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Russian Deficit Will Swell to Fund Ukraine Gas Deal, Putin Says

Russia’s budget deficit will widen to fund a $40 billion energy subsidy to keep the Black Sea Fleet in Ukraine, Prime Minister Vladimir Putin said.

“Even for Russia’s budget this is serious money,” Putin said after meeting his Ukrainian counterpart Mykola Azarov in Kiev late yesterday to discuss restoring Russian gas subsidies in exchange for allowing the fleet to remain until 2042.

Lawmakers in Moscow and Kiev simultaneously ratified the agreement today, less than a week after it was first announced. The Ukrainian opposition threw eggs and smoke bombs to protest the treaty, saying it violates the constitution, while in Russia’s State Duma the nationalist party of Vladimir Zhirinovsky abstained from the vote.

Putin has embraced the government of President Viktor Yanukovych, pledging increased cooperation in aviation and nuclear power following the gas-for-naval base agreement. Yanukovych, who took office two months ago, has vowed to improve relations with Russia after they deteriorated under his pro-western predecessor Viktor Yushchenko.

“This will mean an increase of the budget deficit,” Putin told Ukrainian reporters. “If Ukraine makes a budget based on a lower gas price, you’ll have a deficit even smaller than ours.”

Russia expects to run a budget deficit of just over 6 percent of gross domestic product this year, Putin said.

Factoring in the energy subsidy, Ukraine will be able to cut its budget deficit to just over 5 percent, he said.

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The country’s lawmakers today approved the 2010 state budget with a deficit of 5.3 percent of GDP, opening the way for the next payment of an International Monetary Fund loan.

Keeping the Black Sea Fleet in Crimea is more expensive than any military base in the world, Putin said. The gas price discount, achieved by canceling customs duties, may cost Russia as much as $45 billion over 10 years, he said.

“This isn’t just a question of money of course,” Putin said. “This is also an issue of cooperation with Ukraine.”

As the Ukrainian opposition headed by former Prime Minister Yulia Tymoshenko scuffled with pro-government deputies under a cloud of smoke today, the four-party Russian Duma maintained parliamentary order.

Zhirinovsky said his Liberal Democratic Party of Russia would abstain from backing the treaty because Ukraine would end up moving toward the European Union and North Atlantic Treaty Organization even with the aid package.

“Nobody will appreciate our big present,” Zhirinovsky told the televised session. “They’ll spend it all but won’t reopen Russian schools or switch Russian television back on.”

Putin’s ruling United Russia party, the Communists and Fair Russia supported the treaty.

The government must now focus on modernizing the Black Sea Fleet, said Nikolai Levichev, head of Fair Russia’s parliamentary group. The average age of ships in the fleet is 28 years, and one rescue vessel dates back to 1913, he said.

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