Russia freezes macroeconomic aid to Ukraine, renews trade barriers

Макроэкономика 30.01.2014 The Russian government announced it will postpone its natural gas discount to Ukraine (which had been secured for 1Q14 only) and macro financing (loans for up to USD 12 bln in 2014) until a new Ukrainian government is established, the Interfax-Ukrayina news agency reported on Jan. 29. “It is expedient to wait until the forming of a new Ukrainian government,” Russian Deputy PM Igor Shuvalov appealed to President Vladimir Putin during an open meeting on Jan. 29. “We have to act meaningfully,” Putin replied. “We can only do it when we understand what kind of government it will be”. Russian Economy Minister Aleksei Ulyukaev went further, stating that a schedule of macro support to Ukraine “needs further discussion with Ukrainian colleagues and needs to account for the reformatting of the government”, as cited by Interfax. He added that Ukraine’s credit ratings also should be considered. Incidentally, Standard & Poor’s downgraded Ukraine’s sovereign rating a day before the announcement, referring to a decreased probability that Russia will uphold its promises to provide macro support. Meanwhile, the Employers Federation of Ukraine reported on its website that the Russian Federation has reintroduced strict customs control on all the goods delivered from Ukraine starting January 28. Russia introduced this tactic first in mid-August 2013 after the Ukrainian government made sizeable steps towards signing the EU Association Agreement. Alexander Paraschiy: Putin’s decision to freeze financial support clearly contradicts to his day-before statement in Brussels that loans and gas discounts for Ukraine “are related to the need and wish to support the Ukrainian people, not a certain government.” We attribute his move to Ukrainian President Viktor Yanukovych’s apparent loss of control over the political situation in Ukraine. The future of the gas discount, macro support and trade relations will depend on the new Cabinet of Ministers’ position on the EU Association Agreement. With his decision, Putin is warning Yanukovych not to offer significant concessions to the EuroMaidan protest and the political opposition. Yanukovych seems to have taken this warning seriously by convincing his parliamentary faction to adopt an amnesty law on Jan. 29 that does not satisfy the opposition and escalates the conflict. Ukraine’s risk of a currency crisis and sovereign default is very high now after they were effectively neutralized by Russian promises to provide USD 12 bln loans in 2014. The lack of compromises between the government and opposition to resolve the political crisis is playing against the country’s macro stability. Yanukovych finds himself at the center of a zero-sum financial game between Russia and the West. Based on the rules of this game, a choice of only two options can de-escalate Ukraine’s macro risks: either a violent dispersal of the EuroMaidan and reliance on Russian money, or a victory of pro-EU forces to be accompanied by EU support and IMF financing (along with Yanukovych’s removal). An escalation of violence will only accelerate an economic meltdown and unfortunately, Yanukovych has kept the EuroMaidan’s violent dispersal an option, moreover a viable one in his attempt to keep power at all costs. The risk that he will introduce a state of emergency in Ukraine remains high, in our view.