Russia Backs Off Ukraine Union After Lenin Statue Falls

Russia cast doubt that Ukraine may soon join its customs bloc, a plan that has sparked the ex-Soviet republic’s biggest protests in almost a decade and fueled calls for President Viktor Yanukovych to resign.

Riot police and stick-wielding protesters squared off in central Kiev a day after a group of youths tore down a statue of Vladimir Lenin in the biggest rallies since the 2004 Orange Revolution yesterday. Angry over Yanukovych’s snub of an EU pact in favor of bolstering Russian ties, activists have vowed to stay until the government quits, while Russia said that joining its rival customs union could take years.

“The situation in Ukraine is too explosive right now and the president understands that,” Sergei Markov, a political adviser to Russian President Vladimir Putin’s staff and vice rector of the Plekhanov Russian University of Economics, said by phone from Moscow. “Putin believes that time is on his side and Russia will benefit in the end.”

Ukraine, which is searching for $10 billion to avoid possible default, has become a point of contention for Russia and the European Union. Yanukovych met Putin last week after rejecting EU association and free-trade accords, incensing pro-European opposition forces in Kiev, whose tent camps and barricades in Independence Square are now into a third week.

The yield on Ukrainian dollar-denominated bonds due 2023 rose for a second day to 10.502 percent earlier today, its highest since Dec. 4, before falling to 10.46 as of 3:30 p.m. in Kiev, data compiled by Bloomberg show. The hryvnia strengthened to 8.1710 per dollar from 8.2150 Dec. 6. The Kiev interbank overnight rate was fixed at 20 percent, its highest since January and a jump from 12 percent on Dec. 6.

Riot Police

Around 100 riot police were deployed close to barricades near the Kiev mayor’s office along with ambulances. Scores more arrived at other areas around Independence Square, also known as Maidan, where thousands of protesters gathered, including several dozen wearing helmets and carrying long sticks. Police closed three metro stations after what spokeswoman Olha Bilyk said by phone was a bomb threat from an unidentified caller.

“All central tube stations have been blocked. The Berkut special police forces are surrounding Maidan,” opposition leader Arseniy Yatsenyuk said in a statement on his party’s website. “The opposition will protect Maidan.”

Yanukovych said he would meet three former presidents of Ukraine, all of whom favor closer ties with the EU, to try to find a compromise, while opposition parties have demanded the government’s dismissal before talks start.

‘Complicated Path’

Russian Economy Minister Alexei Ulyukayev said today that Ukraine couldn’t join his country’s customs union with Kazakhstan and Belarus anytime soon.

“There are no preliminary agreements,” he told reporters in Moscow. “It’s a long and complicated path because it assumes a massive amount of work and a clear desire to join on the part of a country that’s a possible candidate. We have seen no such clear desire.”

Ukrainian opposition leaders told crowds yesterday that they’d met a goal to summon 1 million people into the streets and urged groups of 30,000 to set up camps near offices including the presidential administration. The interior ministry estimated turnout at 100,000, while newswire Ukraynski Novyny said about 600,000 people were on the capital’s streets.

Demonstrators are enduring freezing temperatures and snow to picket official buildings and demand snap elections. Protests the previous weekend were marred by clashes with riot police, leaving 400 people injured.

Diverging Paths

The protests underscore the diverging paths Russia and the 28-member EU are offering Ukraine, a key east-west energy transit route. Stuck in a third recession since 2008 after the global economic crisis triggered a drop in the price of steel, a vital export, the country of 45 million needs cash to pay back debt and finance its budget deficit.

Foreign reserves have plunged more than $6 billion in the last year and stood at $18.79 billion on Nov. 30, the lowest level since 2006. The government has repeatedly rejected International Monetary Fund bailout terms. It needs at least $10 billion to avoid a possible default, First Deputy Prime Minister Serhiy Arbuzov said Dec. 7, Interfax reported.

After rejecting the EU accord, Yanukovych visited Beijing and Russia’s Black Sea resort of Sochi last week in search for financial aid and cheaper energy prices. Russia may offer assistance so Ukraine can avoid a default, Markov said.

Putin’s spokesman, Dmitry Peskov, said Dec. 7 that Russia and Ukraine were now “significantly” closer in negotiating positions over natural gas after the meeting. Russia has said it would offer cheaper gas if Ukraine joins the customs union.

Economic Mismanagement

Ukraine also agreed with its EU neighbor Slovakia today on conditions for supplying natural gas to reduce its dependence on Russia. Much of Ukraine’s economic woes are from mismanagement rather than the EU-Russia debate, said Lilit Gevorgyan, a political analyst at IHS Global Insight.

“The country’s current troubles are not a result of pro-or anti-EU policy choices,” she said. Instead, they are due to “years of economic mismanagement, populist economic policies both by current and previous governments, and failure to deal with underlying issues like monopolistic economic structures, corruption, and a politically dependent judiciary.”

Premier Mykola Azarov’s cabinet survived a no-confidence vote last week. It says demonstrators started the trouble with police, while Russia has accused EU leaders of meddling in Ukraine’s affairs and encouraging protests. The clashes have drawn calls for calm from EU leaders, and Germany said it was up to Ukrainians to sort out its own future.

Ukraine’s Decision

“They want to live in a free, democratic country governed by the rule of law,” chief government spokesman Steffen Seibert told reporters in Berlin. “That’s the path that we and many in Europe hope Ukraine will take. But the decision on that path can only be taken in Ukraine.”

The EU’s foreign policy chief, Catherine Ashton, will visit Kiev on Dec. 10 and 11,to bring the clear EU messages,’’ Maja Kocijancic, spokeswoman for Ashton, told reporters in Brussels. European Commission President Jose Barroso spoke to Yanukovych by phone yesterday to urge restraint and a political solution to the situation, he said at a news conference in Milan today.

“I’ve asked him to show restraint in the face of the recent developments, to not use force against the people who are demonstrating peacefully,” Barroso said.

Before it's here, it's on the Bloomberg Terminal.