Two years ago, on December 17, 2013, President Viktor Yanukovych signed a series of agreements with the Russian Federation and the Russian state gas monopoly Gazprom, with many of the terms of the agreements withheld from the public. Many speculated that the deal was meant to shut the door on Ukraine’s Association Agreement with the European Union for at least two years.
Some of the terms included a conditional reduction in prices for Russian gas, a loan of $15 billion, with the first tranche, a $3 billion bond, to be paid back to Russia in two years with an annual interest rate of 5 percent ($1.5 billion in interest alone).
What remained unknown were the concessions Mr. Yanukovych had made to get these “deals.”
With Mr. Yanukovych responsible for extending the Russian Black Sea Fleet’s lease to 2042 for a $100 per thousand cubic meter gas discount, noted Alexander Paraschiy of Concorde Capital investment bank in Kyiv, it was likely that Ukraine would increase its gas purchases from Gazprom to between 20 and 30 percent.
Russian President Vladimir Putin had included a provision that the terms of the discount rate be reviewed on a quarterly basis, with the option to reject the discount rate. This was a way to keep Ukraine and Mr. Yanukovych on a short leash.
During the weekly Ukrainian Cabinet of Ministers meeting that same day, Prime Minister Mykola Azarov said the agreement created “nice prospects for the Ukrainian economy in the next few years, giving the government the possibility of approving today a budget of social and economic development.” Had Mr. Yanukovych signed the agreement with the EU, the loan conditions from the International Monetary Fund (IMF), Mr. Azarov said, would double utility rates, sharply devalue the currency and reduce the spending budget.
Opposition leaders said the terms from the IMF were harsh to modernize Ukraine’s economy to reflect reality, rather than floating government subsidies. The EU was prepared to offer up to $27 billion in loans that “would have broadly matched the bailout package Russia pledged to Ukraine,” the Financial Times wrote on December 18.
Mr. Putin is “practically helping Yanukovych to survive politically and strengthens his socio-economic foundation in front of the Maidan’s defiance. Because it also worries Putin,” said Volodymyr Fesenko of the Penta Center for Applied Political Research in Kyiv. “That’s defiance for Russia.”
“Secondly,” Mr. Fesenko added, the deal “closes the door to returning to EU agreements, which conforms with the interests of the Russian leadership.”
The first $3 billion loan was to remove the default risks for bonds maturing in 2014 for the Ukrainian government and Naftohaz Ukrainy. In the fourth quarter of 2015, when those loans were due, Ukraine was expected to default and sign up for the Eurasian Economic Union.
Now, with Ukraine a signatory of the Association Agreement with the EU and more loan guarantees from the IMF, Russia has reignited its demands for the $3 billion loan to be paid in full, with options to pay over time with interest. There have been threats by Russia of law suits for Ukraine’s refusal to pay, and Ukraine has proposed counter-suits.
Source: “Yanukovych gets loans, cheaper gas in opaque deal with Putin,” by Zenon Zawada, The Ukrainian Weekly, December 22-29, 2013.