Russia to bail out Ukraine for $15 billion

Ukrainian President Viktor Yanukovich (L) gives a wink to his Russian counterpart Vladimir Putin during a signing ceremony after a meeting of the Russian-Ukrainian Interstate Commission at the Kremlin in Moscow, December 17, 2013. [Photo/Agencies]

Russia agreed a $15-billion bailout for Ukraine and slashed the price of gas exports on Tuesday under a deal that keeps the cash-strapped country in Moscow's orbit but fuelled street protests in Kiev.

Vladimir Putin's agreement with Ukrainian President Viktor Yanukovich was a triumph for the Russian leader in a geopolitical battle with Europe. But he failed to lure Ukraine into a customs union with other ex-Soviet republics and the deal is a heavy financial burden for Russia.

Tens of thousands of protesters gathered within hours of the deal in Kiev and accused Yanukovich of selling his country to the highest bidder after walking away from a trade deal with Europe.

"He has given up Ukraine's national interests, given up independence and prospects for a better life for every Ukrainian," Vitaly Klitschko, a protest leader and heavyweight boxing champion, told crowds on Kiev's Independence Square.

The United States said any agreement between Ukraine and Russia would not address the concerns of the protesters.

The two countries' leaders reached agreement at talks in the Kremlin that appeared to begin frostily but ended with them rubbing shoulders and laughing at a ceremony where documents were signed on reducing trade barriers for Ukraine.

Russian Finance Minister Anton Siluanov said Moscow would tap a National Welfare Fund - a rainy day fund - to buy $15 billion worth of Ukrainian Eurobonds. The deal boosted the price of Ukraine's dollar debt, a sign of investors' confidence.

Ukraine's Naftogaz energy company will pay Russia's Gazprom $268.5 per 1,000 cubic meters of natural gas, on which it is heavily dependent. The previous price had been about $400 per 1,000 cubic meters.

"Ukraine is our strategic partner and ally in every sense of the word," Putin said after the talks, with Yanukovich sitting beside him in a gilded Kremlin hall.

"I want to draw your attention to the fact that this (assistance) is not tied to any conditions ... I want to calm you down - we have not discussed the issue of Ukraine's accession to the customs union at all today."

Investors encouraged but see risks

Ukraine had been seeking help to cover an external funding gap of $17 billion next year - almost the level of the central bank's depleted currency reserves.

Investors said the deal would stave off the immediate threat of default or a currency crisis but said there were also risks for Russia, whose own economy is stuttering.

"This is a rescue. Without that money, Ukraine would have defaulted sometime before the middle of next year ... And the cheap gas will provide a significant stimulus for the Ukraine economy," said Chris Weafer, senior partner with consultancy Macro-Advisory. "The next move is for the protesters in Kiev."

Ukraine, which had fears fuel supplies could be hit during the financial crisis, is caught between Western powers, keen to anchor the country in a friendly embrace on the EU's borders, and its former Soviet masters in Moscow.

Yanukovich has been seeking the best possible deal for his country of 46 million but faces calls to resign at home and has been criticized in the West after police used force against the protests in the heart of Kiev.

The deal appears to preclude Ukraine looking West in the near future, though its leaders say they still see building ties with the European Union as a possible long-term goal.

Tuesday's agreement was Ukraine's reward from Moscow for scrapping a planned trade and cooperation deal with Europe last month, Russian former economy minister Andrei Nechayev said.

"It is clear that this refusal had a cost, and, see, Russia has paid," he told Ekho Moskvy radio, portraying it as a purely geopolitical decision because the economic risk to Russia of Ukraine looking West now was "not very big".

Although Russia appears to have won nothing in return, there could be other terms agreed in secret and Moscow now has a financial hold over Ukraine: If it withdraws its money and alters the gas price, it could pull the plug on its neighbor.

Putin appeared to underline this by saying the agreements on the gas price and $15-billion investment were temporary.

Russia also agreed to resume oil supplies to a refinery in Ukraine following a three-year break, traders said.

But Putin will be disappointed if he cannot bring Ukraine into the Eurasian Union he plans to build with Kazakhstan, Belarus and other former Soviet republic to match the economic might of the United States and China.

Ukraine, with its large market, mineral resources and borders with the EU, is vital to that project. Yanukovich may be withholding Ukraine's membership to seek more concessions.

People at anti-government demonstrations in Kiev that have at times attracted hundreds of thousands fear Ukraine will now be stuck in Moscow's orbit, more than two decades after the fall of Soviet communist rule.

"With what has been signed now in Moscow, we can forget about Europe. Yanukovich made a massive mistake. He'd better not come back here, he'd better stay in Moscow," said Deni Deyak, a businessman at the pro-Europe protest in Kiev.

Many protesters say the EU offers hope of more freedom and prosperity. Opponents, and EU leaders, criticize widespread corruption and say Yanukovich manipulates the judicial system to keep opposition leader Yulia Tymoshenko in jail.