Is Ukraine becoming Russia's 88th territory?

  

Even as Ukraine formally gets closer to the European Union with the negotiations on an Association Agreement, the country's extreme economic insecurity and need for foreign capital to finance its debt are enabling a dramatic rise in Russian influence, argues Sonya Koshkina.

Sonya Koshkina is the editor-in-chief of LB.ua ("Left Bank"), a major Ukrainian news site.

"There is little time left before the Ukrainian-EU summit, which will be held in Kiev on 19 December. Both Ukrainian and European mass media are vigorously debating a range of well-known issues, such as the Tymoshenko case, Ukraine's bid for membership of the EU and even the country's geopolitical choice.

At the same time, matters related to the state of the Ukrainian economy are, as a rule, either shifted to the background or not discussed at all, with Russia's influence on the economic situation in Ukraine serving as an example. Yet, it is the economy that often forces one to commit certain political acts. Hence, Russia is the key to understanding relations between Ukraine and the EU.

A number of factors outlined below prove that the economies of Ukraine and Russia are deeply integrated, which certainly has an impact on Ukrainian interaction with the EU.

The price of gas and the dollar exchange rate represent two main factors that will determine the Ukrainian budget for next year.

In the draft law on the 2012 budget registered in Parliament two months ago, the annual average rate of the Ukrainian hryvnya is forecast at 8.1 UAH/USD, while the price of gas is $414-416 per 1,000 cubic metres. In other words, the document envisions a market gas price.

Kyiv started to speak about the possibility of a gas price reduction – down to $220-230 – after Yanukovich held a meeting with his Russian counterpart and the prime minister. The reasons for this remain unclear.

What we do know is that any Russian concession to Ukraine demonstrates that in exchange, the latter will 'give' the former a strategic facility which is Ukrainian property. If the discount on the price of gas for Ukraine is substantial, one may assume that President Viktor Yanukovich is the one who facilitates large-scale economic intervention on the part of Russian business in Ukraine.

This may lead to Ukraine turning into Russia's 88th federal subject or even to an armed conflict. 

Despite the fact that the decisive meeting between the Ukrainian president and the Russian leadership was official, neither the Ukrainian nor Russian authorities disclosed any information about its outcome. There are only fragmentary details – from private sources of some mass media outlets – about the agreement on a 'gas consortium' which was reached by Ukraine and Russia. In fact, this means that the Russian Federation will essentially own the Ukrainian gas transportation system.

'I believe that we will sign everything by the end of November,' said Ukrainian Prime Minister Mykola Azarov about the gas contracts. 'Ukraine will save $500 million a month and $6 billion a year,' he added.

One might wonder why Ukraine is making concessions to Russia when it comes to such an important strategic issue. Several issues indirectly demonstrate the situation in Ukraine.

First, to maintain the current exchange rate of the hryvnya, the National Bank of Ukraine uses its gold reserves which, as we know, can be used only in the worst-case scenario. As of the end of August, the volume of gold reserves was estimated at approximately $38 billion. Nearly $3 billion was used in September. An additional $2 billion was used during the first three weeks of October. This means that there is only $33 billion left.

In November, the National Bank of Ukraine admitted that gold reserves decreased by 2.2%. These are official statistics. No one will say exactly how much gold there is in the reserves, or how much foreign currency and securities there, and how quickly these securities can be sold if the need arises.

Second, judging from reports by the Cabinet of Ministers of Ukraine, the government is trying to defer payments on sovereign debt for as long as possible or until 2013 at the very earliest. This implies that at the moment there is no cash to pay off debts.  Furthermore, in 2013, there will be no parliamentary election and a presidential election will not have taken place. And Azarov will not be in government at that point either.

Third, banks have practically stopped giving loans to the population. This applies to loans both in hryvnyas and foreign currency. They explain it very simply: credit lines are closed due to the high risk of payment default.

If there is the slightest panic, the population starts to withdraw money from accounts en masse. This may trigger a collapse of the country's banking system. Theoretically speaking, banks could be saved by recapitalisation. However, there are no available funds to recapitalise Ukrainian banks.

That is why the task of the Ukrainian government is to hold on until the spring. It needs to ensure that the hryvnya does not crash, inflation does not rise sharply and payment defaults do not lead to a crisis. 

If the economy collapses, the not so popular Ukrainian government will not be able to preserve its status. And that is why precisely at this moment the government is ready to pay any price to rescue the economy and, in fact, to rescue itself. No thought is given to the consequences.

Meanwhile, they are discussing how to enhance economic relations. Business can certainly work by itself but when the state helps big business then it becomes much easier for it to operate.

For example, Sberbank Rossii started to give loans worth $376 million to Ukravtodor to finish  road construction for Euro 2012. Ukrainian telecom company Ukrtelekom also receives loans from this bank.

It has been reported in the media that Gazprombank gave a $1 billion loan to Dmytro Firtash, a Ukrainian businessman with ties to the government, to purchase chemicals. It also granted a loan worth $550 million to the national joint-stock company Naftohaz Ukrayiny. The loan is intended to pay for delivered gas.

In this case, the issue has to do not only with big Russian banks but with business that is directly controlled by the Russian government.

Additionally, rumour has it that Rinat Akhmetov is preparing to sell his telecommunication business to Russia's Alfa-Group. The DTEK company also intends to take a loan worth $500 million from the Savings Bank of the Russian Federation (Sberbank) and an additional $10 billion from the Russian bank VTB.

Although these examples are drawn from the business world and the state has nothing to do with them, it is important to understand that the companies of Ukraine's wealthiest businessman Rinat Akhmetov had previously preferred to borrow money from Western banks.

The most important thing about the trend described is that the Ukrainian government intends to increase threefold its credit line in the Russian bank VTB to $6 billion. It is well known that the Russian state holds an 85.5% stake in VTB.

The deterioration of the economic situation in the eurozone encourages the loss of interest in Ukraine by foreign investors. In essence, Ukraine cannot count on anyone else but Russia. That is why large-scale intervention of Russian business in Ukraine is only a matter of time.

Of course, there is a slight possibility that the Ukrainian government, which is preoccupied today only by how to rescue itself, will start to think about Ukraine's future. However, it might be too late. The Russian government will protect a territory of its exclusive economic interests to the end, even with weapons.

At the same time, no one says that Moscow intends to expand the imperial territory of the Russian Federation. The issue here is not only business. In the 21st century, new lands are conquered with the help of economic tools. That is why Ukraine has every chance of turning into the 88th territory of the Russian Federation."

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