Ukraine’s struggle to negotiate its future

As Kyiv portrays it, Ukraine’s recent decision to forego signing an association agreement with the European Union and instead to reach an economic deal with Russia is a necessity.

Kyiv has been struggling to meet debt payments and to end the Russian sanctions causing economic hardships in Ukraine.

The deal with Russia provides for a one-third discount in the price of gas Ukraine purchases from Russia — taking the more than $400 per 1,000 cubic meters down to $268.50 — and includes a commitment by Moscow to buy $15 billion in Ukrainian government bonds.

Paralleling this view is the consensus by outside observers that the arrangement is a success for Russia in keeping Ukraine out of Europe and within its own orbit, and, consequently, as a geostrategic loss for the West.

While there is some truth in each of these views, the reality is somewhat more complicated. In this still unfolding saga, Ukrainian officials are portraying their decision as forced upon them and, in particular, blame the EU and the IMF for not offering a level of assistance to offset any Russian economic pressure. But the economic debacle in Ukraine, including dwindling foreign reserves and increasing budget deficits, while abetted by the global recession, was largely brought about by Kyiv itself.

Corruption has been rampant — even under the previous reform government of President Viktor Yushchenko — as government power is used to concentrate economic control in the hands of a few oligarchs. The result has led to favoritism in business deals, depletion of the public treasury, stifling of competition, arbitrary takeover of businesses and undermining of targeted businesses through taxation and investigations. Needed reforms are being ignored. The result is that foreign banking institutions have started pulling out of Ukraine and foreign direct investment has decreased.

Ukrainian officials claim that the EU, unlike Russia, was unwilling to provide financial support to meet Ukraine’s pressing debt crisis. However, it turns out that the EU was considering offering Ukraine over $26 billion in loans and grants over seven years if an EU agreement was reached and if Kyiv accepted an IMF agreement. One of the main stumbling blocks, as it has been with previous IMF agreements with Kyiv, is Ukraine’s unwillingness to put in place needed financial and budgetary reforms to comply with IMF requirements. The decision to not sign the EU agreement, therefore, was more a political decision rather than an economic one.

The Ukrainian leadership appears to have been divided, with some oligarchs leaning toward the West in the belief that this was the best way to preserve their fortunes and to move the country forward. The EU promises a system of transparency and legal norms and accountability that is absent in the current Ukrainian context and thus would help these businessmen to preserve their fortunes and grow their businesses without fear of confiscation and political pressures.

Others lean towards Russia based not only on their current business interests but also because Russia, like Ukraine, provides the type of cover and support of a system that helps these oligarchs perpetuate their interests with their own rules—in short, an arbitrary regime that uses the cloak of legality to advance its own interests and to maintain power. President Yanukovych’s administration and the people closely associated with it have greatly benefitted from this system and, in the end, it won out over the interests of the country.

Yanukovych, however, appears to have gained a pyrrhic victory. Russia's release of a first tranche of $3 billion of the overall loan has somewhat stabilized the Ukrainian economy, particularly as regards to helping to raise the level of foreign reserves, however, the Russian agreement takes away the incentive to implement any reforms to put the economy on a sound footing. Russian assistance, therefore, appears to postpone the actual date of economic reckoning and also puts Russia in a position to use its leverage to gain concessions from Kyiv in the future.

The recent decision by the Yanukovych controlled parliament to act on measures that will inhibit peaceful protest, freedom of speech, the functioning of the media and undermine the activities of NGOs, compounds the negative views of the government among the Ukrainian people and abroad and goes counter to any expressed wishes by the government to move towards the EU. The United States has protested these controversial steps taken by parliament and has called on Kyiv to adhere to democrativ principles.

For example, the reduced gas price is to be reviewed quarterly thus leaving the possibility of future price hikes. The Ukrainian government, despite claims that it still wants an EU agreement in the future, has also lost credibility and legitimacy with the people and its standing, both domestically and internationally, continues to diminish. The latest steps by the government have compounded the crisis this past weekend. Clashes have erupted in Kyiv between protestors and police in response to the decision by the parliament to pass these measures aimed at inhibiting peaceful protest, freedom of speech, the functioning of the media and undermining the activities of NGOs.

The Ukrainian public has long had a sense of frustration regarding the economic conditions of the country and the corruption of the government. The one bright hope was the expectation that an EU agreement would help change Ukraine’s fortunes and create a brighter future. When Yanukovych walked away from the agreement the Ukrainian people spilled out onto the streets in an extemporaneous uproar throughout the country, most notably exemplified by the large demonstrations in Kyiv.

The government and its allies failed to realize that the Ukrainian people want a future tied to the values of Europe where democracy, accountability and transparency are fundamental and not those of Russia where authoritarian practices predominate.

It is too early to see how all this will play out. It is obvious, however, that the Ukrainian people have taken an active interest in their future. This is only the beginning of a long process but as history shows in similar cases, time is on the side of the Ukrainian people.

Roman Popadiuk is a principal with Bingham Consulting in Washington, DC. He served as the first US Ambassador to Ukraine.