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Ukraine Can't Hide Putin's Victory

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Ukrainian President Petro Poroshenko is running a magic show. By pretending his country has a chance of joining the European Union or NATO, he is hoping to obscure Kiev's, and Europe's, gradual capitulation to Russian President Vladimir Putin.

On Thursday, Poroshenko announced a reform program meant to culminate in a bid for EU membership. "The doors of the European Union are open to us, I am absolutely sure of that," he said. "Well-bred people always knock and never enter without permission, even if there's no lock." Today, Poroshenko's administration submitted a bill to parliament to repeal the country's non-aligned status and "create grounds for Ukraine's integration into the Euro-Atlantic security space."

Coming ahead of an Oct. 26 parliamentary election, Porosheko's moves are clearly aimed at distracting voters from his recent concessions to Putin's demands. Just last week, the Ukrainian parliament passed a Poroshenko-approved law granting self-government and budgetary support to the areas of eastern Ukraine held by pro-Russian rebels, and Kiev agreed not to lower trade barriers for European goods. In return, Russia apparently pulled out most of its troops from eastern Ukraine and facilitated some prisoner exchanges between the rebels and the Ukrainian military.

Ukraine still has more losing to do. In recent days, Putin has written letters to Poroshenko and to European Commission President Jose Manuel Barroso, demanding that Ukraine's trade pact with the EU be renegotiated. Putin makes it clear he sees a 15-month delay in lowering Ukrainian customs duties as a window for three-sided talks on 2,400 tariff lines. To Putin, even Ukraine's intention to harmonize its laws with EU standards is unacceptable, "entailing immediate and adequate retaliatory measures from the Russian side."

Short of military action, there are three ways Putin can retaliate.

  1. Raise trade barriers against Ukrainian goods. Russian Prime Minister Dmitri Medvedev has already signed an order increasing some customs duties, but it hasn't been enacted yet.
  2. Starve Ukraine of gas. Gazprom head Alexei Miller has already persuaded Hungarian Prime Minister Viktor Orban to cut off the reverse flow of Russian gas to Ukraine. That raises the stakes for Kiev, which is in talks to restore Russian natural gas supplies. The colder it gets, the harder it will be for Ukraine to keep rejecting Russian terms, which include a price increase and the payment of $3 billion in arrears.
  3. Weaken Ukraine's finances. Russia's finance ministry has suggested that it might be able to demand the early repayment of a $3 billion Eurobond that Ukraine issued specifically for its neighbor. The bond included a covenant requiring Ukraine to keep its sovereign debt below 60 percent of gross domestic product -- a threshold it is likely to breach as its economy shrinks. Ukraine insists it doesn't want to restructure its debt, mainly because it doesn't want to face Russia in negotiations.

If nothing else works, the conflict in eastern Ukraine, bubbling on a slow burner now with only occasional shelling and shootouts, can always be reignited with targeted strikes by more Russian soldiers without insignia.

Despite Russia's increasing international isolation and its economic troubles, exacerbated by a drop in raw materials prices, Putin still holds all the cards in Ukraine. Barroso understands this: Forgetting about Europe's repeated pledges not to renegotiate the trade deal to suit Russia, he told the Wall Street Journal this week that substantive discussions about the agreement could be reopened. "We are open and we are constructive and we are pragmatic," Barroso said.

"Pragmatic" is the key word. There is no way the EU and NATO are going to admit Ukraine if it fails to settle its accounts with Russia. It would be too much of an economic burden as well as a constant military threat. Europeans realize there will have to be a lasting three-way deal, and have little desire to take full responsibility for a large, dangerously unbalanced nation.

Changing Ukraine's association deal quietly and not making any promises to Poroshenko would be the least painful policy for the Europeans. Putin knows that, and therein lies his hope for a negotiated, rather than a military, solution to the conflict he started in order to keep Ukraine out of the EU and NATO. Once the parliamentary election runs its course and Poroshenko is firmly entrenched, he will stop making defiant noises and agree to all the required concessions.

That doesn't mean all hope is lost for Poroshenko: He can still try to turn Ukraine into a well-run democratic state. Only Ukraine's long-standing tradition of misgovernment can stop him.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net