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Ukraine Getting $15 Billion From Russia Raises Questions

Russian President Putin & Ukrainian President Yanukovych
Russia's President Vladimir Putin, right, and Ukrainian President Viktor Yanukovych shake hands after signing documents during their meeting at the Kremlin in Moscow, on December 17, 2013. Photographer: Alexander Nemenov/AFP via Getty Images

Dec. 17 (Bloomberg) -- Ukraine sealed $15 billion of Russian financing and a one-third discount on energy imports from its neighbor as anti-government protesters in Kiev demanded to know what President Viktor Yanukovych had ceded in return.

Russia will buy government debt this year and next and will cut the price it charges for natural gas to $268.5 per 1,000 cubic meters, President Vladimir Putin said today after meeting Yanukovych in Moscow. The two leaders said they didn’t discuss a Russia-led customs union after speculation Ukraine was close to joining riled pro-European demonstrators in Kiev.

“The news is positive for Ukraine in the short- to medium-term -- the Russian deals will provide support to the Ukrainian economy, improving the balance of payments and helping replenish reserves,” Credit Agricole SA analyst Alexander Pecherytsyn said today by phone. “The only thing we don’t know is what the Ukrainian president promised in return.”

Yanukovych is grappling with the biggest protests since the 2004 Orange Revolution after he snubbed a European integration and trade accord last month in favor of repairing relations with Russia, which had opposed the deal. The former Soviet republic, a crucial east-west energy transit nation, is struggling with its third recession since 2008 and dwindling foreign reserves.

Yields Plummet

Ukrainian assets rallied the most on record, pushing the yield on the government’s dollar notes due in June down 6.42 percentage points to 8.76 percent. The cost to insure Ukraine’s debt against non-payment with five-year credit default swaps fell 214 basis points to 829, the biggest drop in more than five years, according to prices compiled by data provider CMA.

The yield on Ukrainian dollar bonds due 2023 plunged more than 1 percentage point to 8.833 percent as of 7:11 p.m. in Kiev, the lowest since June 17, data compiled by Bloomberg show.

Putin said the financing is being provided in light of “the problems of the Ukrainian economy linked to the world financial crisis, and to support the budget of the Ukrainian government.” Trade restrictions on Ukrainian goods will also be lifted.

Ukraine will issue $15 billion of Eurobonds for Russia to buy, with a $3 billion tranche of two-year debt possible in 2013, according to Russian Finance Minister Anton Siluanov. The money will come from the National Wellbeing Fund, which contained $88.1 billion at the end of last month.

‘Unites Us’

“Everything that unites us, we don’t have the right to use it differently,” Yanukovych said. “We have to make use of it efficiently. There’s no other alternative. The trade between Ukraine and Russia is so important that we must value it.”

The funds are enough to “plug the black hole in Ukraine’s balance of payments” for about 18 months, while the reduction in the gas price from $400 per 1,000 cubic meters now may narrow Ukraine’s current-account deficit to 6 percent of gross domestic product from 8.5 percent, according to London-based Capital Economics Ltd. Even so, “considerable” risks remain, it said.

“The shift towards Moscow risks inflaming the anti-government protests,” Capital’s Chief Emerging Markets Economist Neil Shearing said by e-mail. “While a deal with Russia was always likely to offer the best terms on short-term financing, closer ties with the EU were more likely to provide an anchor for the structural reforms needed to reinvigorate Ukraine’s faltering economy.”

‘Only Questions’

Ukraine’s opposition had planned a rally for this evening and protesters flocked to Independence Square on hearing news of the Russian agreements. There were about 30,000 people there as of 7:30 p.m., according to The RBC-Ukraine news service. The Interior Ministry put the turnout at about 8,000.

“What did Yanukovych promise in exchange?” said 57-year-old Vera from Kiev, who declined to give her last name. “Nobody gives anything without a reason. Now we have only questions.”

Opposition leaders addressing the crowds, who’ve blocked central Kiev since the government pulled out of a planned European Union association agreement, were similarly skeptical.

“I know only one place where there’s free cheese -- a mouse trap,” said Arseniy Yatsenyuk, head of jailed ex-Prime Minister Yulia Tymoshenko’s party. “We want to hear what he gave in return.”

Protesters’ Demands

As well as a resumption in the EU pact, protesters are demanding the government’s dismissal after violent clashes with police on Nov. 30 and Dec. 1. Demonstrators rebuilt barricades around the square that were removed by police last week. Fortifications include barbed wire, snow-filled sacks reinforced with logs, lumber and old tires.

Vitali Klitschko, head of the opposition Udar party and a parliament member, accused Yanukovych of using strategic Ukrainian companies “as collateral” for the Russian agreement.

“The government betrays Ukraine’s national interest, its independence and each Ukrainian’s possibility at a better life,” Klitschko said.

Parliament was due to meet today for the first time since police unsuccessfully tried to push protesters off Independence Square in the early hours of Dec. 11.

Opposition politicians again blocked the rostrum and the session didn’t begin. They’ve been blocking the chamber since lawmakers failed to back a no-confidence vote to oust the cabinet of Prime Minister Mykola Azarov on Dec. 3.

Merkel Speaks

European leaders have bristled at the snub and criticized Yanukovych for his treatment of protesters. EU Enlargement Commissioner Stefan Fule said Dec. 15 that the government’s “words and deeds” are “further and further apart” on the EU deal. German Chancellor Angela Merkel today said “it’s too much of an either or situation” between Russia and Europe.

“That’s not the way I want the neighborhood to look,” Merkel said on ARD television.

While European officials including U.K. Foreign Minister William Hague have said Ukraine can still sign the EU agreement, Russia will probably “have had to extract some unofficial reassurances” on future membership of its rival customs bloc as part of today’s deal, according to Nomura International Plc. For now, the move risks firing up protesters, it said.

“We expect a major wave of political turbulence through this week,” Nomura said in an e-mailed note. “If the government manages to remain in power without excess brutality, we think it would constitute a partial defeat of the opposition in the short term.”

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Olga Tanas in Kiev at otanas@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; James M. Gomez at jagomez@bloomberg.net

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