Yanukovich Paves the Way for Pan-European Economic Integration

November 28, 2013
Anthony T. Salvia
Director of American Institute in Ukraine

In the wake of Kiev’s decision to take a step back from an immediate signing of the AA/DCFTA with the European Union (EU), it is time to take a look at likely next steps. But first it’s important to note that amid all the anguished howls from Europe, in the end, the fault for signing the agreement at Vilnius lies not with Viktor Yanukovich (or for that matter, with Vladimir Putin) but with Europe.

With or without the AA/DCFTA, Ukraine stands at the edge of a fiscal and economic cliff, and what the EU offered fell far short of a solution the nation’s dilemma.

As it is, Ukraine faces rapidly dwindling foreign exchange reserves and possible default. In addition, Kiev would assume massive levels of indebtedness to comply with the demands of the AA/DCFTA (a staggering €160 billion over 10 years – the equivalent of Ukraine’s GDP for one year), plus the possible collapse of its traditional export markets in Russia and the CIS. And with winter approaching, it would need to increase its importation of oil and gas without the price reductions and waiving of gas import fees that membership of the CU would have entailed.

What did the EU offer to offset the cost of compliance and the likely evaporation of the nation’s export markets? According to Der Spiegel, not a whole heck of a lot: “Loans worth €610 million ($827 million)… along with the vague prospect of a €1 billion loan from the International Monetary Fund (IMF).”

The loan is paltry, and it is only a loan. It would have to be paid back with interest. Moreover, the precondition for getting the loan is submission to the IMF’s requirements for resumed lending, including raising prices for domestic consumers of gas, and cutting pension benefits for retirees. The IMF deal would only have added to the hardships of ordinary citizens, and would hardly have done Yanukovich much good going into a re-election campaign.

Those most outraged at Yanukovich’s “betrayal of Ukraine’s European vector” seem unwilling to listen to what he is now saying: “I would like to emphasize that there is no other option than to build a society of European standards in Ukraine. My policy has always been and will remain consistent in this context.” What does he mean by this?

First, Prime Minister Mykola Azarov says Yanukovich at Vilnius will propose tripartite talks between Ukraine, Russia, and the EU leading to deeper economic integration. This could lead to a “win-win” for everyone, and help put an end to the incessant “either/or” between “Europe” and Russia in which Ukraine seems perpetually trapped – and which continues to roil the nation’s internal politics.

Second, while signing the AA/DCFTA appears to be off the table for now, there is no reason why a modified agreement cannot be considered in the future. For that matter, there is no reason why the Ukrainian people should not be given the chance to decide the matter in a referendum. In the past, polls have shown public opinion more or less evenly divided between the AA and the CU, though recently it seems to have tilted in favor of the AA – perhaps influenced by the Yanukovich administration’s own pro-EU rhetoric. But Ukraine should consider submitting the choice to a national referendum. Many such referenda have been across Europe over the years. Norway held two referenda on EU membership, one in 1972, the other in 1994. (It voted against Europe twice, and shows no signs of regretting it); Croatia held a referendum in 2012, when it voted heavily in favor of EU membership (and increasingly regrets its choice.)

Third, it is impossible to ignore the fact that in terms of internal politics (in the opinion of Der Spiegel), “It appears Yanukovch has played his cards right once again. That is, if he can contain the political anger within Ukraine.” Yes, there are people mobilizing in the streets – people who did not vote for Yanukovich in 2010, and will not in 2015. But then again, in walking away from the deal, at least for now, Yanukovich is responding to the wishes of regional industrialists, the federation of trade unions, transit workers, agricultural interests, and other parts of his core base that would have been hurt by the European deal. There is political wisdom in never turning your back on your core constituents merely to win over others who never liked you in the first place. That almost never works.

Many of those now calling for Yanukovich’s political head would not have voted for him in 2015 even if he had signed the AA/DCFTA. They would have counted on the nation’s on-going economic weakness coupled with a possible currency meltdown (which associate status in Europe would hardly have obviated) to pave the way for Yanukovich’s defeat at the polls. Thus, they could have had their cake and eaten it, too – eurointegration without Yanukovich.

But now it is Yanukovich who is holding the cards: in keeping the door open to both Europe and Russia, he is better placed to work out a reasonable economic and fiscal deal for Ukraine, in which case Russia’s $500 billion in foreign exchange reserves, current account and budgetary surpluses and debt-to-GDP ratio of 9% (compared to Europe’s 91%) are not to be sneezed at. And in pursuing a tripartite Ukraine-Europe-Russia accord, he would be striking a blow for the multi-vector foreign policy he proposed in 2010 and which the Ukrainian people voted for. Pan-European integration -- with Ukraine the major beneficiary – is the only strategic choice that makes sense for the nation.

If Yanukovich -- clearly adept in the art of political poker -- continues to play his cards right, he can go into the 2015 election campaign with a record of having delivered on the economy, side-stepped the draconian measures required of the IMF/EU, and restored fiscal solvency. If so, and having solidified his base in the south and west of the country, he will leave himself well-placed for reelection.