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World News: Uncertainty on IMF Loan Sends Ukraine to Moscow 

By Alan Cullison 

10 February 2009

A10

The International Monetary Fund is likely to suspend loan payments to Ukraine, a move that would further push the government toward Moscow for aid and exacerbate a feud between top leaders in Kiev.

Ukraine is failing to meet the terms of its loan deal with the IMF, and likely won't get the next installment this month, according to a person close to talks between the fund and the government in Kiev.

Faced with a cash shortage, Kiev is passing the hat around to global powers. Talks were held in Moscow last week over a $5 billion loan to help plug Ukraine's budget deficit.

Ukraine Prime Minister Yulia Tymoshenko said her government also sent letters to the U.S., European Union, China and Japan, and that "Russia is ready to help with the credit agreement's signing."

President Viktor Yushchenko criticized the talks with Moscow. "It's a dangerous policy and poses a threat to Ukraine's national interests," he said.

The U.S. State Department said it was looking into reports of Ukraine's request for aid.

Ukraine has been hit by falling prices of metals and fertilizers, its main exports. Infighting between Mr. Yushchenko and Ms. Tymoshenko has led to a policy deadlock.

The deficit has been a sticking point in talks with the IMF on the release of the second installment of a $16.4 billion loan that it agreed to extend to Ukraine last year. The IMF released the first $4.5 billion tranche in November and had made further disbursements contingent on Ukraine reducing the budget shortfall and making progress on bank restructuring.

Ms. Tymoshenko's government's 2009 budget is forecast to show a deficit of 3% of gross domestic product.

Last week, an IMF mission monitoring Kiev's progress left without an agreement with the government that would have paved the way for disbursing the next loan tranche. Ceyla Pazarbasioglu, assistant director of the European Department of the IMF, said "further actions, including structural fiscal measures, are needed for us to recommend completion of the review."

The Plain Dealer 

Battered Ukraine economy brings new fears of default

http://www.cleveland.com/news/plaindealer/index.ssf?/base/news-4/1234171816323990.xml&coll=2

Monday, February 09, 2009 

Tom Lasseter

McClatchy Newspapers

Kiev, Ukraine - Standing outside the railway station on a cold winter morning, a group of laborers tried to duck the bitter wind as they waited for someone to offer them work unloading trucks or swinging a hammer. As usual, no one came. 

"We'll go a week without a job," said Vitaly, who didn't give his last name because the police sometimes round up the workers. "It's probably going to get worse. It's going to get bad." 

Vitaly is from the east Ukrainian town of Kryvyi Rih, where many steelworkers have been sent home. The global collapse of steel sales, which make up 40 percent of Ukraine's exports, is just one of the punches that the country has taken lately, and there are fears that the economy could completely implode. 

The United Nations said in a January report that the probability that Ukraine would default on its foreign debt more than quintupled from late 2007 through late 2008, putting it almost in the same league as Iceland, whose economy melted down last year. The International Monetary Fund announced an emergency $16.4 billion bailout for Ukraine last October. 

In Iceland, with a population of 300,000, the crisis toppled the government amid street protests and fiscal calamity. In Ukraine, with some 46 million people sandwiched between the European Union and Russia, widespread instability would be far more damaging. 

"There's no hope," said Petro Romanuk, a minibus driver, who said the number of passengers coming to the city and looking for work had plummeted in the past few months as people had given up. "The politicians don't care about us. Each day it gets worse; each day we trust them less and less. There may be another revolution." 

While no one predicts an immediate default, the numbers are alarming. The national currency has plunged 59 percent against the dollar during the past six months. A new gas contract negotiated with Russia last month will end subsidies and expose Ukraine to far higher gas prices. 

Credit lines have dried up, and steel prices are half what they were. Steel production in Ukraine fell some 13.4 percent last year, the biggest amount of any large global supplier. 

"This is the first economic crisis Ukraine has faced as a market economy, and the foundations of our market economy are weak," said Kseniya Lyapina, a parliament member from President Viktor Yushchenko's party. 

The level of distrust in the competence of local and national leaders is hard to overstate. Yushchenko's approval rating is in the single digits, and poll numbers for the two main contenders to replace him in elections early next year are slipping. 

"There is this combination of economic instability and political instability; it is not good for Ukraine at the moment," said Olena Bilan, a senior analyst at Dragon Capital, a leading investment company in Kiev. "But the government doesn't have much room to do something" such as a large stimulus package. 

