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$24 billion cost

Perhaps Europe won’t want to rescue Ukraine from Russia’s grip

Russian president Vladimir Putin is treating the uprising in neighboring Ukraine with unusual restraint. The same man who in 2008 dispatched tanks and annexed territory to bring Georgia to heel now says that if an independent-minded Ukrainian government should take power, it can expect a continued friendly economic bailout (as long as it pays its bills, naturally).

Ukrainians are essentially fighting over whether to join a Russian-led trade federacy of former Soviet states, as the government wants, or hitch their economic wagon to the EU, as the opposition favors. Losing Ukraine to Europe would be a mortal blow to Putin’s plans for regional dominance, along with Moscow’s centuries-old view of Ukraine as integral bone-and-sinew in the Russian body.

So why is Putin acting so reasonably? He may just think his usual tough-guy tactics will backfire with the Ukrainians. But a number of analysts see him playing a more subtle game.

It seems likely that Ukraine’s pro-Moscow president, Viktor Yanukovych, will be forced out before his term ends in February 2015. The resignation of his prime minister and repeal of anti-dissent laws on Jan. 28 have not sated the opposition, and he has few or no cards left to play. But if a new Ukrainian government spurns Putin and signs an “association agreement” with the European Union, as also seems probable, Putin’s promise yesterday to maintain Moscow’s super-friendly terms—5% interest on $12 billion in additional bailout money, and a 33% discount on natural gas purchases from Gazprom—might prove empty. “Russia’s debt support is conditional on a pro-Russia government, and if Yanukovych is ousted, the debt support may cease,” Macro-Advisory’s Chris Weafer said today in a note to clients.

And even if Putin were willing to maintain the lifeline, the new government itself “could say, ‘We don’t want the bailout,’” said Jeff Mankoff of the Center for Strategic and International Studies.

But the question will then be whether Europe and the International Monetary Fund are prepared themselves to rescue Ukraine.

The sums are not trifling. Ukraine will require about $24 billion to cover a budget deficit, debt repayments, natural gas bills and pension support just in 2014, Moody’s said in a Dec. 27 note to clients. In coming years, much more debt will come due, including $2 billion already received from Russia and possibly $3 billion more to come Jan. 31. In total, Ukraine’s current debt is about $137 billion. Mankoff told Quartz that Europe is conflicted—Poland and some other Eastern European states are pushing for Ukraine to be integrated into the EU, while other members are ambivalent.

And even if Europe is willing in principle, Ukraine may not be able to meet its terms. Yanukovych went to Moscow in the first place because its bailout terms were so much easier than Europe’s. “A new opposition-backed president is unlikely to have any more of an appetite for the EU/IMF austerity package offered last year than the present incumbent has,” wrote Weafer.

Europe and Russia derive mutual glee from poking each other in the eye. But in this case, whoever “wins” Ukraine will arguably be the one that gets the poke.

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