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Why Ukraine’s bailout money could end up in Russia

A section of the Bratstvo gas pipeline emerges from underground near Ivano-Frankvisk, Ukraine, Feb. 6, 2014.
Vincent Mundy | Bloomberg | Getty Images
A section of the Bratstvo gas pipeline emerges from underground near Ivano-Frankvisk, Ukraine, Feb. 6, 2014.

Ukraine is desperate for a financial bailout after months of conflict in the former Soviet state, and the West seems eager to hand over the funds. But a lot of that cash could end up going to Ukraine's chief antagonist: Russia.

"That money could very well indirectly make it toward Russia, given the amount of economic and financial transactions between Kiev and Moscow," said Stratfor Eurasia analyst Eugene Chausovsky.

Ukraine has been in a recession since the middle of last year, and its economy has been hit by deflation. The Ukraine government said last month that its budget deficit rose 21.2 percent in 2013 over 2012.

In response to its economic struggles and Russia's invasion of the Crimea, the European Union on Wednesday said it's ready to give $15 billion in loans and grants to Ukraine. On Thursday, the U.S. House of Representatives overwhelmingly passed a measure that will fast-track $1 billion in loan guarantees to Ukraine.

Alexander Gordin, managing director of Broad Street Capital, who has had extensive business dealings in Russia and Ukraine for two decades, told CNBC that some of the money will likely be used to pay back Russian loans to Ukraine and to buy Russian natural gas. Ukraine buys 60 percent of its natural gas from Russia.

(Read more: Crimea votes to join Russia; Obama orders sanctions)

Access to natural gas is a card Russia has repeatedly played against Ukraine and other European countries, and the Atlantic Council's Adrian Karatnycky said that Sevastopol, a Ukrainian city in the Crimea that serves as the base for Russia's Black Sea Fleet, is the only reason Ukraine has gotten a reasonable price on gas in the past.

"If Crimea were ever to become Russian, which is doubtful, it will be a slow economic death to Ukraine," Karatnycky said.

(Read more: Hedge funds buy war insurance on Russia-Ukraine conflict)

Stratfor's Chausovsky said he believes that although the European Union has said that financial assistance given to Ukraine will not be used to pay for Russian natural gas, it could happen anyway.

A prominent Russian business source who spoke to CNBC on the condition of anonymity echoed those sentiments.

"The money that Ukraine gets from the EU will go straight to payments for gas," he said. "So, that money will 100 percent end up back in Russia," the source said.

(Read more: Can Russia take my Pepsi? Consumer brands at risk)

Lilit Gevorgyan, senior economist at IHS Global Insight, said much depends on what develops with Ukraine's plans for keeping itself supplied with natural gas this year and beyond.

"However, it is expected that a large chunk of this loan will go into covering the current account gap and also financing the budget deficit," Gevorgyan said. "The Russian gas bill will also be a significant drain, although it also depends how much gas Ukraine is planning to import from Russia in 2014 and onward."

—By CNBC's Dina Gusovsky. Follow her on Twitter @DinaGusovsky.

Contact World Economy

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