Despite the turmoil, Lyapina said that there could be a silver lining to the fiscal pain: The country's industrial base and labor market - still hampered by Soviet-era inefficiencies in some quarters, such as work forces at some factories that are too big by a third - will be forced to become leaner. 

The Washington Times

February 9, 2009

Status of Crimea hangs over Russia, Ukraine

Joshua Kucera THE WASHINGTON TIMES

http://www.washingtontimes.com/news/2009/feb/09/status-of-crimea-hangs-over-russia-ukraine/

 

SEVASTOPOL, Ukraine 

A marble plaque on the wall of the Russian Sailors' Club, one of the city's trademark white granite neoclassical buildings, reads: "TIME CAPSULE: To be opened by service members of the Russian Black Sea Fleet and citizens of the 'hero city' of Sevastopol, 22/2/2021." 

There is a hitch, however. The Ukrainian government says Russia and its fleet have to be out of Sevastopol by 2017. 

While the recently resolved Russian-Ukrainian dispute over natural gas has garnered more headlines, the status of Crimea could carry more long-term potential for conflict between the two post-Soviet states. 

This bit of Ukraine sticks into the Black Sea and has a majority ethnic Russian population as well as a major Russian naval base. Worries about its status resurfaced in the aftermath of the August war between Georgia and Russia. Like Georgia, Ukraine has drawn Russia's ire for its friendly relations with the West and desire to join NATO. 

Like South Ossetia - the former Georgian territory whose "independence" has been recognized by Russia - Crimea favors closer ties with Russia and Russia encourages this, in part to tweak the pro-Western government in Kiev. 

During the Georgia-Russia war, Ukrainian President Viktor Yushchenko traveled to Georgia to publicly offer his support, and Ukraine sold arms to Georgia. Ukraine accused the Russian Consulate in Simferopol, Crimea's capital, of passing out Russian passports to residents of Crimea; Russia had done the same in South Ossetia over the past several years, and then said that its intervention there was to defend the rights of its citizens. 

On Jan. 26, Russia announced plans to build a new naval base in another breakaway Georgian region, Abkhazia, the Associated Press reported, perhaps as insurance for a loss of Sevastopol. 

Polls show that 47 percent of Ukrainians felt less secure as a result of the Georgia war, said Boris Tarasyuk, Ukraine's first foreign minister after the Orange Revolution that brought pro-Western leaders to power in 2004. Ukraine moved troops stationed across the country toward Crimea during the war, and the defense minister has called for dramatically increasing spending on the military since the war. 

"What happened in Georgia convinced many people in Ukraine, especially those in charge, to pay adequate attention to the quality of its armed forces and the necessity to allocate adequate funding for making the armed forces modern, well-equipped and ready," Mr. Tarasyuk told The Washington Times. 

While no one is predicting imminent conflict in Crimea, there are troubling signs that the peninsula could be a source of tension for years to come. Russian is spoken everywhere in Crimea, except in government-mandated Ukrainian-language TV and radio ads. Graffiti in Sevastopol reads "Sevastopol is Russian" and "Crimea is Russian." 

That Crimea is part of Ukraine today is a historical quirk. Russian Empress Catherine the Great founded Sevastopol as a naval base, and Crimea was part of Russia until 1954, when Soviet Premier Nikita Khrushchev made it part of the Ukrainian Soviet Socialist Republic. The move had little import until the Soviet Union collapsed, leaving Crimea's majority Russian population and the headquarters for the Black Sea Fleet in Ukraine. 

During the era of Russian leader Vladimir Putin, Russian nationalist politicians, in particular Moscow Mayor Yuri Luzhkov, have made Crimea into a Russian cause celebre. Mr. Luzhkov used to make frequent visits to Sevastopol, during which he would argue that the city should be part of Russia, until he was declared persona non grata by Ukraine last year. 

Mr. Luzhkov has funded barracks for sailors of the Black Sea Fleet and built a branch of Moscow State University in Sevastopol. Mr. Luzhkov and other Russian officials also pay for a variety of citizens groups that promote Russian interests in Crimea. 

The Black Sea Fleet is both the emotional heart and the strategic crux of the dispute. In Soviet times, the fleet had nearly 600 ships and 100,000 sailors and support staff. But during Russia's financial collapse of the 1990s, the fleet fell into disrepair, and now numbers only about 60 operational ships. 

Ukraine inherited some of the Soviet fleet, as well, but its ships are in an even worse state, and military analysts estimate that it only has about six operational ships. 

