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Ukrainian Leader Sure on EU Pact as Russia Warns of Backlash

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Ukraine's President Viktor Yanukovych
“Our relations with the EU will benefit the customs union,” said Viktor Yanukovych, Ukraine's president. “Ukraine is a bridge between Russia and the EU and it’s very important to make sure the bridge is strong and reliable. Dialog between Ukraine, Russia and the EU on trade issues is possible in the near future.” Photographer: Andrei Mosienko/AFP/Getty Images

Sept. 25 (Bloomberg) -- Ukrainian President Viktor Yanukovych said he’s confident his country will sign an accord to cement ties with the European Union this year as Russia threatens retaliation for snubbing its own customs union.

Ukraine plans to sign an Association Agreement and free-trade pact with the 28-member bloc at a summit in Vilnius, Lithuania on Nov. 29, Yanukovych said in an interview yesterday in New York. Russia has disrupted the passage of Ukrainian goods across its border in recent weeks and has tied requests from its neighbor for cheaper natural gas imports to membership in the customs bloc it created with Belarus and Kazakhstan.

“There’s a mutual understanding that there will be no obstacles on the way to signing the agreement,” Yanukovych said after meeting European Union President Herman Van Rompuy and European Commission President Jose Barroso. “The main problem in Ukraine’s relations with Russia has always been Russia’s use of energy to pressure Ukraine.”

The EU deal would pull Ukraine further away from Russia’s orbit 22 years after it declared independence following the Soviet Union’s demise, directing it toward the path that brought the three Baltic nations, also former Soviet republics, into the world’s largest trading bloc in 2004.

‘Threats, Humiliation’

“We are hearing these threats and even some humiliation by the media outlets,” Yanukovych said. “That doesn’t help our relations and that doesn’t paint Russia in a good way.”

While Ukraine is “convinced” it will sign the EU agreement in November, it wants to find a way to develop a relationship with the Russia-led customs union, Yanukovych said, adding that it “makes no sense” for the bloc’s members to reply to Ukraine’s EU agreement with a trade war.

“Our relations with the EU will benefit the customs union,” Yanukovych said. “Ukraine is a bridge between Russia and the EU and it’s very important to make sure the bridge is strong and reliable. Dialog between Ukraine, Russia and the EU on trade issues is possible in the near future.”

While EU enlargement head Stefan Fule said the bloc backs Ukraine amid Russian pressure, to seal the pact the country must address examples of selective justice such as ex-Premier Yulia Tymoshenko’s jail term.

Tymoshenko Solution

A European Parliament commission led by ex-Polish President Aleksander Kwasniewski and Pat Cox, the former head of the legislature, is working on a solution to the issue of Tymoshenko’s seven-year sentence for abuse of office while serving as prime minister, according to Yanukovych.

There are no means of freeing her or allowing her to get treatment in Germany under existing Ukrainian law and she’s awaiting decisions in other cases against her, Yanukovych said.

“The Tymoshenko issue is very complicated,” he said. “It would be less complicated if she’d attend court meetings, but she’s refusing to do so.”

Yanukovych probably won’t free the former premier, an iconic figure of the 2004 Orange Revolution that defeated him, in the near future, according to Luis Costa, an emerging-markets strategist at Citigroup Inc. in London.

“Tymoshenko’s imprisonment has been one of Yanukovych’s major political statements since he came to power,” he said today in a note. “Letting her go would be seen as a massive political defeat.”

Political ‘Battle’

While her release from prison may not be necessary to secure the EU deal, she must be granted adequate medical care, according to Algirdas Butkevicius, prime minister of Lithuania, which holds the bloc’s rotating presidency. He sees the fate of the pact becoming clear two weeks before the Vilnius summit.

“It’s not good when politicians battle to the point where they even put people in jail,” he said today in an interview in the Lithuanian capital. “Of course, responsibility is the same for everyone, no matter what their position, but it has to be clearly said what her violations were.”

As Ukraine’s economy struggles to recover from a recession, Moody’s Investors Service cut its credit rating further into junk territory Sept. 20, propelling the cost to insure government debt against non-payment for five years to the highest level since 2010.

Default Risk

Moody’s lowered Ukraine’s grade by one level to Caa1, seven steps below investment status, citing “very high default risk.” The nation’s credit-default swaps stood at 1,024 basis points as of 12:31 p.m. in Kiev, the world’s fourth-highest.

Yanukovych said he’s optimistic the government can reach an agreement this year with the International Monetary Fund for a $14.3 billion bailout. While the Washington-based lender has sought an increase in household gas tariffs to reduce budget subsidies, Yanukovych said that would be “unacceptable” and he’s seeking different terms.

“We’ve been in talks with the IMF all these four years and we expect the IMF will finally be willing to make an agreement,” he said. “We’ve fulfilled all of the conditions, except for one, which is an increase in gas prices for households. There is no room for us to hike the price. On when the agreement may be signed exactly -- this is a question to the IMF. We’re willing to replace that condition with another and are willing to discuss it.”

To contact the reporters on this story: Halia Pavliva in New York at hpavliva@bloomberg.net; Karen Toulon in New York at ktoulon@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Tal Barak Harif at tbarak@bloomberg.net

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