Ukraine – torn between the EU and Russia

Ukraine is enduring its worst political upheaval since the Orange Revolution of 2004. Last week, President Viktor Yanukovych, apparently under pressure from Russia, refused to sign an agreement with the EU that would have deepened economic ties. This revived long-standing tension between the Europe-orientated, Ukrainian-speaking west of the country (once part of Poland and Austria-Hungary) and the Russian-orientated east. Members of pro-Europe protests in Kiev, which the government has attempted to break up violently, say they are determined to oust Yanukovych.

Yanukovych’s choice was “plainly… made more in his own interests than in his country’s”, as The Economist pointed out. Facing an election in 2015, “and desperate for cash to prop up an economy he has helped to ruin”, he is hoping Russia will offer cheap gas and loans “with few conditions and little awkward oversight”. He may now join a customs union pushed by Russia, which would encompass a handful of post-Soviet states, hardly as promising for long-term Ukrainian growth as deeper integration with the EU.

It didn’t help, however, that the EU insisted on a deadline of late November for Yanukovych to agree to its deal, said Mary Dejevsky in the FT. Ukraine has not yet sufficiently detached itself from Soviet-era economic ties with Russia. So “it would be ill-advised to burn its bridges with Moscow now; the EU cannot necessarily replace what Ukraine would lose” in the short term.

Whether Ukraine ultimately finds a way to get closer to Europe or stays in Russia’s sphere of influence, it needs money quickly, as Richard Barley pointed out in The Wall Street Journal. The economy is in recession as endless mismanagement has hampered investment and confidence, while prices for steel, a key export, have tumbled. The budget and current account deficits are ballooning. The external shortfall is worth 8% of GDP, meaning that the economy depends on lots of foreign capital.

But even before the protests, said Capital Economics, it was having trouble borrowing in international markets, and to make matters worse, the foreign currency reserves it is depending on to repay external debt are dwindling fast. Ukraine could slip into a balance of payments crisis. No wonder then, said Neil Buckley in the FT, that Yanukovych followed David Cameron to China this week.

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