Russia Cleans Up Its Own Mess with Ukraine Bailout

One of the reasons Ukraine needs financial aid is that Russia tried to choke off its economy.

Russia has thrown neighboring Ukraine a lifeline with the promise of financial aid but it is partly to blame for the fact that its former satellite state needs the money in the first place.

Russian president Vladimir Putin promised his Ukrainian counterpart Viktor Yanukovich $15 billion in credits and a price reduction in natural gas exports on Tuesday after a day of talks in Moscow.

The bailout was met with apprehension in Kiev where thousands of Ukrainians had taken to the streets to protest their government’s scuttling of a trade deal with the European Union last month. Although Putin insisted the financial agreement doesn’t bring Ukraine any closer into his customs union — which is supposed to morph into an Eurasian Union that can compete with Europe’s — pro-Western Ukrainians suspect that is his very design.

They have reason to.

The Russian leader sees Ukraine, which has a population almost a third of Russia’s, significant mineral resources and access to Black Sea ports, as a bridgehead into Europe. He had threatened to take “protective measures” if Ukraine signed an association agreement with the European Union which, he warned, could “squeeze out” Russian goods. In what was widely interpreted as a warning sign, Russia stopped Ukraine’s exports at the border in August and later blocked Ukrainian chocolate and railway carriages from entering the country.

Partly as a result of Russia’s actions, Ukraine’s economy contracted 1.5 percent in the third quarter of this year while its foreign reserves fell 30 percent. Before the bailout was announced, the central bank’s currency reserves were barely enough to cover an external funding gap of $17 billion next year. Russia’s aid, then, was necessary in part because Russia had tried to choke off its smaller neighbor.

Moreover, the natural gas price reduction is less impressive than it might seem. It is supposed to save Ukraine some $2 billion per year but it won’t import gas at a discount. Rather, it will buy gas at almost the same price the rest of Europe pays. Until now, it had been paying a premium on the 60 percent of its natural gas it imports from Russia.

The bailout is nevertheless a hard one for Russia to swallow. It not only has to tap into its rainy day fund to afford the program at a time when its own economy is stagnating; it also has to change the vehicle’s very rules to allow the investment. Ukraine’s credit rating is otherwise too low for the fund to invest in.