Ukraine & Vilnius – All Is Not Lost

Today’s big news from the Slavo-sphere is Ukraine’s failure to pass a bill allowing jailed ex-prime minister Yulia Tymoshenko to travel abroad for medical treatment, and the government’s subsequent decision to halt work towards signing the planned Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU at next week’s Vilnius Summit.

The immediate question is, what next? The EU has made signing the agreement conditional upon Tymoshenko’s being released to seek treatment; will Ukraine manage to reverse course and allow her to do so by November 28th? Or is today’s vote the first step towards joining Putin’s customs union? Much of today’s coverage has been downright gloomy, seeing the deal as firmly torpedoed, and Ukraine as lost to Russia’s sphere of influence; it has also focused heavily on “the Tymoshenko Question”, and made only general references to Russian pressure (to not sign the deal) and Ukraine’s precarious financial position (coverage from Spiegel here; El Pais here; Reuters here) Even before today’s surprising news, EU diplomats seem to have given up hope, citing newly-opened court proceedings against Tymoshenko’s lawyer as evidence of Ukraine’s desire to avoid signing the DCFTA.

But there are reasons to be slightly more optimistic about the prospects of a deal getting done in Vilnius. See this post from Beyond Brics for the full story, but the general theory is that there’s a decent chance today’s hullabaloo over Tymoshenko is really a negotiation ploy aimed at the IMF. Ukraine has a substantial current account deficit, and, in what some might call a misguided attempt to prop up the value of its currency, has been drawing down its foreign reserves at an alarming rate. In the event the DCFTA is signed, the combination of retaliatory Russian trade sanctions and an influx of goods from the EU could be enough to bring about bankruptcy. The EU has already promised ~$1billion in support, and it’s hard to see them coming up with more. Meanwhile, talks with the IMF have stalled over Ukraine’s refusal to cut fuel subsidies from its state budget. The 3-dimensional chess, long game, President Yanukovich-is-a-strategy-mastermind, explanation then, is that by putting off a solution to the Tymoshenko Question (and threatening the deal’s viability), Yanukovich can coerce the EU (which wants to prevent Ukraine from falling firmly into Russia’s orbit) into offering more, or more immediate, financial support, or into pressuring the IMF to care a bit less about those fuel subsidies.

Yanukovich faces re-election in just over a year, so one imagines the fuel subsidies are fairly important to him. On the other hand, support for the DCFTA is high, and Ukraine may never get a better (or even another) chance to tie itself so closely and firmly to the European Union. But under current conditions, there are legitimate fears that signing the deal could wind up forcing Ukraine into default. Right now, Yanukovich must see his options as something like this:

1. Do the deal with the EU, don’t do the deal with the IMF, hurtle into bankruptcy, lose elections
2. Do the deal with the EU, do the deal with the IMF, cut fuel subsidies, lose elections
3. Don’t do the deal with the EU, forget about the IMF, cut a deal with the Kremlin to stave off economic collapse, win elections

If I were a betting man, I would still wager at this point on the DCFTA being signed; there’s too much at stake for Ukraine to pass up the opportunity. But for that to happen, Yanukovich’s view of how options 1&2 end will have to change. Today’s coverage has focused on the Tymoshenko Question, but I suspect the real clues to whether or not Ukraine signs in Vilnius next week are hiding at the IMF. When it comes to Tymoshenko the president can take matters into his own hands and just issue a pardon.