Russia’s bailout of Ukraine: A short-sighted effort?

Russian FinMin confirmed that Moscow will turn to its National Welfare Fund for $10 billion for Ukraine. Would you say that it is really somehow a worthy deal for Russia or more like a desperate effort to keep Ukraine on Kremlin’s orbit? Read few comments.

Sean Roberts, Senior Research Fellow, The Finnish Institute of International Affairs

It is important to reiterate that the crisis in Ukraine has not just appeared overnight, but is the manifestation of more systemic problems within the country. In short, Ukraine is in deep economic trouble and in desperate need of some outside help, but the EU’s association agreement is simply the second best option on the table at the moment. On the other hand, Russia is prepared to offer Ukraine a more substantial deal, but it is not without its drawbacks. Russian help comes at a price and with certain expectations that will limit Ukraine’s room for maneuver in the future. In short, Ukraine has for the time being lost its main asset – its ability to remain uncommitted to either the EU or Russia but continue to gain concessions from both.

As for Russia, the commitment to Ukraine is perhaps a little less desperate than it looks. First, there is the very important ‘Eurasian Union’ project that Vladimir Putin is personally championing. This union will develop on the basis of the existing customs union between Russia, Belarus and Kazakhstan and will likely involve future expansion. Ukraine is considered important for the success of this project, and so there is now some expectation that Russian money will secure Ukraine’s participation/ membership in this latest effort at post-Soviet integration. Second, and related to the first, Russia’s military industrial complex has received a huge financial boost from the state over the past few years as Russia attempts to modernise its armed forces. As Ukraine retains a number of facilitates producing key components for the Russian military, there are likely some serious economic and security considerations behind these efforts to keep Ukraine within Russia’s orbit of influence.

However, there is considerable risk involved for Russia too. Russia does not have a bottomless pit of money. It is also important to note that there is little domestic support for diverting money to develop some of Russia’s regions (North Caucasus, for example), let alone bail out other states. More importantly, any pressure on Ukraine to integrate in the Eurasian Union could backfire quite quickly – if not before Ukraine’s presidential election in 2015, then immediately afterwards. As mentioned, Ukraine will lose its only real leverage as a nation the moment it commits to either the EU or Russia. This makes Russia’s investment in Ukraine seem a little short-sighted at this moment in time and by no means a risk-free investment on the part of the Russian authorities.

Steven PiferSenior Fellow, The Brookings Institution

I see the $15 billion in credits that President Putin offered President Yanukovych as a Russian effort to keep Ukraine from proceeding with the EU association agreement. This would seem to be a risky loan, given that the Ukrainian government is not undertaking the reforms that the International Monetary Fund or other economists recommend, so it is not clear that Ukraine’s financial situation will have stabilized when the time comes to repay the credits. My understanding is that Ukraine’s credit rating would not qualify it for a loan from the Russian “rainy day” fund, so a special exception had to be made – Russian pensioners may come to regret that.

Dominik Tolksdorf, Transatlantic Post-Doctoral Fellow for International Relations and Security (TAPIR), Institut français des relations internationales (IFRI)

Russia’s investments in the Ukrainian bonds are attempts by the Kremlin to support the Ukrainian government in office on a short-term basis and to keep Ukraine in its orbit: the mid-term goal is to convince Ukraine to join the customs union between Russia, Belarus and Kazakhstan. The Kremlin´s support can thus be seen as a political signal: Russia is there to help its neighbors in difficult times, and it is also more flexible in providing short-term assistance than organizations like the EU. Such support is nothing special in international relations, and it is completely legitimate for Russia to provide this assistance, as it can invest its funds wherever it wants to. However, the perhaps more important question is if the December deal between Ukraine and Russia is also regarded as legitimate in Russia, which sees economic slowdown as well: there are some investment guidelines that stipulate when the National Welfare Fund can be used to support foreign debt securities, i.e. the bonds must reach a certain credit rating by the international credit rating agencies. Bonds from Ukraine clearly do not meet these criteria. For these understandable reasons, there is opposition in Russia in using the National Welfare Fund for Ukraine.

Jakob Hedenskog, Deputy Research Director, Project Manager, Division of Defence Analysis, Swedish Defence Research Agency

Whether this is a worthy deal for Russia may only be fully answered by the Russian leadership. What is interesting is that the aid package is linked to the foreign policy of Ukraine. The aid is meant to be paid in bailouts of $2-3 billion each time (the first was paid in December). The aid is short-sighted and meant to keep status quo in Kyiv. If Ukraine changes its foreign policy preferences towards the EU again, Russia may stop further bailouts at any time convenient for Russia.

Marcel de Haas, Senior Research Associate, Netherlands Institute of International Relations Clingendael

It is not a desperate effort to keep Ukraine in, but fits within Russia’s foreign security policy, as laid down in its national security strategy, the military doctrine and the foreign policy concept. In these documents and Presidential statements is mentioned that Russia, as successor state to the USSR, has privileged rights in certain regions, i.e. Moscow has the right to intervene in former Soviet republics, such as militarily in Georgia (2008) and politically and economically in Ukraine now. Concurrent with this are statements, such as by MFA Lavrov earlier this week, that the EU should not mingle in Ukraine, meaning that is the Kremlin’s sphere of influence.

Jack Sharples, European University of St Petersburg/European Geopolitical Forum

It would appear that the Russian government’s decision to buy $15bn of Ukrainian government bonds, using $10bn of Russia’s National Welfare Fund (currently valued at $88bn) and $5bn of Special Drawing Rights (SDRs) is primarily geopolitically motivated. The Ukrainian economy is in a difficult state, and it appears that the Ukrainian President, Viktor Yanukovych, would prefer to accept a bailout from Russia than meet the conditions form reform attached to further bailouts from the IMF or EU. Politically, Russia benefits insofar as Yanukovych’s refusal to sign the Association Agreement (AA) with the EU seems to have been a condition of the Russian loan – If Yanukovych had signed the AA, the possibility of enticing Ukraine into the Russian-led Customs Union (with Kazakhstan and Belarus) would have been lost.

Financially, the loan appears to be a gamble for Russia. Ukraine’s credit rating (B-) is far below the AA rating usually required for the investment of Russia’s National Welfare Fund. However, the repayment date of 2016 provides a win-win situation for Russia: Ukraine is due Presidential elections in 2015. The loan repayment date gives Yanukovych breathing space to fight that election, while if Yanukovych loses, the new (most likely pro-Western) President will face the almost immediate problem of repaying the loan to Russia. With an interest rate of 5 percent, Russia could earn up to $1.5bn in interest payments over two years. There is of course the risk that the Ukrainian government will simply be unable to repay the loan. Such a situation would provide the Russian government with even greater leverage over its western neighbour, but could generate popular unrest in Russia given that the National Welfare Fund is used to support Russian pensions. The big question for the Russian government is this: Is it worth spending $15bn to keep Ukraine in Russia’s ‘sphere of privileged interest’? President Putin seems to think so.


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