(Updates with Bildt’s comment in seventh paragraph, Azarov in 22nd.)
Dec. 18 (Bloomberg) -- Ukrainian anti-government protesters demanded to know what President Viktor Yanukovych had ceded to seal $15 billion of Russian financial aid and a one-third discount on energy imports.
Russia will buy Ukrainian state debt this year and next and will cut the price it charges for natural gas to $268.50 per 1,000 cubic meters, President Vladimir Putin said after meeting Yanukovych in Moscow yesterday. The two leaders said they didn’t discuss a Russia-led customs union after speculation Ukraine was close to joining riled pro-European demonstrators in Kiev.
“I know only one place where there’s free cheese -- a mouse trap,” Arseniy Yatsenyuk, head of jailed ex-Prime Minister Yulia Tymoshenko’s party, said at Independence Square yesterday. “We want to hear what he gave in return.”
Yanukovych is grappling with the biggest protests since the 2004 Orange Revolution after he snubbed a European integration and trade accord last month in favor of repairing relations with Russia, which had opposed the deal. The former Soviet republic, a crucial east-west energy transit nation, is struggling with its third recession since 2008 and dwindling foreign reserves.
Ukrainian assets rallied, with the yield on Ukraine’s dollar denominated bonds due 2023 also fell for a second day, declining eight basis points, or 0.8 percentage point, to 8.77 percent, the lowest since June 18. The cost to insure Ukraine’s debt against non-payment with five-year credit default swaps dropped for a second day, decreasing 96 basis points to 876, according to data compiled by Bloomberg.
The hryvnia strengthening 0.3 percent to 8.27 against the dollar as of 11:22 a.m. in Kiev today.
European leaders cautioned that the aid may not benefit Ukraine in the longer term. Russia’s emergency loans raise the risk that Ukraine will further delaying “urgent economic reforms and necessary EU modernisation,” Carl Bildt, Sweden’s foreign minister, said on his Twitter Inc. account. “Decline might continue.”
Putin said the financing is being given because of “problems of the Ukrainian economy linked to the world financial crisis, and to support the budget of the Ukrainian government.” Restrictions on Ukrainian goods will also be lifted, while Ukraine agreed to add Russia’s ruble to the list of currencies acceptable for inclusion in central bank reserves.
Ukraine will issue $15 billion of Eurobonds for Russia to buy, with a $3 billion tranche of two-year debt possible in 2013, according to Russian Finance Minister Anton Siluanov. The money will come from the National Wellbeing Fund, which contained $88.1 billion at the end of last month.
“Everything that unites us, we don’t have the right to use it differently,” Yanukovych said. “The trade between Ukraine and Russia is so important that we must value it.”
The funds are enough to “plug the black hole in Ukraine’s balance of payments” for about 18 months, while the reduction in the gas price from $400 per 1,000 cubic meters now may narrow Ukraine’s current-account deficit to 6 percent of gross domestic product from 8.5 percent, according to London-based Capital Economics Ltd.
Even so, closer EU ties would be “more likely to provide an anchor for the structural reforms needed to reinvigorate Ukraine’s faltering economy,” Neil Shearing, Capital’s chief emerging-markets economist, said yesterday by e-mail.
Russia’s intention is “crystal clear,” Yatsenyuk said today on Bloomberg Television. It wants to “restore the Soviet Union, which is called the Customs Union.”
Protesters flocked to Independence Square on hearing news of the Russian agreements. There were about 30,000 people there as of 7:30 p.m., according to The RBC-Ukraine news service. The Interior Ministry put the turnout at about 8,000.
“What did Yanukovych promise in exchange?” said 57-year- old Vera from Kiev, who declined to give her last name. “Nobody gives anything without a reason. Now we have only questions.”
Opposition leaders addressing the crowds, who’ve blocked central Kiev since the government pulled out of a planned European Union association agreement, were similarly skeptical. Vitali Klitschko, head of the opposition UDAR party and a parliament member, accused Yanukovych of using strategic Ukrainian companies “as collateral” for the Russian agreement.
“The government betrays Ukraine’s national interest, its independence and each Ukrainian’s possibility at a better life,” Klitschko said.
As well as a resumption in the EU pact, protesters are demanding the government’s dismissal after violent clashes with police on Nov. 30 and Dec. 1. Demonstrators rebuilt barricades around the square that were removed by police last week. Fortifications include barbed wire, snow-filled sacks reinforced with logs, lumber and old tires.
European leaders have bristled at the snub and criticized Yanukovych for his treatment of protesters. EU Enlargement Commissioner Stefan Fule said Dec. 15 that the government’s “words and deeds” are “further and further apart” on the EU deal. German Chancellor Angela Merkel said yesterday that “it’s too much of an either or situation” between Russia and Europe.
“That’s not the way I want the neighborhood to look,” Merkel said on ARD television.
Lithuanian Foreign Minister Linas Linkevicius said Ukrainian officials told him during his visit to Kiev before their trip to Moscow that none of the 14 agreements would contradict the potential process of EU accords, according to the RIA Novosti news service.
Ukraine’s government is still working on EU integration, while the deal with Russia has guaranteed financial stability, Prime Minister Mykola Azarov said today in Kiev.
While European officials including U.K. Foreign Minister William Hague have said Ukraine can still sign the EU agreement, Russia will probably “have had to extract some unofficial reassurances” on future membership of its rival customs bloc as part of today’s deal, according to Nomura International Plc. For now, the move risks firing up protesters, it said.
“We expect a major wave of political turbulence through this week,” Nomura said in an e-mailed note. “If the government manages to remain in power without excess brutality, we think it would constitute a partial defeat of the opposition in the short term.”
--With assistance from Stepan Kravchenko, Scott Rose, Evgenia Pismennaya and Henry Meyer in Moscow and Jones Hayden in Brussels. Editors: Torrey Clark, Andrew Langley