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Putin plies Ukraine with $15 billion bond sweetener

AP

Russian President Vladimir Putin opened his wallet on Tuesday in the battle with the European Union over Ukraine’s future, saying Moscow will buy $15 billion worth of Ukrainian government bonds and sharply cut the price of natural gas for its economically struggling neighbor.

The announcements came after Putin held talks in Moscow with Ukrainian President Viktor Yanukovych, who is facing massive protests at home for his decision to shelve a pact with the EU in favor of closer ties with Moscow. News of Russia’s bailout package angered protesters, who immediately accused Yanukovych of selling out the country to the Kremlin and pressed demands for his ouster.

Washington said the Kremlin agreements would not address the concerns of the demonstrators in Kiev, while German Chancellor Angela Merkel dismissed what she described as a “bidding competition” over Ukraine.

Putin’s move closely followed Ukrainian government claims that the country desperately needs at least $10 billion in the coming months to avoid bankruptcy. In November, the Fitch ratings agency downgraded Ukraine’s bonds to a B-minus rating, which puts them in “junk bond” territory.

Putin sought to calm protesters in Kiev by saying he and Yanukovych didn’t discuss the prospect of Ukraine joining a Moscow-dominated economic bloc that they fear will pull their country closer into Russia’s orbit.

Yanukovych has maneuvered between Russia and the EU in an apparent search for the best possible deal. He has insisted that Ukraine intends to sign the EU agreement but wants to negotiate better conditions.

But neither Putin nor Yanukovych mentioned the possibility on Tuesday, and they didn’t take questions, suggesting they were keeping their messaging tightly controlled.

Russian Finance Minister Anton Siluanov said after the Kremlin talks that Russia would purchase $15 billion in Ukraine’s Eurobonds. The money would come from Russia’s rainy day National Welfare Fund that accumulates oil and gas revenues. He also said Moscow could buy the first $3 billion of those Eurobonds this week.

Putin emphasized that Russia’s decision to buy the Ukrainian securities wasn’t contingent on Kiev freezing social payments to its citizens — a clear jab at the International Monetary Fund, which has pushed Ukraine to reduce spending as a condition for providing a bailout loan.

Putin said the Russian state-controlled gas monopoly, Gazprom, will cut the price Ukraine is required to pay for Russian gas deliveries by about one-third from the current $400 per 1,000 cubic meters to $268.50 per 1,000 cubic meters.

Ukraine serves as a key conduit for Russian natural gas exports to Europe, and fierce gas pricing disputes between the neighbors have repeatedly resulted in supply cuts to EU customers.

Yanukovych explained last month’s decision to spike the EU agreement as necessary to improve ties with Russia, which has banned or halted imports of some Ukrainian goods and threatened more sanctions if Ukraine signs the EU pact. The EU has been cool about Ukraine’s pleas for a bailout.

Putin and Yanukovych both pledged Tuesday to boost economic and trade ties to expand the “strategic partnership” between the two neighbors.

A dozen agreements signed Tuesday included one to settle disputes in mutual trade, a deal to jointly modify a Soviet-designed transport plane, a deal on industrial cooperation and an agreement to design a bridge across the Kerch Strait.

Russia’s decision to buy Ukrainian securities effectively means a $15 billion financial aid package, which could be enough to avert a balance of payments crisis for the next 18 months, according to an estimate by Neil Shearing, the chief emerging markets economist at Capital Economics in London.

He said in a note to investors that the gas price cuts could reduce Ukraine’s current account deficit by around $4.5 billion a year. Together with the purchase of Ukrainian securities that would be enough to sustain Ukraine’s balance of payments for around two years.

Tim Ash, emerging markets analyst from Standard Bank in London, said that it remains unclear what conditions Putin has put in place for such a significant amount of aid.

“I cannot imagine that Putin suddenly felt very generous,” he said. There will be a tough set of requirements that “either permanently breaks the link with the EU … or ensures Russia’s control over gas supply/transit.”

Ukrainian opposition leaders, speaking to protesters who have camped on Kiev’s main Independence Square for nearly a month, quickly denounced the Kremlin agreements and accused Yanukovych of treason.

Vitali Klitschko, a world heavyweight boxing champion who quit to concentrate on politics, accused Yanukovych of making Ukrainian assets collateral for the Russian bailout.

“The only way out for the country is early elections,” he told a crowd of over 10,000 protesters. “We are all staying here and will fight for the right to live in a free country.”

Opposition leaders vowed to continue their protests, if necessary, through the New Year and Orthodox Christmas, celebrated on Jan. 7. They continue to call for the ouster of Cabinet and demand early presidential and parliamentary elections.

Another opposition leader, Oleh Tyahnybok, also accused Yanukovych of selling out Ukraine to Russia by signing the agreements with Putin.

“He wants to surrender us, Ukrainians, to serfdom, to eternal slavery under Moscow,” Tyahnybok said. “Today Yanukovych betrayed Ukrainians.”

In Washington, White House spokesman Jay Carney responded to the announcements by repeating the U.S. call for Ukraine’s government to enter into immediate dialogue with demonstrators.

“Any agreements concluded between Kiev and Moscow will not address the concerns of those who have gathered in public protest across Ukraine,” Carney said. “We urge the Ukrainian government to listen to its people.”

Merkel, speaking in an interview with ARD television, said “this ‘either-or’ between Russia and Europe is dominating too much … and the neighborhood should not look that way in the long term, in my opinion.”

“We have to break that up,” she said. “Ukraine can’t do that alone; we in Europe, and in Germany, will have to keep talking with Russia.”