GO
Loading...

UPDATE 1-Russia nears loan deal with Ukraine to keep it in its orbit

Timothy Heritage and Katya Golubkova
Monday, 16 Dec 2013 | 12:07 PM ET

* Russia confirms discussing loan with Ukraine

* Russian and Ukrainian leaders meet on Tuesday

* Deal also possible on cutting gas price for Ukraine

(Adds Bildt and Lavrov, debt rallies, Russian central bank)

MOSCOW, Dec 16 (Reuters) - Russia signalled on Monday it was about to agree a loan deal with Ukraine to help its indebted neighbour stave off economic chaos and keep it in its former Soviet master's orbit.

In snowbound Kiev, the opposition went ahead with plans for another big rally for Tuesday against what they see as moves by President Viktor Yanukovich to sell out national interests to Russia after he backed away from a landmark deal with the European Union that would have shifted their country westwards.

An aide to Russian President Vladimir Putin suggested a credit would be agreed at talks with Yanukovich in Moscow on Tuesday, and Ukraine's energy minister said a deal was also very probable on lower prices for Russian gas.

Yanukovich has turned to Moscow for money after spurning the chance of joining a free trade pact with the EU, despite the risk of protests against him swelling. He also visited China this month as he sought the best deal for his country.

"The situation in Ukraine is now such that without loans, from one side or another, they will simply fail to maintain economic stability," Andrei Belousov, an economic adviser to Putin, told Interfax news agency. "I do not rule out that, if there is a request, a credit could be provided (to Ukraine)."

Russia's Finance Ministry confirmed talks on a loan were under way. Ukraine's dollar bond prices rallied and debt insurance costs fell on the growing expectations Moscow could reach agreements with Kiev.

"I consider it a positive. A Russia deal is better for Ukraine in the short term as it is more likely Ukraine will get more financial support more quickly," said Charles Robertson, emerging markets economist at Renaissance Capital.

Investors have fretted that without international support, Ukraine will struggle to repay debt that falls due next year.

Agreement on Tuesday would also be seen in Moscow as a triumph for Putin keeping Ukraine in Russia's political and economic orbit more than two decades after the Soviet Union collapsed, and preventing a historic Westward shift by Kiev.

EU, RUSSIA TRADE BARBS

Underlying the East-West tug-of-war that has emerged over Ukraine, Sweden's foreign minister Carl Bildt accused Moscow on Monday of trying to woo Kiev with propaganda and "sometimes outright lies".

His Russian counterpart Sergei Lavrov, meeting EU foreign ministers in Brussels, took a veiled swipe at the bloc by criticising "external intervention" as Ukraine considers its future.

Divisions have emerged in Brussels over how to handle the issue. The EU's enlargement chief said on Sunday the 28-nation bloc was halting work on a trade and political pact with Ukraine, suggesting the EU has lost patience with Kiev's demands for financial aid, but other EU ministers later said the door remained open.

Ukraine is seeking help to cover an external funding gap of $17 billion next year - almost the level of the central bank's depleted currency reserves.

Belousov did not say how much Russia, whose own economy is stuttering badly, would be ready to offer Ukraine. But sources in Ukraine said the deal could be worth $15 billion, with Russian providing about $3-5 billion up front.

The most Brussels has so far offered Ukraine is 610 million euros ($837.56 million) but EU officials are in discussion with the International Monetary Fund, the World Bank and other financial institutions on ways to help Ukraine.

Apart from loans, Ukraine is seeking a lower price for Russian gas - now at around $400 per 1,000 cubic metres - to help it cope with its debt burden.

Ukrainian Prime Minister Mykola Azarov says he hopes a deal on a cheaper price for gas deliveries will soon be concluded. A reduction of at least 10-15 percent is likely, sources in Kiev said.

RISKY MANOEUVRE

Russia's central bank dismissed concerns about Russian banks' exposure to Ukraine as "quite insignificant", amounting to less than 1 percent of their assets.

Tuesday's talks are intended to conclude a "substantial package" of agreements to chart out a road map to removing trade barriers for Ukraine with Russia, both sides say.

Yanukovich is seeking the best deal possible for Ukraine but playing East against West is a hazardous manoeuvre running the risk of alienating both parties and there is no certainty Ukraine can avoid default or a currency crisis.

Putin regards Ukraine as vital to creating a political and economic union stretching from the Pacific to the EU's eastern borders. But Yanukovich is not expected to sign Ukraine up for a Russia-led customs union which Putin sees as the basis for this.

Holding out on membership of the customs union could be Yanukovich's last bargaining chip as he tries to survive the protests in Kiev and win a presidential election in 2015.

In Kiev, the main protest camp had thinned out again on Monday after about 200,000 people protested on Sunday. A few thousand people were listening to prayers, speeches and songs but these numbers are likely to swell again on Tuesday.

($1 = 0.7283 euros)

(Additional reporting by Richard Balmforth and Gabriela Baczynska in Kiev, and by Andrius Sytas in Vilnius, Writing by Timothy Heritage; editing by Ralph Boulton)