Russia sees its fleet as the protagonist of many of the nation's finest moments, including the epic defenses of Sevastopol during the Crimean War and World War II. 

"The Black Sea Fleet doesn't have much military significance - its significance is economic and especially political," said Sergey Kulik, the head of a Ukrainian government think tank in Sevastopol. 

"Russia can use the fleet, depending on what they want, to turn up or turn down the pressure in Crimea whenever they want," said a Western diplomat in Kiev, who spoke on the condition of anonymity. 

The current agreement governing the fleet's presence in Sevastopol expires in 2017, and Mr. Yushchenko declared last year that the lease would not be extended. But Russian officials have said they will not discuss moving the fleet until then - even though it would take several years to redeploy it - and Russian officials in Sevastopol said they will never accept its departure. 

"I don't know what would happen if the fleet had to leave in 2017. I think what happened in South Ossetia would look mild in comparison," said Vladimir Solovyev, a former intelligence chief of the Black Sea Fleet who is now the head of the local office of the Institute of Countries of the Commonwealth of Independent States, a Moscow-based activist group. 

The Ukrainian government has done its part to raise tensions, as well, by imposing new language laws. Foreign films must now be dubbed into Ukrainian, though they are subtitled in Russian, and local television is increasingly being broadcast in Ukrainian, much to the consternation of Sevastopol's residents. 

"We're being deprived of our right to speak Russian," said Raisa Teliatnikova, the head of the local office of the Russian Community of Crimea, another Moscow-funded Russian rights group. 

She said Kiev's language policies are doomed to fail because of the historical links between Russia and Ukraine. "It's impossible to separate Ukraine from Russia, no matter how hard they try to join NATO or the West, deep down they know they can't survive without Russia," she said. 

Last year, two new monuments were erected on the peninsula, one to Catherine the Great and the other to Petro Konashevych-Sahaidachny, a 17th-century Ukrainian hero. But the monument to Catherine is in prime real estate, in the city center across from the Black Sea Fleet museum, while the Ukrainian statue is in a distant suburb. 

"You can see the attitude of the people through these two monuments," Mr. Solovyev said. "At Catherine the Great, you can always see fresh beautiful flowers, while at Sahaidachny, you just see old artificial flowers." 

Shortly after it was erected, though, the Catherine the Great statue was splashed with blue and yellow paint, the colors of the Ukrainian flag. The culprit was never caught, and one city official, who asked not to be identified, said "both sides could gain" from the defacing of the monument. Now, small groups of pro-Russia volunteers stand by the monument to protect it against further mischief. 

 

 

The Weekly Standard

http://www.weeklystandard.com/Content/Public/Articles/000/000/016/132vvmik.asp

 

The New Ostpolitik 
America's German problem. 
by Melana K. Zyla 
02/16/2009, Volume 014, Issue 21 

 

No sooner had Russia turned off the gas flowing through Ukrainian pipelines in the first days of the new year, sending tens of thousands of Europeans into a deep freeze, than German economy minister Michael Glos pointed out that "if we already had the Nord Stream pipeline," which would bypass Ukraine, flowing from Russia to Germany under the Baltic Sea, "then we in Germany, at least, would be a little more reassured."

The official desire to replace the current Russia-Ukraine pipeline with a Russia-Germany pipeline says a great deal about how Germany sees the gas dispute, and other global issues as well: Get the small fry--Balts, Poles, Ukrainians, and other former Russian suzerainties--out of the way and let Moscow and Berlin restore some Ordnung to things. In the January crisis, Russia cut off gas heading west to Ukrainian pipelines after Ukraine and Russia disagreed over what penalty Ukraine owes Russia for disputed late payment fees, and what the price of the gas should be now that global prices have fallen.

Glos's comment underscores to what degree Berlin has entered a new era of shared interests with Moscow and divergence from Washington. Incoming administration officials would be wise to recognize that on issues ranging from the gas dispute to Eastern Europe to Afghanistan and Iran, the Germany of today is not the partner the United States once had. 

President Bush learned that lesson the hard way. His administration at first hailed Germany's Christian Democratic Union chancellor, Angela Merkel, as a foreign-policy soulmate, akin to France's Nicolas Sarkozy. But on issue after issue, she fell short of expectations.

