Russian President Vladimir Putin's decision to provide Ukraine with more than $15 billion in aid is much more than a show of support for embattled Ukrainian President Viktor Yanukovych. It is a political masterstroke that undermines the Ukrainian opposition and gives Russia more control over its neighbor than ever before.
At first glance, Putin has given Ukraine a great deal. Russia's National Welfare Fund will lend Ukraine $15 billion by purchasing newly issued government bonds, and state-controlled Gazprom will lower the price of natural gas for Ukraine from $406 per thousand cubic meters to $268.50. There's no overt quid pro quo: Putin stressed that the two leaders did not discuss Ukraine's membership in a customs union with Russia. He didn’t even hint that the aid was conditional on Ukraine abandoning its dreams of closer integration with Europe.
The deal left Ukrainian demonstrators nonplussed. They had taken to the streets to protest Yanukovich's decision to scuttle a trade agreement with the European Union in favor of closer ties with Russia, but how could they denounce money and cheap gas with no visible strings attached?
In speeches to protesters in downtown Kiev, the heads of three major opposition parties went through the motions of condemning the Russian deal. Ultranationalist Oleh Tyahnybok declared it "treason" and "fiction." Boxer Vitali Klitschko, head of the opposition party Udar, said he'd meet Yanukovych in the "political ring." Former central bank governor Arseniy Yatsenyuk called on the government to lower gas prices for private consumption by 30 percent, forgetting that the EU and the International Monetary Fund both want Ukraine to cut energy subsidies.
Even as demonstrators demanded to know the real terms of the deal, their mood turned sour. "There is weariness in the air," journalist Yulia Belinskaya, who has taken part in the protests since late November, wrote on Facebook. "I have cried, argued, laughed, sang, worried, helped. I have no emotional strength left for a revolution. We have lost this battle."
With its economy shrinking and its government teetering on the edge of default, Ukraine had virtually no alternative to Russia's embrace. Meeting the tough conditions required to receive aid from the EU and the IMF would take time, a luxury the government does not have. Yanukovych's deal with the Kremlin is probably the only way to avert financial collapse.
Contrary to the criticisms of Putin's opponents, the deal is not particularly onerous for Russian taxpayers. The National Welfare Fund, created to cover the Russian state pension system's deficits with extra oil revenues, will get a good return on its investment in Ukrainian bonds if the government stays solvent. Even after news of the Kremlin deal broke, the yield on a dollar issue due in 2023 was almost 9 percent, far higher than what the fund earns on the highly-rated U.S. and European bonds in which it has invested most of its $88 billion. (Incidentally, Franklin Templeton fund manager Michael Hasenstab, whose big bet on Ukraine I wrote about recently, must have made a killing when bonds prices jumped after the Russia deal.)
The gas-related part of the package will help keep Ukraine solvent by reducing the amount the government must spend to maintain low energy prices for consumers. If gas imports from Russia remain at this year's level of about 25 billion cubic meters, Ukraine will save about $3.4 million. The reduced budget expenditure on energy subsidies might even unlock the door to IMF financing.
Even Gazprom might not lose too much. True, it will receive less money for the gas it delivers, but the price cut might also help it reverse a trend of falling exports to Ukraine. Despite a contractual obligation to buy at least 41.6 billion cubic meters of Russian natural gas, Ukraine imported only 32 billion cubic meters in 2012 and further reduced its consumption this year.
Most important for Putin, the asreement allows Russia to keep Ukraine on a tight leash. Russia will become Ukraine's single biggest creditor, and will retain the power to change the price of gas every three months. Putin gains geopolitical influence while defusing the tension in Kiev and averting a Ukrainian default that could have had undesirable political consequences for him. All told, not a bad deal for him.
(Leonid Bershidsky, an editor and novelist, is a Bloomberg View contributor. Follow him on Twitter.)