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Might be time to pay your bills, Russia warns West-looking Ukraine

Russia warned today that Ukraine’s failure to pay its bills for Russian gas is becoming critical – just weeks before Ukraine plans to sign a deal with the EU that Russia opposes.

There is a bitter Ukrainian joke that goes like this: “Russia and Ukraine are similar, like two bottles of water standing side-by-side. It’s just that one is with gas, the other without.”

That is almost all you need to know about the increasingly troubled trajectory of Russo-Ukrainian relations.

For the past several years Russia has been trying to rope Ukraine, the France-sized Slavic neighbor with which it shares profound cultural roots and much ambivalent history, into a Moscow-led customs union. Russian President Vladimir Putin hopes it will eventually evolve into a larger Eurasian Union, a political alliance that would reoccupy much of the geopolitical territory vacated by the former Soviet Union.

The main Russian lure dangled before Ukrainians has been the prospect of heavy discounts on the Russian gas that powers the Ukrainian economy and heats the country’s homes. As Ukrainians have balked at joining the customs union, the price of Russian gas has inched upwards, and is now far beyond the ability of the unreformed, energy-wasteful Ukrainian economy and the near-bankrupt Ukrainian state to pay.

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Now, as it grows increasingly likely that Ukraine will take a decisive step Westwards next month by signing an Association Agreement with the European Union that will preclude membership in the Russian-run club, Moscow is intensifying the pressure that began over the summer with a chocolate boycott and stepped-up customs inspections.

On Tuesday, Russian Prime Minister Dmitry Medvedev said Ukraine’s chronic failure to pay its energy bills has become a critical problem, and suggested that Russia might start demanding advance payment before delivering any gas. With winter coming on, that’s not an idle threat for Ukrainians. Ukraine owes $882 million for August supplies, and Russia wants to see the cash, Mr. Medvedev said.

“Ukraine has already reacted. They said there are problems with payment for gas, but they are not critical. But I think that … they are critical,” the independent Interfax agency quoted Medvedev as saying.

“I believe this is the very last argument, a kind of ultimatum that Russia is presenting on the eve of Ukraine’s signing the association agreement with the EU,” says Mikhail Pogrebinsky, director of the independent Center for Political and Conflict Studies in Kiev.

“Against this background, [the threat of] advance payments for gas is like a Sword of Damocleshanging over our heads,” he adds.

Kremlin spokesman Dmitry Peskov insisted Tuesday that Russia was not putting political pressure on Ukraine over its plans to sign the EU deal, and said he did not know how prominently the subject of gas may have figured in urgent talks that took place in Sochi last week between Mr. Putin and Ukrainian President Viktor Yanukovych.

But Putin’s chief economic adviser, Sergei Glazyev, was more blunt. In remarks quoted Tuesday by Interfax-Ukraine, he called Ukraine’s plan to sign the EU association agreement “treachery” and predicted that it would cause great harm to Ukraine’s economy if it happened.

“[Expert] estimates show that Ukraine will be witnessing a decrease in its economic growth and balance of trade until 2020 if it signs the association agreement with the EU and joins the unequal free trade zone. We estimate [these losses] at approximately minus-1.5 percent of GDP per year,” he said.

But if Ukraine joins the Russian customs union “it will immediately gain $10 billion in trade because of the shift to domestic gas pricing, we will not levy the export duty on crude delivered to Ukraine, and this will bring them $5.5 billion,” Mr. Glazyev added.

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Ukraine has indicated that it will sign the EU deal at a summit meeting in Vilnius, Lithuania, next month. The last obstacle is a political one. Several European countries say they won’t allow the agreement to go through unless Ukraine releases jailed opposition leader Yulia Tymoshenko, who was, ironically, convicted of making a disadvantageous gas bargain with Russia when she was prime minister.

Kiev has put out conflicting signals on whether it will release Ms. Tymoshenko in time for the Vilnius summit.

But experts say that if Ukraine does opt for the European deal, it can expect to face stiff consequences, including a toughening of trade terms with Russia, a possible visa regime between the two countries and, of course, absolutely no relief on its energy bills.

“All suggestions that Russia has ‘pardoned’ Ukraine and resigned itself to the idea of Ukraine joining the EU association deal do not correspond to reality. Russia has not accepted this civilizational betrayal of the interests of the Ukrainian and Russian people,” says Kiril Frolov, an expert with the official Institute of the Commonwealth of Independent States in Moscow.

“Russia will protect its interests. Ukrainians should not hope that Russians will just chatter [about consequences] and then just forget it all,” he adds.