Countries‎ > ‎Russia‎ > ‎18.12.2013‎ > ‎

Russia gives Ukraine bailout package of at least $20 billion

Russia lavished Ukraine with a bailout package worth at least $20 billion Tuesday, trumping the West in a Cold War-tinged struggle that keeps the former Soviet republic in Moscow's orbit. The pact, one of the richest ever offered by Russia to another country, came just weeks after Kiev turned its back on a trade deal with the EU that Moscow had strongly opposed. Announced after talks in the Kremlin between Russian President Vladimir Putin and his Ukrainian counterpart Viktor Yanukovych on Tuesday, the deal gives Ukraine loans and cheaper natural-gas supplies.

It appears to be substantially larger and the terms less restrictive than the aid the West had been offering to entice Ukraine to sign the EU's trade-and-political accord. Russian officials said the first $3 billion in credits could be released within days.

"Ukraine's trade with Russia makes it impossible for us to act in any other way," Mr. Yanukovych said, referring to the deep economic links between the two countries. "There is no alternative to this."

Mr. Putin, in turn, told Mr. Yanukovych, "Ukraine, without doubt, is our strategic partner and ally."

The contest for the allegiance of this France-sized nation of some 46 million grew increasingly antagonistic in recent weeks as Western politicians flocked to the Ukrainian capital to join thousands of protesters who had taken to its central square after Mr. Yanukovych's abrupt about-face on an offer from the EU on Nov. 21.

Those demonstrators—and Ukraine's opposition—were livid at the news of the deal with Moscow on Tuesday.

"He has given up Ukraine's national interests, given up independence and prospects for a better life for every Ukrainian," an opposition leader, Vitali Klitschko, told crowds on Kiev's Independence Square.

White House spokesman Jay Carney also denounced the deal, saying it "will not address the concerns of those who have gathered in public protest across Ukraine."

He added, "We urge the Ukrainian government to listen to its people and to find a way to restore a path to the peaceful, just, democratic and economically prosperous European future to which Ukrainian citizens aspire."

But there is no sign so far that their weekslong protest will force Mr. Yanukovych to change his mind.

The deal represents a large bet by Mr. Putin on Ukraine's creaking economy, hamstrung by corruption and red tape and weak steel exports. Russia is itself grappling with slowing growth and rising unemployment, and Mr. Putin has reduced planned spending for the next two years. Mr. Putin's desire to keep Ukraine close appears to have overridden economic considerations, observers said.

Germany's new foreign minister, Frank-Walter Steinmeier, accused Russia of taking advantage of Ukraine's economic weakness—some of which was caused by Russia's introduction of trade restrictions in recent months as Kiev appeared to move toward a deal with the EU—to trump the pact with Brussels. He acknowledged the EU deal was inadequate to win Ukraine's support.

"The only thing I'm sure of is that we presented a financial and economic aid package that lay far behind what was necessary to keep Ukraine competitive and permanently tie it economically to Europe," he said.

EU officials have said they weren't prepared to get involved in a bidding war with Russia over Ukraine.

Tuesday's agreement with the Kremlin is a vindication for the embattled Ukrainian president. It appears to confirm suspicions among some Western diplomats that his courting of the EU was in part a feint aimed at alarming the Kremlin with the prospect of losing its historical vassal and thus extracting better terms.

Moscow and Kiev said Tuesday that the issue of Ukraine's potential accession to a Moscow-led trade bloc called the Customs Union wasn't discussed, but Ukrainian opposition leaders said they suspected there were secret assurances given.

Mr. Yanukovych has insisted even after turning away from the EU offer that he intended to cast Ukraine's lot with Europe in the future. He didn't address that issue on Tuesday.

The new deal also offers a lifeline for Mr. Yanukovych's political fortunes, which had suffered in recent weeks as even powerful business tycoons who have long backed him seemed to be hedging their bets.

He faces an election in 2015 against an opposition energized by the protests, and agreeing to painful International Monetary Fund measures could have spoiled his chances.

"It's a big victory for Yanukovych in the short term, as it buys him some time and gives him more options," said Adrian Karatnycky, senior fellow at the Atlantic Council in Washington. "It's a modest victory for Putin as he's blocked [Ukraine's] move toward Europe and keeps the most Russia-friendly government in place."

Under the deal, Russia will buy $15 billion in Eurobonds issued by Ukraine. Kiev will also receive a discount on critical gas supplies from Russian state giant OAO GazpromOGZPY +1.34% of nearly one-third to $268.50 per 1,000 cubic meters through 2019, Ukraine's top energy official said.

The bailout will cost Russia about one-sixth of its National Welfare Fund, which it had so far been careful to husband for pensions and infrastructure projects. Officials said they would have to change the regulations governing the fund's investments, which so far have been limited to top-quality foreign debt.

For Gazprom, the discount comes as the company is already under pressure to cut costs and announced plans Tuesday to cut capital expenditures next year.

As demand for Ukrainian 10-year bonds rose, yields dropped more than one percentage point to 8.7% on the news of the deals. The cost of insuring Ukraine's five-year debt against default plunged to 8.5 percentage points from Monday's close of 10.48 points.

Western officials had urged Mr. Yanukovych in recent weeks to return to the EU deal and agree to a lending program with the IMF to bail out his recession-hobbled economy.

Mr. Yanukovych abruptly turned his back on the EU pact last month following weeks of Russian trade restrictions and two meetings with Mr. Putin shortly before the agreed signing date.

He said the EU wasn't offering enough cash to offset the damage to trade with Russia, and slammed the IMF's economic-overhaul conditions, such as raising the gas price for households, as unbearable for Ukrainians.

Russia said Tuesday it would move to normalize trade relations, suggesting its intention to ease restrictions.

"The IMF offered us essentially a loan and a revolution: take $15 billion, raise [gas and heating] tariffs, freeze pensions and wages," lawmaker Volodymyr Oleinik from the ruling Party of Regions told a local news agency.

The funds from Moscow will help replenish Ukraine's dwindling foreign-currency reserves needed to make around $10 billion in debt repayments next year and prop up the national currency, which many here see as the main marker for economic stability.

Crowds at the barricaded encampment on Independence Square swelled to tens of thousands Tuesday evening, but Mr. Yanukovych seemed likely to ignore them in the hope they thin out and disappear as the cold winter continues to bite.

—Lukas Alpert in Moscow, Serena Ruffoni in London and Anton Troianovski in Berlin contributed to this article.