Consider Bush's efforts to expand NATO. In the run-up to a NATO foreign ministers' meeting in Brussels in early December, Merkel publicly torpedoed Ukraine and Georgia's chances to proceed towards membership. Her government did the same last spring, ahead of the Bucharest NATO meeting. Both times, news of Germany's opposition coincided with Merkel's visits with Russian leaders, who vociferously oppose Ukraine and Georgia's inclusion in NATO. 

Russia's influence "is unfortunate because all of us have said no third party gets a veto" in NATO matters, says Daniel Fata, deputy assistant secretary of defense for European and NATO policy during Bush's second term. As for Afghanistan, Germany in October announced the withdrawal of its only combat troops there--some 100 special operations soldiers. It plans to expand only its NATO peacekeeping force, to 4,500, and thereby add to the risk of creating what Defense Secretary Robert Gates has called a "two-tier alliance," in which only the United States and a few other NATO countries do the fighting. Germany's own soldiers don't think much of their restricted, noncombat missions, with Germany's top special operations general, Hans-Christoph Ammon, calling his country's training of an Afghan police force a "miserable failure" and adding that at Germany's current rate of effort and financing, "it would take 82 years to have a properly trained Afghan police force." Indeed, the United States has had to take over Germany's police-training mission.

Merkel supporters try to explain her weakness as a result of her sharing power with the left-leaning Social Democratic party. Yet Labour-led Britain has 8,050 troops in Afghanistan, many of them in combat roles.

Which raises the question: With German conservatives like these, who needs Socialist pacifists? In 2006, after a newly elected Merkel gave a tough speech on making the trans-Atlantic relationship her priority, "we had hoped that we would see a big change" from the anti-American politics of the outgoing Social Democratic chancellor, Gerhard Schröder, says Fata. Instead, "there was a lot of disappointment on our side." 

And there's the prospect of more disappointment to come. Merkel is now in an election year in which she will face off against Frank-Walter Steinmeier, her foreign minister and vice-chancellor from the Social Democratic party. Until the September vote, she's likely to channel Steinmeier's views, particularly the pro-Moscow ones. That's because she wants "to avoid having Russia [be] a topic of the election campaign," says Joerg Himmelreich, transatlantic fellow at the German Marshall Fund of the United States. 

German voters don't like Vladimir Putin, says Himmelreich, a former policy-planning staffer at the German foreign ministry and banker in Moscow. But as Fata puts it, "Germany and Russia are always going to have a special relationship," not least because of Germany's dependency on Russian energy and large amounts of trade with Russia.

Of course, Germany's Christian Democrats often showed great solidarity with Washington, even in the face of solicitousness from Moscow, during the Cold War. But even if Merkel's party regains a majority in 2009, that tradition may be gone for good. For one thing, the party's base is German industry, which is now heavily invested in Russia and dependent on Russian gas. Germany gets one-third of its gas from Russia, and will be dependent on that source for years--even if it does develop alternatives. Moreover, German companies and the political class are heavily tied to the Nord Stream pipeline project, which is controlled by Russia's state-owned energy giant Gazprom. 

Indeed, gas is the leading means through which Moscow manipulates Berlin. Gazprom's gas cutoffs this January, like those in 2006, prompted Germans and other West Europeans to see Ukraine as an unstable partner that gets in the way of their economic needs: Cut Ukraine out of the relationship, and things will be golden is the message from Moscow.

In Russia's gas politics with Germany, the most powerful connection of all is between Gazprom and former chancellor Schröder. He chairs the $16 billion Nord Stream project, which is 51 percent owned by Gazprom. Schröder's service to Gazprom may be the most disturbing illustration of Moscow's influence on German elites ("It has never happened in German history that a chancellor acts as an agent of a foreign company that doesn't always follow the interests of Germany," says Himmelreich), but it's hardly the only one. Himmelreich says Berlin's foreign policy think tanks are pressured by Moscow. Even the prestigious German Council on Foreign Relations, he says, has been pressed not to invite Putin critics or Russian opposition voices to its events.

The head of the Council's Russia program, Alexander Rahr, confirmed that there have been occasions when "official Russia criticized us," but added, "we never adjusted our themes and seminars to their wishes."

Beyond Russia, there's a gap between Germany's tough rhetoric and action on Iran as well. While Merkel and Steinmeier have been critical of Iran's nuclear ambitions and blocked Germany's biggest banks from doing business there, Germany's economic relations with Iran continue to grow. With annual trade between the two now over $7 billion, Germany is Iran's biggest EU trading partner. 

