As Kyiv portrays it, Ukraine’s recent decision to forego signing an association agreement with the European Union and instead to reach an economic deal with Russia is a necessity.
Kyiv has been struggling to meet debt payments and to end the Russian sanctions causing economic hardships in Ukraine.
The deal with Russia provides for a one-third discount in the price of gas Ukraine purchases from Russia — taking the more than $400 per 1,000 cubic meters down to $268.50 — and includes a commitment by Moscow to buy $15 billion in Ukrainian government bonds.
Paralleling this view is the consensus by outside observers that the arrangement is a success for Russia in keeping Ukraine out of Europe and within its own orbit, and, consequently, as a geostrategic loss for the West.
While there is some truth in each of these views, the reality is somewhat more complicated. In this still unfolding saga, Ukrainian officials are portraying their decision as forced upon them and, in particular, blame the EU and the IMF for not offering a level of assistance to offset any Russian economic pressure. But the economic debacle in Ukraine, including dwindling foreign reserves and increasing budget deficits, while abetted by the global recession, was largely brought about by Kyiv itself.
Corruption has been rampant — even under the previous reform government of President Viktor Yushchenko — as government power is used to concentrate economic control in the hands of a few oligarchs. The result has led to favoritism in business deals, depletion of the public treasury, stifling of competition, arbitrary takeover of businesses and undermining of targeted businesses through taxation and investigations. Needed reforms are being ignored. The result is that foreign banking institutions have started pulling out of Ukraine and foreign direct investment has decreased.
Ukrainian officials claim that the EU, unlike Russia, was unwilling to provide financial support to meet Ukraine’s pressing debt crisis. However, it turns out that the EU was considering offering Ukraine over $26 billion in loans and grants over seven years if an EU agreement was reached and if Kyiv accepted an IMF agreement. One of the main stumbling blocks, as it has been with previous IMF agreements with Kyiv, is Ukraine’s unwillingness to put in place needed financial and budgetary reforms to comply with IMF requirements. The decision to not sign the EU agreement, therefore, was more a political decision rather than an economic one.
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