Bloomberg News

Yanukovych Seeks to Cool Russia Aid Rage With Pre-Vote Wage Vow

December 18, 2013

Ukrainian President Viktor Yanukovych sought to calm anger at a $15 billion Russian bailout by pledging to raise wages before his 2015 re-election bid.

Prime Minister Mykola Azarov said today that public salaries would rise three times next year and argued people would have suffered without the Russian aid. Anti-government protesters demanded to know what Yanukovych had ceded to secure the financing from President Vladimir Putin yesterday in Moscow.

“Putin is giving him cash to buy out his power base,” Jan Techau, director of the Brussels office of the Carnegie Endowment, said by phone. “This is Russia’s strategy for between now and election day so that the economy doesn’t tank.”

Ukrainians are staging the biggest protests in almost a decade after Yanukovych rejected a European Union integration accord last month and instead chose deeper ties with Russia, which had opposed the deal. The ex-Soviet state, a key east-west pipeline transit nation, is struggling with its third recession since 2008 and dwindling foreign reserves.

Ukraine will issue $15 billion of Eurobonds for Russia to buy, with a $3 billion tranche of two-year debt possible in 2013, according to Russian Finance Minister Anton Siluanov. It will also get a one-third cut in the price it pays its neighbor for natural gas, Putin announced yesterday.

Bonds Surge

Ukrainian assets rallied, with the yield on Ukraine’s dollar denominated bonds due 2023 falling for a second day to 8.94 percent at 6:59 p.m. in Kiev. The cost to insure Ukraine’s debt against non-payment with five-year credit default swaps dropped to 785 basis points, the lowest since Aug. 5, according to data compiled by Bloomberg.

Yanukovych, who faces elections in March, 2015, has damaged his popularity by snubbing an EU association accord and overseeing the use of force against protesters, according to a poll published by Tyzhden magazine.

He’d lose to any of the opposition candidates if a vote was held now, with his worst result against former heavyweight boxing champion Vitali Klitschko, who polled 46.9 percent, compared with 28.6 percent for Yanukovych, the Nov. 28-Dec. 7 survey of 2,013 people by Perspektyva showed. It had a 2.2 percentage-point margin of error.

Azarov defended Yanukovych’s decision to accept the Russian assistance, saying agreeing instead to an International Monetary Fund loan would have resulted in a surge in household heating prices, hryvnia devaluation and cuts to salaries and pensions.

Seasonal Gift

“What would have happened without these agreements, if the government hadn’t taken the difficult but necessary decision to halt the signing of the EU accord?” he said today. “The answer is obvious -- bankruptcy and social collapse. That’s the present Ukraine would have got for New Year.”

By refraining from IMF support, Ukraine has “avoided policy conditions ultimately aimed at helping revive its economy,” Fitch Ratings said today.

Putin and Yanukovych said they didn’t discuss yesterday a Russian-led customs union that’s a rival to the EU deal. Speculation Ukraine was close to joining had riled pro-European demonstrators in Kiev.

On hearing about the Russian agreements last night, thousands of protesters flocked to Independence Square, the focal point of the 2004 Orange Revolution. About 10,000 gathered this evening, the UNIAN news service reported.

Russia’s intention is “crystal clear,” Arseniy Yatsenyuk, head of jailed ex-Prime Minister Yulia Tymoshenko’s party, said today on Bloomberg Television. It wants to “restore the Soviet Union, which is called the customs union.”

Collateral Claim

Klitschko, head of the opposition UDAR party and a parliament member, accused Yanukovych of using strategic Ukrainian companies “as collateral” for the Russian agreement.

As well as a resumption in the EU pact, protesters are demanding the government’s dismissal after violent clashes with police on Nov. 30 and Dec. 1. Demonstrators have rebuilt barricades around the square that were removed by police last week, with fortifications including barbed wire, snow-filled sacks reinforced with logs, lumber and old tires.

European leaders cautioned that the Russian aid may not benefit Ukraine in the longer term. Russia’s emergency loans raise the risk that Ukraine will further delaying “urgent economic reforms and necessary EU modernization,” Carl Bildt, Sweden’s foreign minister, said on his Twitter Inc. account.

World Watching

German Chancellor Angela Merkel said today that she expects the Ukrainian leadership to adhere to democratic standards. In London, Prime Minister David Cameron told Parliament “the world is watching what the Ukraine authorities have done and are contemplating doing.”

Ukraine’s agreements with Russia don’t prevent an EU association treaty and Brussels is ready to sign it as soon as Ukraine is, the news service Interfax cited EU foreign-policy chief Catherine Ashton as saying.

The financing allows Russia to keep control of Yanukovych as he gears up for the 2015 ballot, according to Joerg Forbrig, senior program officer for Central and Eastern Europe at the Berlin bureau of the German Marshall Fund of the U.S. Winning the vote will be difficult without “massive fraud,” he said.

“Russia wants to buy time,” Forbrig said by phone. “Putin’s keeping him on a very tight leash. It’s enough to keep him ticking over but not enough to allow him to walk away.”

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Olga Tanas in Kiev at otanas@bloomberg.net; Kateryna Choursina in Kiev at kchoursina@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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