Ukraine’s EU Snub Sparks Tensions as Kiev Braces for Rallies

Ukraine’s decision to break off negotiations for a European Union trade deal sparked tensions from the nation’s parliament to the Russian president’s home town as Kiev braced for protests.

Russia and the EU traded barbs, accusing each other of pressuring the ex-Soviet nation. Ukrainian Prime Minister Mykola Azarov, speaking in parliament amid a hail of insults and paper projectiles, blamed the International Monetary Fund for the turnaround. Ukraine’s Channel 5 reported that about 1,500 protesters gathered on Independence square in the city center, surrounded by riot police.

The EU and Russia each buy about a quarter of Ukrainian exports and have been jostling over relations with the second-most populous former Soviet country, a crucial transit route for energy shipments. The two sides accused each other of blackmail, while Vladimir Putin said the EU is encouraging protests.

“Tensions increased as the social and economic situation became strained,” Volodymyr Fesenko, head of the Penta Political Analysis Center in Kiev, said by phone today. If President Viktor Yanukovych “leads Ukraine into the customs union, we will face a serious risk to the country’s unity.”

The cost to insure Ukrainian debt against non-payment for five years with credit-default swaps fell 27 basis points, or 0.27 percentage point, to 968, the third-highest in the world after Argentina and Venezuela, according to data compiled by Bloomberg. The yield on the Ukrainian dollar bond due 2023 fell 20 basis points to 9.58 percent at 7:32 p.m. in Kiev.

“Not Realistic’

Yanukovych’s government will focus on reviving trade with Russia and other former Soviet republics, it said yesterday. The decision is probably final, said Linas Linkevicius, the foreign minister of Lithuania, which holds the EU’s rotating presidency. Postponing the signature of the agreement ‘‘is not realistic,” he said in a telephone interview yesterday.

The EU is “pressuring and blackmailing” Ukraine to reverse yesterday’s decision, Putin said today in St. Petersburg. The country of 45 million is crucial to Putin’s ambition to set up a trading area to emulate the Brussels-centered bloc.

The EU continues “to believe that Ukraine’s future lies in a strong relationship with” the western bloc, Maja Kocijancic, spokeswoman for EU foreign-affairs chief Catherine Ashton, told reporters today in Brussels. The U.S. is “disappointed” in the decision, State Department spokeswoman Jen Psaki told reporters yesterday.

Demonstration Planned

The decision exposed a growing divide in the country over economic and political priorities. In a reflection of mounting tensions, thousands of protesters took to the streets in near-freezing temperatures in Kiev last night over the government’s move.

Backing for membership of the 28-nation bloc is at 58 percent, according to a poll of 1,000 people this month by researcher IFAK Institut GmbH & Co. It gave no margin of error.

Opposition leaders including world heavyweight boxing champion Vitaly Klitschko spoke and bands performed songs at the rally in Kiev last night, which was attended by about 2,000 people, private television broadcaster Channel 5 reported. People plan to gather for another rally tonight.

‘Bluffing, Blackmail’

Today marks the ninth anniversary of the start of the Orange Revolution, which was led by jailed ex-Premier Yulia Tymoshenko and helped overturn Yanukovych’s presidential victory in 2004. She urged people to “take to the streets” across the country.

“You think you can continue bluffing and blackmail and play between those two centers to get benefits to keep your power,” Tymoshenko wrote on her website in a letter to the country’s leaders. “You are mistaken. Never stay alone against Russia, because you will lose everything. Only a deal with the EU can protect you.”

Klitschko, speaking at today’s rally, told people that they should “press the authorities” to sign the EU agreement next week.

A turnout of more than 100,000 protesters on Nov. 24 may force Yanukovych to backtrack as the country’s European integration will be one of the main topics of the campaign before the 2015 presidential election, said Fesenko at Penta.

European governments had urged Ukraine to sign association and free-trade agreements at a Nov. 28-29 summit in the Lithuanian capital of Vilnius. Russia, which supplies 60 percent of Ukraine’s natural gas, threatened trade measures if the deal went ahead, offering membership of its customs union as an alternative.

Tymoshenko’s Fate

While Yanukovych reiterated yesterday that his country’s goal is European integration, lawmakers repeatedly failed to pass a bill to allow Tymoshenko to travel abroad for medical treatment, a key EU condition for the trade accord to proceed as the bloc deems her imprisonment a case of selective justice.

Yanukovych has accused Tymoshenko of involvement in crimes including a murder, claims she denies. He defeated Tymoshenko to become president in 2010 after serving two stints as premier and now trails Klitschko in polls for the presidency.

Ukraine’s motivation for suspending preparations for the EU treaty was “purely economic,” with the government making the “only possible” choice in the situation, Azarov told lawmakers in Kiev today.

Speaking over chants of “Shame!” by opposition lawmakers, who attempted to keep him from speaking, Azarov said a Nov. 20 letter from the IMF tipped the balance for Ukraine.

‘Last Straw’

“The last straw that broke the camel’s back was the IMF’s position,” Azarov said. “They offered to provide us with a loan equal to what we have to repay them. At the same time they demanded to double utility prices, freeze salaries, and cut budget spending.”

The government has been discussing a third IMF bailout since 2008 for more than a year, rejecting demands by the lender to cut household heating subsidies. An IMF mission left Kiev last month with a negotiations over a new $15 billion loan continuing.

The IMF is ready to remain in discussions with Ukrainian authorities, the Washington-based lender said in an e-mailed statement. Its recommendations included exchange-rate flexibility, fiscal consolidation, higher energy tariffs, it said.

Ukraine entered its third recession since 2008 in the second quarter as demand for its steel exports shriveled, while reserves have plummeted.

‘Unprecedented Pressure’

The reasons may have been more complex, according to former Polish President Aleksander Kwasniewski, one of the EU’s main negotiators with Ukraine. While economic difficulties contributed to yesterday’s decision, “unprecedented pressure” from Russia also played a part, he said.

Similar accusations were leveled at the EU in Moscow, where Foreign Minister Sergei Lavrov said this week it was the trading bloc that put Ukraine under “brazen pressure” to choose between Russia and the 28-member bloc.

“We basically heard threats from our European partners toward Ukraine, including even helping to hold mass protest actions,” Putin said today, adding that Russia is ready to participate in trilateral talks with Ukraine and the EU.

Ukraine’s actions may be a negotiating ploy to help garner financial aid, according to Liza Ermolenko, an emerging-markets analyst at London-based Capital Economics Ltd.

“There have been some suggestions in the media that policy makers are just trying to raise the stakes,” she said by e-mail. “The key in all this is that until the summit next week there’s not much point trying to guess what Ukraine is going to do.”

Still, time may be running out. Yesterday’s decision “puts a large question mark over the general direction of Ukraine’s foreign policy,” Tatiana Orlova, an economist at Royal Bank of Scotland Group Plc in London, said by e-mail.

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