition Leaders: Given the smart recovery of President Yanukovych, opposition leaders have to develop a new playbook. They should reject personal gain, should quietly negotiate with the business elite and moderate allies of Yanukovych, and help protest leaders on the Maidan to strengthen and unify the country’s budding civic movement.

The War Party in Ukraine’s Government: For the moment, the architects of the bloody police crackdowns of late November and early December remain in place. Still, the likelihood that their tactics will gain dominance is diminished by President Yanukovych’s growing belief that he has a political path toward survival.

None of the Above

Russian President Vladimir Putin: He has basically preserved Russia as a major factor in Ukraine’s future over the short term and helped stem the bleeding of an unreliable ally. But he also has had to forego plans to press Ukraine into the Customs Union – Russia’s chosen tool for reviving its sphere of influence in the lands of the former Soviet Union. In short, the crowds on the Maidan forced him into a defensive struggle. Whether he wins will depend on the wisdom of President Yanukovych, the acuity of Euro-Atlantic diplomacy, and the ability of Ukraine’s discontented populace and economic establishment to press for the EU option. It also will depend on how deeply Putin can enmesh Ukraine in bilateral joint ventures in the railroad, aerospace, machine-building and aircraft sectors.

The Maidan Protest Movement: While the protest movement may have a last, end-of-year hurrah this weekend, the demonstrations are likely to abate in the short term, notably with the New Year and Orthodox Christmas holidays approaching.

The protest movement’s long-term viability remains as an ever-present check on President Yanukovych, his political “family, and their bad behavior. In this the crowd in the Maidan has natural allies among Ukraine’s business elite, reformer/modernizers in the pro-presidential camp, and in the pro-Maidan news media.

For the protest movement to emerge as a winner, it must use the winter respite to reconfigure as a coherent and structured civic force, akin to Solidarity in Poland, with networks of activists, clear chains of command, and significant resources.

Related Experts: Adrian Karatnycky