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International Relations

At a crossroads between Moscow and the EU

Ukraine is torn between having closer ties with the European Union and joining a Russian-led customs union. Experts cast doubt on whether Kyiv will reach a final decision by the end of this year.

The association treaty between Ukraine and the European Commission, which involves the creation of a free trade zone, is still on hold. The EU has been critical of democratic shortcomings in the country and demanded the release of political prisoners on several occasions, including former Ukrainian premier Yulia Tymoshenko.

In the meantime, Moscow has been using the stalemate between Kyiv and Brussels to encourage Ukraine to join a customs union including Russia, Belarus and Kazakhstan. In the past few weeks, extensive talks have been held between the offices of Ukrainian President Viktor Yanukovych and Russian President Vladimir Putin.

During a visit to Moscow on December 18, 2012, the Ukrainian president was expected to sign a series of documents. However, his trip was cancelled only a few hours before takeoff. Both governments declared that the meeting to be postponed indefinitely, since it was necessary to "continue working on the documents at an expert level." However, it never became publicly clear what kind of documents were to be signed.

Rebate on gas

In an interview with DW, the Russian business expert Mikhail Delyagin said he would not exclude Ukraine from joining the customs union this year. "Within the framework of the customs union, Ukraine could demand an 'integration rebate' on energy sources," Delyagin said, thus having to pay less for its gas imports. Since the country depends on energy supplies from Russia, this would become "a matter of life and death in the upcoming winter," Delyagin added.

South Stream pipeline in Anapa, Russia, for transporting Russian gas to Europe

Russian gas is a "matter of life and death" for Ukraine, Delyagin said

Delyagin believes that the country's membership in the economic union would not only benefit Ukraine, but the member states of the current union: Russia, Belarus and Kazakhstan. This would give Russia the opportunity to carry out many joint projects, particularly in the field of machinery construction, he said. "Together with Ukraine, the Russians could make a lot of money," Delyagin emphasized.

But also the Ukrainian Prime Minister, Mykola Azarov, is convinced of the advantages of working more closely with Moscow. His main argument is that many Ukrainian goods are not competitive on the European market.

"What are we providing to the countries in the customs union? The products we cannot sell on other markets," Azarov said in an interview with several Ukrainian television channels. "These are engineering products - our pipes, and so on," he added.

Closer EU ties

President Yanukovych still has not taken a clear position. Ukrainian economist Igor Burakovsky is hoping that the president "makes the only favorable decision" for the country by creating a free trade zone with the EU.

Joining the customs union in exchange for cheaper gas would be a short-term decision, Burakovsky said, which would show "the inability of the state to carry out economic reforms, tap into new markets and change existing rules." These steps are necessary, he added, "to make the country more interesting for local and foreign business people."

According to Burakovsky, adjusting the Ukrainian economy to EU regulations - as provided for by the association treaty - would significantly improve the investment climate in the country. Regardless, Burakovsky believes, it would be possible for Ukraine to establish closer ties with the countries of the customs union without actually joining it.

Ukrainian customs and border service at the Hoptivka car border crossing on the Ukrainian-Russian border

Ukraine could benefit from both adjusting its economy and joining the customs zone, Burakovsky thinks

Year of stagnation?

But most experts believe that there will be no major changes in 2013 between Russia, Ukraine and the EU. Sascha Tamm, former head of the Moscow office of the Friedrich-Naumann Foundation, said he can't picture Ukraine joining the customs union. "The interests of the majority Ukrainian oligarchs clearly oppose this," he said.

"Rich business people would barely profit from the customs union - except for the lower gas prices," Tamm said, adding that he expects the Ukrainian government to continue its balancing act between Russia and the EU.

His statements are supported by the Swedish business expert Anders Aslund, who is currently an executive member of the Kyiv School of Economics. The oligarchs are hoping for new sales markets in Europe, he said.

Furthermore, Aslund added, Putin's declarations of wanting Ukraine to join the customs union were primarily directed at Russian voters who support post-Soviet reintegration projects. However, the customs union would not be profitable for Moscow, Aslund said.

Will Yanukovych fall?

Aslund believes it will be difficult for Ukraine to get out of the stalemate created by President Yanukovych. He does not believe the Ukrainian head of state will free former premier Yulia Tymoshenko in order to improve ties with the EU.

Ukrainian President Viktor Yanukovych at his inauguration in Ukrainian parliament in Kyiv

Some experts expect Ukrainian President Viktor Yanukovych to fall from power

Aslund is also expecting an economic crisis in the country. "The gross domestic product will drop and there will be a devaluation of the national currency," he said. In the end, Yanukovych will lose his grip on power, the expert stated, adding that market-based reforms are not possible under the current president: "It is a very incompetent and corrupt government."