As Ukraine Protests Reignite, Yanukovych's Options Dwindle

With blood on the streets of Kiev and regional government buildings overrun by protesters, Ukrainian President Viktor Yanukovych seems in danger of losing control of his country.

Ukraine is sliding “in the direction of civil war, the worst thing which can happen to a country,” the European Union’s justice minister, Viviane Reding, told CNBC at Davos today, echoing international alarm and outrage over the violence that has left as many as five dead and 1,250 injured.

Yanukovych could deploy the army and police to crush the protests. But that would draw even more condemnation, and possibly economic sanctions, from foreign governments. A brutal crackdown would also wipe out Yanukovych’s chances of winning reelection next year—and if he lost, he and his allies “would probably end up in prison,” says Lilit Gevorgyan, an analyst at IHS in London. “It’s not in the government’s interest to raise the stakes so high.”

Nor is Yanukovych likely to step down, because his family and associates have business interests that would suffer if he’s no longer in power. “This is not only about political power, it’s about commercial and business interests,” Gevorgyan says.

As recently as mid-January, it looked as though the president had survived an earlier wave of protests and could focus on his reelection campaign after securing a $15 billion Russian bailout, which he promised to use for popular social programs and to stave off utility rate increases.

Now, Yanukovych is signaling that he’s willing to negotiate with opponents. Violence in Kiev ebbed after a truce was called on Jan. 23, followed by talks that secured the release of some detained protesters. He has promised a government shakeup, and Parliament has been recalled from its winter break and may consider a no-confidence vote against the government, as well as the repeal of laws curbing public protests.

Prime Minister Mykola Azarov said today that the government also was talking to Switzerland and to the EU about mediating the crisis.

There’s been no ground given, though, on protesters’ demand for early elections. “Yanukovych appears unwilling to make key concessions at this stage, increasing the risk to his hold on power,” Alex Brideau, senior analyst at Eurasia Group in Washington, said in an e-mailed note.

“I don’t see talks leading to anything,” a 20-year-old protester named Ivan told Bloomberg News in Kiev today. “We’ll achieve something once the president resigns.”

Adding to the pressure, Ukraine’s central bank has loosened its grip on the hryvnia currency. Over the past two weeks, the exchange rate against the U.S. dollar has jumped from 8.2 to more than 8.4, and is likely to rise to 10, predicts economist Liza Ermolenko of Capital Economics in London. Although a weaker currency helps Ukrainian exports, it will spur inflation, adding to consumers’ unhappiness. “Coming at a time when there’s a lot of political unrest, there are big risks,” Ermolenko says.

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