Ukraine’s president Viktor Yanukovych secured a $15bn bail-out from Russia this week, even as protests have continued against his government’s decision to abandon talks with the European Union over closer political and economic ties.
Russia showed its backing for the regime in Kiev by agreeing to buy $15bn-worth of government debt, and to gas price cuts estimated to be worth $4bn.
The deal was hailed as “historic’ by Ukraine’s prime minister Mykola Azarov, who said it would allow the government both to cut corporation tax and increase social spending. He argued that a deal with the EU would have meant accepting “unfeasibly stringent IMF conditions for economic reform”, reports the BBC.
What the commentators say
The Russia deal offers economic benefits for Ukraine in the short term, and political benefits for the Yanukovych administration. As Bloomberg’s Carol Matlack pointed out, it “provides an urgently needed infusion of foreign cash to prop up Ukraine’s dwindling currency reserves”. It also ensures that “the government can avoid politically unpopular gas price hikes before the 2015 elections”.
A deal with Europe would bring many more benefits to Ukraine, said British foreign secretary William Hague, writing in The Daily Telegraph. Ukrainian firms would have “better access to a market of more than 500 million consumers”. This would eventually boost Ukraine’s GDP “by more than 6%”, as “lower tariffs and increased competition would bring prices down, allowing household consumption to increase by up to 12%”.
As analyst Lilit Gevorgyan, who works for consultancy IHS Global Insight, warns, Russian aid “is probably going to be a bandage on Ukraine’s economic troubles rather than a serious remedy”.
Indeed, the deal could end up pushing necessary reforms “onto the backburner”. And the support is “unlikely” to be altruistic. Moscow will look “for tangible gains, such as ownership of lucrative Ukrainian assets”. Overall, it means Russia has “more clout over the Ukrainian economy and businesses”.
New to MoneyWeek?
Welcome, and thank you for visiting us.
Here at MoneyWeek, our aim is simple. To give you intelligent and enjoyable commentary on the most important financial stories of the week, and tell you how to profit from them.
If you've enjoyed what you've read so far, I've got something you'll definitely be interested in.
Every working day the MoneyWeek team sends out a hard-hitting email, 'Money Morning', giving you a rundown of the latest financial events, and revealing what you should do to maximise profits and head off losses…
And with your permission, I'd like to send you Money Morning for FREE.
To sign-up enter your email address below.
We hope you enjoy your stay on the site. Good luck with your investments!
Digital Managing Editor, MoneyWeek