LAST FRIDAY, 21 February, the Foreign Ministers of France, Germany and Poland, along with the Special Representative of the President of Russia engineered a peace deal between the pro-EU Ukrainian opposition and the Russian-backed President Viktor Yanukovich, which brought an end to the violence that left 77 people dead.
Perhaps the biggest surprise, beside the UK playing no part in the mediation talks, was the fact that Yanukovich signed the deal at all.
So has the EU won the fight for Ukraine?
First set to the EU
On the face of it, the EU was the winner in Friday’s peace deal. The powers of the Ukrainian President are to be curbed; Yulia Tymoshenko, the former Prime Minister and a bête noire of Russian President Vladimir Putin, has been released; and a national unity government is to be formed which will give power to the pro-EU opposition.
With its supporters’ hands on the levers of power for the first time since 2010, the EU has a chance to revive not only its Eastern Partnership (EaP) initiative, which I discussed in my January column, but also the EU-Ukraine Association Agreement (Association Agreement) that Yanukovich decided not to sign at the third EaP Summit in Vilnius on 29 November 2013. It was Yanukovich’s refusal to sign the Association Agreement that sparked the political crisis which left Ukraine paralysed for over three months.
Second set and match to Russia?
Before Yanukovich was ejected from power, Russia promised to reduce the prices that Ukraine pays for its gas to $268.50 per 1,000 cubic meters. With 70 per cent of its gas imports coming from its largest neighbour, Ukraine cannot afford to ignore such an offer. The country still owes Gazprom, Russia’s state-owned gas monopoly, $3.3 billion for natural gas and its refusal to pay this debt or accept the inevitable price rises, will increase the possibility of a major disruption to European and Ukrainian gas supplies.
The EU simply does not have the means to either supply cheap gas or to provide subsidises to offset any price hikes, allowing Putin the opportunity to re-establish Russia’s influence in the long-term. Russia also has the possibility of restoring its influence over Ukraine by exploiting the country’s economic difficulties. The Association Agreement contains a Deep and Comprehensive Free Trade Agreement (DCFTA) which aims to progressively remove customs, tariffs and quotas on goods traded between the EU and Ukraine.
Even with these safeguards in place, Ukraine’s trade deficit with the EU, which in 2012 stood at €9.2 billion according to the European Commission, will most likely increase when DCFTA comes into force.
Growing trade deficit
The growing trade deficit with the EU has contributed to the country posting a record current account deficit of $16.1 billion (8.9 per cent of GDP) in 2013. On top of these desperate figures is the $13 billion in foreign currency debt that the National Bank of Ukraine (the central bank of Ukraine), the Ukrainian government, and the state-owned gas company Naftogaz must service in 2014 to avoid the country defaulting on its loans, according to the rating agency Standard & Poor’s. Only a massive long-term financial package would offset such a default and put the Ukrainian economy back on track, yet it most likely to come from Russia than from the EU.
Money is no object to Putin
Putin has made it clear that money is no object when it comes to promoting Russian interests; after all he spent between $50 billion – $51 billion on the Sochi Games. If he spent that kind of money on a vanity project, then it is safe to assume that Putin will match, and even go beyond, any financial package offered by the EU to keep Ukraine in Russia’s sphere of interest. The EU, on other hand, cannot make such decisions or commitments so easily. EU leaders have yet to decide on whether Greece requires a third bailout, over a year after it was discussed at a Eurozone meeting. If they cannot agree to fund a member state of the EU, what are the chances of a non-member state like Ukraine receiving substantial financial aid over the long-term?
Even if EU leaders agree to provide funds to Ukraine in principle, the next question will be: how much? The longer these issues take to resolve, the weaker the pro-EU movement will become. The instability caused by a delay in funding, will allow Putin to step into the breach with a financial package that will strengthen the Pro-Russian parties in the Ukrainian parliament (Verkhovna Rada), thus helping to re-establish Russia’s influence over the country.
Russia may have lost the first round in shaping the future of Ukraine, but in the long-term it may win the fight.
David Moloney is a PhD student at the University of Limerick after having been awarded a scholarship. His PhD will explore the role of MEPs, and officials from the Council of Ministers in shaping the EU’s response to the economic crisis in the Member States. David is a former employee of the European Parliament. Follow him on Twitter @Dav_Moloney