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EU studies options in tense countdown to Ukraine deal

Luke Baker
Tuesday, 19 Nov 2013 | 8:12 AM ET

BRUSSELS, Nov 19 (Reuters) - European officials are considering a range of options to keep alive plans for Ukraine to sign an EU free-trade agreement at a summit in Vilnius on Nov. 29, despite President Viktor Yanukovich's failure to deliver on his commitments so far.

While Ukraine still has 10 days to meet calls for judicial reforms and other steps - including a resolution in the case of jailed former prime minister Yulia Tymoshenko - time is rapidly running out, and contingency plans are taking shape.

A meeting of European Union foreign ministers in Brussels on Monday made no progress in resolving the outstanding differences, while Ukraine's parliament on Tuesday delayed a critical session aimed at breaking the deadlock over Tymoshenko.

After two years of negotiation, clinching the EU-Ukraine association agreement has taken on far-reaching geopolitical implications, with Russia - Ukraine's ex-Soviet master and chief energy supplier - unsettled about its neighbour being drawn out of its orbit and closer into the arms of the EU.

Months of verbal and financial sparring, with Moscow threatening to cut off gas supplies and demanding Kiev pay back debts, is building to a head in the countdown to Vilnius, with Russia accusing the EU of playing hardball, too.

A senior EU official directly involved in efforts to reach agreement with Ukraine likens the situation to a scene in the Woody Allen movie "Match Point", when a tennis player hits the ball and it clips the net, prompting a freeze-frame.

"The ball is hanging there above the net, and no-one knows which way it's going to fall. The whole match depends on that moment. That is the situation we're in with Ukraine," he said.

The uncertainty is causing profound unease in financial markets, with foreign investors worried Ukraine's fragile debt market will collapse if there is no agreement with the EU, no lifeline negotiated with the IMF and Russia turns the screw.

Ukraine's credit has been cut to "junk" by the three main ratings agencies, with the outlook also negative, while the country has had to impose controls to prop up the currency.

Eurasia, a strategy consultancy, now sees a less than 50 percent chance of Kiev signing the EU agreement since it doubts the Tymoshenko issue can be resolved in time.

That's largely because Yanukovich is reluctant to release his political rival for medical treatment or to partially pardon her, as the EU wants, since at the back of his mind he is concerned she will challenge him in elections in 2015.

"Yanukovich likely understands the political, trade, and financial benefits that can come with EU integration and wants the deal to happen," said Eurasia analyst Alex Brideau.

"Yet he is making what he believes to be the optimal political decision on Tymoshenko, while betting the EU will accept his terms. We believe that this won't succeed."

"LEAP OF FAITH"

While time is running out, EU officials still see options available to secure agreement and remain narrowly optimistic that a deal will be signed on Nov. 29, one that could well go down as a critical moment in post-Soviet history.

As well as the possibility that Ukraine's parliament finds a way to pass legislation in the coming days that would allow Tymoshenko to travel abroad for medical treatment, there are other ways the stand-off could be resolved.

Releasing Tymoshenko was never specifically mentioned as a step Ukraine had to take, she has just become symbolic of what the EU sees as a problem of selective justice in Ukraine.

If the other association 'benchmarks' are met by Ukraine - and the EU's appointed monitors agree they are close to being achieved - then a way may be found to sign the agreement with the proviso that the Tymoshenko issue is resolved in the coming weeks.

One EU official said it may be sufficient for Yanukovich to give his word to EU leaders at a dinner in Vilnius on Nov. 28 that he will pardon Tymoshenko for the agreement to go ahead.

"This may come down to the issue being resolved directly with EU leaders in Vilnius," said the official, speaking on condition of anonymity. "If the leaders feel they have Yanukovich's word and he will stick to it, then it can work."

It may also be decided among EU member states in Brussels before then. Using what's known as a "written procedure", countries can say whether they agree Ukraine has done enough to justify the agreement. EU ambassadors, as representatives of their countries, could also agree a position in their regular meetings, called Coreper, and have that approved before Nov. 29.

Otherwise, EU foreign ministers could meet in Brussels or Vilnius on Nov. 27 or 28 to make a last-minute assessment.

"There are options. If the political will is there, member states will do it (agree the deal). I still see the glass as more than half full," said the official.

In much the same way that tackling the euro zone debt crisis required a political leap of faith that wrongfooted many in financial markets, a solution on Ukraine may ultimately come down to what is known in Brussels and elsewhere as a "fudge".

From the EU's point of view, history and its policy of outreach to former Soviet states is riding on it. From Ukraine's point of view, the future for trade and investment, and the long-run solvency of the country, is riding on it.

"It is up to Ukraine to choose: if it does not move closer to Europe now, its dysfunctional political and economic system is likely to be perpetuated," Judy Dempsey, an analyst with Carnegie Europe, a think-tank, wrote in a commentary.

"Yanukovich and lawmakers will have to make an enormous political leap to break this deadlock before Vilnius."

(Additional reporting by Justyna Pawlak in Brussels and Pavel Polityuk in Kiev; Editing by Will Waterman)