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Ukraine’s EU Retreat Sparks Tensions as Kyiv Braces for Protests

Ukraine’s decision to break off
negotiations for a European Union trade deal sparked tensions
from the nation’s parliament to the Russian president’s home
town as Kyiv braced for protests.

Russia and the EU traded barbs, accusing each other of
pressuring the ex-Soviet nation. Ukrainian Prime Minister Mykola Azarov, speaking in parliament amid a hail of insults and paper
projectiles, blamed the International Monetary Fund for the
turnaround. Riot police were descending on central Independence
square on the ninth anniversary of the Orange Revolution after a
flash rally last night.

The EU and Russia each buy about a quarter of Ukrainian
exports and have been jostling over relations with the second-most populous former Soviet country, a crucial transit route for
energy shipments. The two sides accused each other of blackmail,
while Vladimir Putin said the EU is encouraging protests.

“Tensions increased as the social and economic situation
became strained,” Volodymyr Fesenko, head of the Penta
Political Analysis Center in Kyiv, said by phone today. “If
Yanukovych leads Ukraine into the customs union, we will face a
serious risk to the country’s unity.”

The cost to insure Ukrainian debt against non-payment for
five years with credit-default swaps rose 78 basis points, or
0.78 percentage point, to 1,003, the third-highest in the world
after Argentina and Venezuela, according to data compiled by
Bloomberg. The yield on the Ukrainian dollar bond due 2023 rose
8 basis points to 9.905 percent at 12:24 p.m. in Kyiv.

“Not Realistic’

President Viktor Yanukovych’s government will focus on
reviving trade with Russia and other former Soviet republics, it
said yesterday. The decision is probably final, said Linas Linkevicius, the foreign minister of Lithuania, which holds the
EU’s rotating presidency. Postponing the signature of the
agreement ‘‘is not realistic,” he said in a telephone interview
yesterday.

The EU is “pressuring and blackmailing” Ukraine to
reverse yesterday’s decision, Putin said today in St.
Petersburg. The country of 45 million is crucial to Putin’s
ambition to set up a trading area to emulate the Brussels-centered bloc.

The EU continues “to believe that Ukraine’s future lies in
a strong relationship with” the western bloc, Maja Kocijancic,
spokeswoman for EU foreign-affairs chief Catherine Ashton, told
reporters today in Brussels. The U.S. is “disappointed” in the
decision, State Department spokeswoman Jen Psaki told reporters
yesterday.

Demonstration Planned

The decision exposed a growing divide in the country over
economic and political priorities. In a reflection of mounting
tensions, thousands of protesters took to the streets in near-freezing temperatures in Kyiv last night over the government’s
move, with opposition parties calling on Ukrainians to march in
the capital on Nov. 24 to show their support for the EU
agreement.

Backing for membership of the 28-nation bloc is at 58
percent, according to a poll of 1,000 people this month by
researcher IFAK Institut GmbH Co. It gave no margin of error.

Opposition leaders including world heavyweight boxing
champion Vitaly Klitschko spoke and bands performed songs at the
rally in Kyiv last night, which was attended by about 2,000
people, private television broadcaster Channel 5 reported.
People plan to gather for another rally tonight.

Today marks the ninth anniversary of the start of the
Orange Revolution, which was led by jailed ex-Premier Yulia Tymoshenko and helped overturn Yanukovych’s presidential victory
in 2004.

‘Bluffing, Blackmail’

“You think you can continue bluffing and blackmail and
play between those two centers to get benefits to keep your
power,” Tymoshenko wrote on her website in a letter to the
country’s leaders. “You are mistaken. Never stay alone against
Russia, because you will lose everything. Only a deal with the
EU can protect you.”

A turnout of more than 100,000 protesters on Nov. 24 may
force Yanukovych to backtrack as the country’s European
integration will be one of the main topics of the campaign
before the 2015 presidential election, said Fesenko at Penta.

European governments had urged Ukraine to sign association
and free-trade agreements at a Nov. 28-29 summit in the
Lithuanian capital of Vilnius. Russia, which supplies 60 percent
of Ukraine’s natural gas, threatened trade measures if the deal
went ahead, offering membership of its customs union as an
alternative.

Tymoshenko’s Fate

While Yanukovych reiterated yesterday that his country’s
goal is European integration, lawmakers repeatedly failed to
pass a bill to allow Tymoshenko to travel abroad for medical
treatment, a key EU condition for the trade accord to proceed as
the bloc deems her imprisonment a case of selective justice.

Yanukovych has accused Tymoshenko of involvement in crimes
including a murder, claims she denies. He defeated Tymoshenko to
become president in 2010 after serving two stints as premier and
now trails Klitschko in polls for the presidency.

Ukraine’s motivation for suspending preparations for the EU
treaty was “purely economic,” with the government making the
“only possible” choice in the situation, Prime Minister Mykola Azarov told lawmakers in Kyiv today.

Speaking over chants of “Shame!” by opposition lawmakers,
who attempted to keep him from speaking, Azarov said a Nov. 20
letter from the IMF tipped the balance for Ukraine.

‘Last Straw’

“The last straw that broke the camel’s back was the IMF’s
position,” Azarov said. “They offered to provide us with a
loan equal to what we have to repay them. At the same time they
demanded to double utility prices, freeze salaries, and cut
budget spending.”

Ukraine entered its third recession since 2008 in the
second quarter as demand for its steel exports shriveled, while
reserves have plummeted. Joining Russia’s customs union would
shrink its current-account gap by cutting energy costs.

The reasons may have been more complex, according to former
Polish President Aleksander Kwasniewski, one of the EU’s main
negotiators with Ukraine. While economic difficulties
contributed to yesterday’s decision, “unprecedented pressure”
from Russia also played a part, he said.

Yanukovych told his Lithuanian counterpart Dalia Grybauskaite that Russia threatened to suspend imports from
industries in eastern Ukraine, potentially causing massive
losses and affecting hundreds of thousands people, the Baltic
News Service reported, citing Grybauskaite’s adviser, Jovita
Neliupsiene.

Darka Chepak, Yanukovych’s spokeswoman, didn’t answer her
mobile phone when Bloomberg News called for comment.

Putin’s Reaction

Similar accusations were leveled at the EU in Moscow, where
Foreign Minister Sergei Lavrov said this week it was the trading
bloc that put Ukraine under “brazen pressure” to choose
between Russia and the 28-member bloc.

“We basically heard threats form our European partners
toward Ukraine, including even helping to hold mass protest
actions,” Putin said today, adding that Russia is ready to
participate in trilateral talks with Ukraine and the EU.

Ukraine’s actions may be a negotiating ploy to help garner
financial aid, according to Liza Ermolenko, an emerging-markets
analyst at London-based Capital Economics Ltd.

“There have been some suggestions in the media that policy
makers are just trying to raise the stakes,” she said by e-mail. “The key in all this is that until the summit next week
there’s not much point trying to guess what Ukraine is going to
do.”

Still, time may be running out. Yesterday’s decision “puts
a large question mark over the general direction of Ukraine’s
foreign policy,” Tatiana Orlova, an economist at Royal Bank of
Scotland Group Plc in London, said by e-mail.

To contact the reporters on this story:
Daryna Krasnolutska in Kyiv at
dkrasnolutsk@bloomberg.net;
James G. Neuger in Brussels at
jneuger@bloomberg.net

To contact the editor responsible for this story:
Balazs Penz at
bpenz@bloomberg.net