Ukraine's new leadership under President Viktor Yanukovych is facing its first major tests this week as it tries to unravel an expensive gas deal with Russia and convince the International Monetary Fund to resume lending. If Yanukovych and his team succeed in bringing down the price Ukraine pays Russia for gas and in renewing the flow of IMF cash, it would give the cash-strapped country a breather.
It would give Yanukovych, who won the presidential election last month with less than half the electorate voting for him, a much needed boost at home and would comfort foreign investors.
But the lengthy negotiations will force Yanukovych’s team to make hard choices and possibly go back on electoral promises.
A Ukrainian delegation was on a one-day trip to Moscow on Tuesday to begin talks on gas, while a mission from the IMF is due to arrive on Wednesday and stay over a week.
WHAT’S AT STAKE WITH THE RUSSIAN GAS DEAL?
Former Prime Minister Yulia Tymoshenko, Yanukovych’s arch-rival, brokered a 10-year gas deal with her Russian counterpart Vladimir Putin in January 2009 to end a three-week energy row that led to supply cuts to Europe.
The deal said Ukraine must pay unsubsidised European prices for gas as of this year and Russia in turn must pay unsubsidised market tariffs for transporting its gas through Ukraine to the European Union, constituting a fifth of the bloc’s consumption. But Yanukovych claims Ukraine has ended up paying more for gas than some European countries and so he wants lower prices. At about $700 million a month, the gas bills are crippling the country, whose economy shank 15 percent last year.
Previous disputes between Kiev and Moscow over gas prices have ended in supply cuts to Europe — as happened in January last year. EU leaders find it unacceptable that their industries and people can be affected by rows between two non-EU members.
Yanukovych can hope that his closer ties to Moscow could avoid a row. He may offer Russia in return the chance to participate in a consortium together with the EU to operate Ukraine’s pipeline system.
Yanukovych has been promising to renegotiate the gas deal practically since the day it was signed. A failure to reach a deal would undermine his image as a strong leader who can do business with Russia.
But a deal in which Moscow gets a stake in a consortium to run the pipeline system may give rise to accusations that he has sold Ukraine out.
Many Ukrainians consider the gas transit network — so vital in transporting gas to Europe — as the only trump card Kiev has against Russia’s dominant position as the key energy supplier, a position some Western observers say it abuses.
Yanukovych says he wants a deal ready in time for a visit from Russian President Dmitry Medvedev, some time in mid-May.
WHAT CAN HAPPEN WITH THE IMF?
The IMF suspended its $16.4 billion bailout programme last November over broken spending promises and the prospect of dirty political campaigning ahead of the presidential election.
Since the deal was signed late 2008, the IMF has softened its demands as the scale of Ukraine’s economic crisis became apparent.
Nevertheless, the IMF was sorely disappointed when the Tymoshenko government failed to increase household gas prices, which are heavily subsidised and thus sap state finances.
And the last straw came when parliament approved minimum wage increases that would cost the budgets billions. Those wage increases were promoted by Yanukovych’s Regions Party in the assembly and he has since said he would stand by them. The IMF is likely to come to the negotiation table with demands that the gas prices are increased, the wage increases are scrapped and a budget for this year is passed with a budget deficit of about 4 percent.
But senior presidential official Irina Akimova has already said the government will aim to keep the budget deficit for the year at no higher than 6-7 percent.
Yanukovych hopes to find a compromise and Prime Minister Mykola Azarov raised the prospect of Kiev seeking an altogether new deal with the fund.
But if the IMF sticks to its demands, Yanukovych would have to break his election promises of maintaining the minimum wage rises and improving the lot of the most vulnerable in society.
The IMF will stay in Ukraine until Apr. 2. If talks go well, it may decide soon after to disburse new funds. If not, talks lasting weeks or even months may continue.
