Ukraine struggles to balance lure of Europe, pull of Russia

Russia is dangling billion-dollar benefits if Ukraine joins a Moscow trade alliance, a move that would scuttle Kiev's chance at an EU free-trade deal.

A year after Ukrainian President Viktor Yanukovich began reversing his country's pro-Western tilt to realign with Russia, Mr. Yanukovich appears to have taken a strong stand against Moscow.

Even though Russian Prime Minister Vladimir Putin arrived in Kiev Tuesday with up to $9 billion in annual benefits for Ukraine's troubled economy in return for joining a Moscow-led customs union, which already includes Belarus and Kazakhstan, Yanukovich reportedly rebuffed him.

While Ukraine hopes to further improve economic ties with Russia, its top priority is to finalize a free-trade agreement with the European Union, which would preclude joining the Russian trade alliance.

The decision is a critical moment for Ukraine, as it will have to choose between trying to build better economic relations with Europe or keep an important benefactor satisfied. Ukraine is still recovering from a 15 percent plunge in its GDP following the global economic crash, and it has grown politically polarized by Yanukovich's major past concessions to the Kremlin. Those include renewing a 25-year lease on a Russian naval base in Crimea in return for cheaper Russian energy supplies.

"This is not merely a discussion over economic advantages, but about the very nature of Ukraine," says Oleksiy Kolomiyets, president of the independent Center for European and Transatlantic Studies in Kiev. "The customs union being proposed to us is a camp of authoritarian regimes, and our political system would follow the economic logic if we became part of it. Yanukovich has clearly stated that we will not join."

But he adds that powerful forces in Ukraine, which is deeply divided between its nationalistic, pro-Western west and Russian-speaking and Moscow-oriented east, still favor the union. "There is intense political struggle over this issue, and it's only just beginning," he says. "Ukraine's economy is very fragile and extremely vulnerable to Russian blackmail."

Russian pressure

Putin reportedly ended the meeting by warning Yanukovich that joining the EU scheme could lead Russia – Ukraine's biggest trading partner – to retaliate by erecting trade barriers against Ukrainian goods.

"I have to remind you that ... in this case we would have to implement the protective measures," Ukrainian news agencies quoted Putin as saying.

But in a more conciliatory vein, Putin told Ukrainian Prime Minister Mykola Azarov on Wednesday that Russia might be open to offering yet another discount on the price Kiev pays for Russian natural gas – one of the biggest causes of Ukraine's spiraling budget deficit. In return, Ukraine might accept a joint venture between Russia's state gas monopoly Gazprom and Ukraine's Naftohaz, Ukrainian news agencies reported.

Negotiations with the EU could lead to a deal that would open Ukraine's economy to European imports, substantially increase EU quotas for Ukrainian goods, and possibly lead to visa-free travel between the two.

"The EU deal is a realistic possibility for Ukraine, though it's no panacea," says Fyodor Lukyanov, editor of Russia in Global Affairs, a leading Moscow foreign policy journal. "But the broader prospects, that Ukraine might become a candidate for EU membership, do not seem realistic at all."

Putin's grand plan

Putin has made the revival of USSR-era economic synergies between former Soviet states the centerpiece of his regional foreign policy. A Putin-authored grand plan for a Common Economic Space that would reintegrate the economies of several post-Soviet states was scuttled by Ukraine's 2004 Orange Revolution and its subsequent Westward turn under President Viktor Yushchenko.

But Mr. Yushchenko was crushed in the first round of elections a year ago, and Yanukovych went on to narrowly defeat Orange Revolution heroine Yulia Tymoshenko. In a series of deft political maneuvers, Yanukovich canceled the Orange Revolution by restoring the supremacy of president over parliament, ending Ukraine's bid to join NATO, and moving Ukraine back into Russia's security sphere.

In Kiev Tuesday, Putin said that further integration of Russia and Ukraine's economies could involve reuniting the Soviet-era energy, aviation, nuclear, and space industries of the two countries.

"The technological links from the Soviet period are still functioning, and one partner cannot be efficient without another," Putin said. "That is what we must think about and give a second wind to the capabilities formed during the previous decades."

Russia, Ukraine drifting apart

But Dmytro Vydrin, a Yanukovich adviser, says that the Russian and Ukrainian economies have drifted too far apart in the 20 years since they were both part of the Soviet Union to easily reintegrate.

"Here in Ukraine we have an economy dominated by private business, while in Russia there is state capitalism with tough control from the center. How compatible are these two systems?" he says.

While Putin seems to express a glowing vision, the details are fuzzy, Mr. Vydrin adds.

"What we need now is a plan [for better cooperation with Russia], and I don't see that on the table," he says. "The European deal would bring us into the EU sphere, where Ukraine would be exposed to European values, legal culture, social protections, and trading practices. But from Russia it's just talk of integration, and ideas for separate deals. We need to know how it would work."