Ukraine's rejection of EU deal highlights economic woes

Moscow (AFP) - Ukraine's stunning refusal to sign a historic trade deal with the European Union highlights the perilous state of the ex-Soviet nation's economy and its continued reliance on its old master Russia.

The country once known as the breadbasket of Europe is quietly suffering through some of the worst pain known anywhere on the continent outside of Greece.

Its economy has shrunk for five successive quarters. The vital industrial sector has contracted by nearly six percent in annual terms.

And massive external debt commitments have seen gold and hard currency reserves dip to levels supporting fewer than three months of imports -- a red line for most economists.

Add to that the danger of losing crucial Russian markets with no immediate benefit from the 28 EU nations and the choice facing Ukrainian leaders -- still publicly committed to closer political ties with Brussels -- was dire.

"The International Monetary Fund's position was the final straw," a seemingly-exasperated Prime Minister Mykola Azarov said in reference to IMF pressure on Ukraine to raise its subsidised domestic gas prices before it gets access to a frozen financial lifeline.

"The decision was hard, but the only possible one in the economic situation," he told parliament to cries of "shame" from the pro-Western opposition bloc.

The end result is that the Eastern Partnership summit kicking off in Vilnius on Thursday will not see Kiev and Brussels sign an Association Agreement that would have pulled Ukraine out of Russia's orbit and put it on a path to eventual EU membership.

"In the short term, it makes sense for Ukraine to have withdrawn from the deal," Liza Ermolenko of the London-based Capital Economics consultancy remarked.

"It looks like (Ukrainian President Viktor Yanukovych) came out thinking that the economic cost now would be too big to take the risk."

'Unjustified' Russian threats

EU leaders have almost unanimously blamed the blunt threat of Russian retaliation against its western neighbour for Ukraine's ultimate change of heart.

"Hard to overlook in reasoning for today's decision impact of Russia's unjustified economic and trade measures against Kiev," EU enlargement commissioner Stefan Fuele wrote in an angry Twitter message after Ukraine formally broke off the talks on Thursday.

"Ukraine government suddenly bows deeply to the Kremlin," Swedish Foreign Minister Carl Bildt added on his own Twitter account.

Russian President Vladimir Putin's hopes of keeping Ukraine tied to a Moscow-led Customs Union that restores trade along old Soviet routes have been an open secret.

Moscow banned imports of Ukraine's most popular chocolates and imposed unforgiving customs checks along the border as the Vilnius summit approached.

Natural gas giant Gazprom -- seen by critics as the Kremlin's main weapon against uncooperative partners -- stepped in late last month by slapping Ukraine with a whopping bill of nearly $1 billion.

The mounting pressure prompted Yanukovych to rush to Russia over a November weekend for hush-hush talks with Putin that prompted immediate opposition calls in Kiev for him to be impeached.

His meeting with Putin forced Yanukovych to realise that a deal with the European Union "would have produced many immediate negatives in exchange for uncertain benefits," said Russia in Global Affairs foreign policy magazine editor Fyodor Lukyanov.

"Europe ignored hints that it must compensate at least a part Ukraine's (economic) losses from its signature of the Association Agreement," he added.

"After that, Yanukovych simply had no other choice."

'They have to pay salaries today'

The European Union's own figures for last year show 25.3 percent of Ukraine's exports going to EU nations and 24.1 percent reaching Russia.

But Putin has made clear that "pragmatic" considerations would have forced Russia to put up immediate barriers against Ukrainian products ranging from candy to heavy machines.

Meanwhile the benefits of free trade with Brussels would not have been felt for the many months or years it usually takes bureaucracies to finalise such accords.

Anders Aslund of the Peterson Institute for International Economics estimated that Ukraine's economy would have grown by an extra 12 percent over the long term had it signed the Brussels accord.

"But they have to pay salaries today," countered Alexei Malashenko of the Carnegie Moscow Centre. "And this money can only come from Russia."