Berlin's interests now diverge from Washington's on several key issues. The new administration's best chance to lead on issues of concern to Europe will therefore be to play Europeans off each other the way Moscow does, Himmelreich says. For example, "German policy towards Russia will be considerably weakened if the United States succeeds in getting Sarkozy onboard for a new Russia policy." The United States should support energy transport routes for Europe that bypass Russia, such as those that tap Central Asian energy, and be wary of Gazprom's efforts to gain control of gas interests in North Africa, which remain an alternative source for Western Europe. Himmelreich says the United States should also push Europeans to improve their military capabilities. 

On NATO, the United States will need to continue to push to bring Georgia and Ukraine into the fold. Otherwise, Russia will control the issue, using Germany to represent its interests. How strongly Berlin will ultimately embrace Moscow isn't clear. But as the gas and NATO disputes show, the two are now more tightly linked than they have been in decades.

Melana K. Zyla is a reporter in Washington. 

 

U.S. Department of State

Robert Wood

Acting Department Spokesman
Daily Press Briefing

February 9, 2009

Excerpt on Ukraine-related matters

…QUESTION: There was a lot of reporting over the weekend about Vice President Biden’s comments at the Munich Security Conference related to the relationship with Russia. And he talked about hitting the reset button and starting over in the relationship between the U.S. and Russia, but that was the day after the U.S. State Department issued a statement condemning Russia’s – on Friday evening, condemning Russia’s involvement – plans to still establish military bases in the two breakaway republics in Georgia. 

How do – are there – there seem to be some mixed signals there. What’s going on? 

MR. WOOD: No, not at all. I think what the Vice President was saying was that, look, our relationship with Russia is a very important one. And there have been some real problems and difficulties in that relationship, but we need to go forward, and that’s what I think he meant by the fact that we, you know, need to hit the reset button, because there are a number of challenging issues that we face and – where we need the Russian cooperation, where Russia needs American cooperation, and so I don’t see anything contradictory there. 

You know, where we have problems – and we’ve talked to the Russians about, you know, this – the idea of bases in Abkhazia and South Ossetia – we’ve made very clear that Russia needs to adhere to the ceasefire agreements. And you know, setting up bases in those two areas basically are violations of their commitment. But again, we have a – it’s a very important relationship, it’s a very complex one. But there are a number of issues in the international community that require both Russian and American leadership, and we look forward to working with Russia, as the Vice President said, on trying to deal with a number of these challenges. 

QUESTION: Robert, just one thing on this. I just want to – you didn’t correct her, the question when – the question was – had revolved around the statement on Friday saying that the U.S. condemned this decision. But in fact, that’s not what it said, is it? 

MR. WOOD: I don’t have the statement in front of – yeah.

QUESTION: Just looking at it now, it’s one of – it’s -- regrets the decision. There is a diplomatic nuance there, anyway. 

MR. WOOD: Well, I’ve just basically said to you what I think the Vice President was trying to say with regard to the relationship with Russia. We’re looking forward and not backward with Russia. There are a number of very, very important issues, as I said, that we have to deal with in the international community. And Russia’s participation, Russia’s cooperation is going to be essential to try to deal with these challenges. 

QUESTION: So you’re basically saying you’re going to mute certain protests over certain Russian actions by issuing statements on a Friday night and saying regret -- 

MR. WOOD: I didn’t say we were going to mute anything. I just said that – I said the relationship is a very complex one, but we want to move forward. 

QUESTION: Will you still move as strongly on NATO expansion as the previous administration, Ukraine and Georgia?

MR. WOOD: Well, I mean, we’ll be – we will be looking at various issues. I mean, we’re still committed to improving and strengthening NATO’s relationship with both Ukraine and Georgia through the NATO-Georgia Commissions and the NATO-Ukraine Commissions, so that hasn’t changed. But I don’t want to get ahead of where we may, at some point, go. And leave it at that. 

QUESTION: So wait, the State – the U.S. – the Administration supports Ukraine and Georgia’s admission to NATO or them getting the MAP?

MR. WOOD: We’ve been on the record as – if you remember the April, you know, Bucharest declaration, it’s very clear that those two countries will be members of NATO. 

QUESTION: But that was almost a year ago and there was a different administration in place.

MR. WOOD: Well --

QUESTION: Is there any change that you know of?

MR. WOOD: To my knowledge, there hasn’t been any change. And as I said, this Administration will be working with its other NATO allies to try to strengthen those relationships with Ukraine and Georgia through those commissions….

 

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