Putin Battles Europe for Ex-Soviet States Amid Kiev Protests

Vladimir Putin’s dream of recreating the Soviet empire is being tested on the streets of Kiev.

Hundreds of thousands of demonstrators facing off against riot police in the Ukrainian capital are protesting civil rights infringements and a government decision to back off signing free-trade accord with the European Union. The battle is really about whether Russian President Putin can extend his economic influence over its ex-Soviet neighbor, said Tim Ash, chief economist for emerging markets at Standard Bank (SBK) Group.

“For Putin, Ukraine is the Great Game with the EU -- and the big prize,” Ash said in a telephone interview. “Bringing it into the fold would recreate a big part of the Soviet Union inside his trade zone.”

Putin, who described the 1991 collapse of the Soviet Union as the “greatest geopolitical catastrophe” of the 20th century, is using his country’s energy wealth to anchor Ukraine, Armenia, Kazakhstan and Belarus in a Russian-led bloc after two decades of advances by the West. Ukraine, the route for half of OAO Gazprom (GAZP)’s gas shipments to Europe, faces a choice: cheaper gas and continued access to its traditional customers, or stronger ties with the EU’s $18 trillion market.

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The protests started after President Viktor Yanukovych returned from a Nov. 20 meeting with Putin in Moscow. The government the next day announced that it was turning its back on an EU deal that would have dropped almost all tariffs on Ukrainian exports. Russia had pledged to retaliate with higher tariffs if Ukraine signed the pact.

Bond Selloff

Investors punished Yanukovych with a bond market selloff as they fretted about how Ukraine will meet its outstanding bond payments. The yield on the government’s 2023 dollar bonds rose to a record 10.62 percent yesterday, before declining to 10.51 percent by 2:18 p.m. in Kiev. The cost to insure the country’s debt against non-payment for five years using credit-default swaps rose 7 basis points to 1,099, the highest since Sept. 30, indicating credit risk surpassed globally only by Argentina and Venezuela, data complied by Bloomberg show.

The decision also had implications for Gazprom, Russia’s largest company. Its stock dropped to a three-month low yesterday because of concerns that Ukraine will get a discount on its gas in any deal with Russia. The stock rose 0.59 percent to 137.40 rubles as of 1:44 p.m. in Moscow today.

Merkel, Fabius

The drama in the streets of Kiev, which German Chancellor Angela Merkel says harks back to the Cold War, is the latest twist in a 22-year tug of war between the EU and Russia over its former Soviet vassals.

“Ukraine can very easily become closer to Europe without becoming an adversary of Russia,” French Foreign Minister Laurent Fabius said today in an interview on RMC Radio. “Mr. Putin has a view that’s a bit more unequivocal.”

For some politicians and executives in Ukraine, Armenia, and Moldova, the EU holds out the promise of a future as part of western society. For Russia’s leaders, losing Ukraine from their economic and political sphere of influence might scuttle the plans to build the customs union into a global power.

Energy politics is the weapon of choice for Putin, 61, whether it’s through dangling the promise of price cuts or alluding to the threat of cutting off supplies during a midwinter freeze.

Showing what Russia can do for its friends, Putin on Dec. 2 announced a 30 percent price cut for Armenia after the Caucasus nation in September abandoned plans for EU association and agreed to join the Moscow-led Customs Union.

Gas Dependence

The Russian leader is also building pipelines to increase dependence on Russian energy imports in ex-Soviet bloc states. About two-thirds of the gas in Poland, almost 80 percent in Hungary and 100 percent in Estonia comes from Russia. All three are members of the EU.

With Russia’s gravity so strong even for countries already in western structures, the free-trade accord promised to pull Ukraine further out of Moscow’s orbit, 22 years after the Soviet Union’s demise gave the country independence. That sent Ukraine toward the path that has brought three ex-Soviet republics and eight former satellites into the world’s largest trading bloc since 2004.

Yanukovych himself has flip-flopped between the EU and Russia during his political career. His election victory in 2004 was overturned after weeks of protests by opposition forces favoring EU and NATO entry. He then pushed for the EU agreement after coming to office in 2010, saying it was needed to stop Russia from pressuring his country using energy.

Plans Unravel

The plans unraveled as he balked at a demand by the EU to release his main political opponent, ex-Premier Yulia Tymoshenko, one of the leaders of the Orange Revolution. Her seven-year prison sentence for abuse of office has been condemned as selective justice by European officials.

Yanukovych, who faces elections in 2015, says Ukraine can continue to deepen its ties to the EU and is sending a delegation to Brussels to discuss a road map for association. Ukraine needs to secure loans from international organizations worth 10 billion euros ($13.6 billion), First Deputy Prime Minister Sergei Arbuzov said Dec. 2.

Ukraine is looking for a lifeline as it suffers its third recession since 2008. Talks with the International Monetary Fund on a bailout of about $15 billion have stalled as the government in Kiev rejects demands to cut household heating subsidies.

Euro Crisis

The 28-member EU, which has been focused on the euro region’s worst recession since World War II, has declined to offer financial assistance beyond a 610 million euro loan, arguing that Ukraine will benefit over time from increased access to European markets.

That offer shows that the EU, turning inward to deal with the fallout from the euro crisis, can’t offer the benefits it gave to eastern European countries after the fall of the Berlin Wall, said Lilit Gevorgyan, an analyst at IHS Global Insight in London.

“Ukraine is battling with economic recession and needs immediate remedies, which the EU appears not in the position or willing to offer,” Gevorgyan said by e-mail.

Russia is willing to go further. It offered to sell gas to Ukraine at a lower price if it opted to join the customs union, according to First Deputy Prime Minister Igor Shuvalov. A loan is also possible if the government in Kiev is willing to make “commitments,” Shuvalov said in an interview last month.

Russia went to war in 2008 with another former satellite, Georgia, as the Caucasus nation was strengthening its ties with NATO. The country views the tussle over Ukraine, the second-most-populous ex-Soviet nation, as critical to make its common economic space a serious rival to the EU.

Eroding Europe

“The financial crisis has significantly eroded the concept of the EU and Russia’s influence is growing,” Alexey Pushkov, head of the foreign affairs committee of Russia’s lower house of parliament, said in a phone interview. “There is a redistribution of the balance of power in the world.”

Even as the protests enter their 15th day, Ukraine’s aspirations to cast its lot with western Europe face a major obstacle from the power of its much bigger eastern neighbor.

“Russia is naturally a problem,” Stefan Meister, an analyst at the European Council on Foreign Relations in Berlin, said by phone today. “The influence and dependency of Ukraine on Russia means there’s a certain limit to its sovereignty due to gas and power politics.”

To contact the reporters on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net; Scott Rose in Moscow at rrose10@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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