Streetwise Professor

December 17, 2013

Don Putin to Bonasera Yanukovych: Some Day I Will Call On You to Do a Service For Me

Filed under: Economics,History,Military,Politics,Russia — The Professor @ 12:13 pm

The inevitable has happened.  Yanukovych traveled to Moscow, and received Putin’s promise to purchase $15 billion in Ukrainian government debt using the Russian sovereign wealth fund, and a further promise to cut gas prices substantially (though temporarily).  These terms are very similar to what Edward Lucas tweeted a couple of weeks ago, so his sources are vindicated.

There was no quid pro quo announced.  Specifically, Putin claimed that Ukraine’s joining of USSR Lite-the Customs Union-was not discussed.

This was a tactical choice.  Announcement of a formal agreement to join, or a plan to join, would have stoked the protests in Maidan and elsewhere in Ukraine.  But everyone can see the writing on the wall, and so I don’t think that makes much difference.  Announcing Ukraine’s accession to the organization would have just been gilding the lily.

This is something out of the Godfather, with Putin in the role of Don Corleone, and Yanukovych in the role of Bonasera.  “Some day I will call on you to do a service for me.”

For all the attention the deal is getting, it really doesn’t change much.  It was almost inevitable that Yanukovych would throw in with Putin.  As I said on Twitter, Putin was offering Yanukovych a fix, and the Euros were offering him years of rehab.  Easy choice for a corruption addict like Yanukovych.  The opposition and protestors will see through the lack of a formal announcement about the Customs Union, and will take this as proof that Yanukovych has sold out Ukraine to Russia.  The die has been cast, and the standoff between the protestors and the government will continue.  If the protests do not fade away, Yanukovych will have to decide whether to repress it, or just try to wait it out.

And as before, the key figures will be the oligarchs and the military and security forces.  In one ominous note, Putin offered increased cooperation between the Russian and Ukrainian militaries.  I’m sure he did.  He wants to make sure they are reliable.

What’s in this for Russia, as opposed to feeding Putin’s imperial ambitions?  Well, Putin has tied Russia to a money pit.  The Russian economy is already moribund, and the sovereign wealth fund is not sufficient to withstand a substantial drop in oil prices (which is a real possibility).  Investing in Ukrainian junk bonds is hardly the action of a prudent fiduciary.  Moreover, this cannot be the end of it.  This is just the first fix for the junky.  He will need more, and more, and more.  The $15 billion will get him over the immediate fiscal crisis, but it will soon rear its ugly head again, because the fundamentals of the Ukrainian economy are still abysmal.  And the investment is a wrong-way risk from Putin’s perspective.  If the Russian economy takes a hit, due to a fall in the oil price or anything else, the Ukrainian economy will take a hit too, and the bonds Russia has bought will tank.  This is exactly the opposite of the kind of investment one should put in a “rainy day fund.”

Insofar as the gas price is concerned, Gazprom’s stock price fell only slightly on the news.  Since the deal was largely anticipated, that’s not much of an indication of whether the price cut, which is substantial in dollar terms (almost 50 percent) is expected to last long.

One final note.  Yanukovych comes off looking even more buffoonish than before, which I hardly thought possible.  He justified his decision by saying that given the dependence of the Ukrainian economy on Russia’s, he had no choice but to throw in with Putin.

What?  He just noticed this dependence?  It escaped his notice while he was negotiating with the Euros?

This statement is almost as buffoonish as his threat to investigate those who negotiated the Association Agreement with the EU because they had put Ukraine at risk.  Again: he had no idea what was being negotiated, and what its implications would be?

It’s very Obamaesque, in fact.  Apparently Yanukovych only learns about these things by reading the paper, or something.

In sum, what transpired in Moscow today just formalizes what everyone who was paying attention predicted.  It really changes nothing.  The divide between the protestors and the government remains, and how that plays out from here no one can predict with any certainty.

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  1. Despite some good news over the weekend, it seems like Yanukovych has decided to play for time. Besides this deal, the PoR summit decided they needed to reshuffle the cabinet, but Azarov is to remain PM. That means no end to the crisis. Parliament met for only 10 minutes Tuesday so not enough time was seen whether a new vote of no confidence was possible or if that is no longer a real option. Despite exit polls showing the opposition picked up three seats on Dec 15, LA Times reports PoR won four seats. Not sure what that means – fraud, or that support for Euromaidan has failed to attract new votes? I don’t see reports indicating any reaction to it by the protesters.

    The situation appears stalemated as Yanukovych appears unable to end the Euromaidan by force, but isn’t open to a political solution. This could carry on for many more weeks or even months. Unless the protesters can increased their support in the south and east, or the oligarchs force a significant defection from the PoR, I don’t see how this can end. Will there be ongoing crisis until the February 2015 presidential election?

    Comment by Chris — December 17, 2013 @ 12:48 pm

  2. @Chris. That’s pretty much my take. It seems like a stalemate. I don’t see a way either side can break it. A lot depends on the endurance of the protestors, and Yanukovych’s patience, both of which are unknowable, to me anyways.

    The ProfessorComment by The Professor — December 17, 2013 @ 12:57 pm

  3. @Chris. The only upside I see from a prolonged stalemate is that it will suck Putin dry. He will have to pour more and more into the Ukrainian money pit. The utter foolishness of what he is doing, all in the service of his grandiosity and imperial vision and desire to undo the Cold War, is rather staggering.

    The ProfessorComment by The Professor — December 17, 2013 @ 1:00 pm

  4. […] direction when it comes to economics and domestic policies, which, oh wait, was exactly what the Euromaidan types wanted. As Klaus mentions, Estonia, Latvia, and Lithuania seem to be doing just […]

    Pingback by Ukranian Crisis - Page 25 - Defense Technology & Military Forum — April 5, 2014 @ 1:36 pm

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