Russia takes Ukraine

 

Rumours about sovereign default in Ukraine, a major casualty of the global downturn, have been in the air for months. In 2009, its gross domestic product fell by 15% and is likely to shrink by another 6% this year.

The European Union, already caught up in the Greek crisis and soon to be tangled up in the Portugal’s too, is unwilling to take this non-Euro zone country on board. To make it worse, in February the International Monetary Fund suspended its $16.4bn rescue loan until Ukraine cuts spending.

Ukraine submitted to Russian demands. It agreed that the Russian fleet will stay in Crimea until 2042 in exchange for a 30% discount on price for natural gas. Thanks to this it will be saving $3bn - $4bn a year. In addition, Ukraine can now pare its budget and get access to the IMF’s funding.

Russia, on the other hand, will have to pay $2.8bn for its fleet this year instead of the $98m that it has been paying so far and $3.7bn, in 2011. Overall, in ten years time the rent will make a staggering $40bn.

Yet the deal does not make sense from a military perspective. The fleet in Sevastopol consists of old vessels that need to be written off in the coming years. Moreover, in the unlikely event of a big war it will not even get through to the Mediterranean because it can easily be blocked in the straits.

So, why does Russia pay the price? The deal saves Ukraine from the fate of Iceland and Greece, from the imminent default, in which Ukraine would not hope for help from the European Union: it is bigger than Greece and is not an EU member. If that happened, the Ukrainian state would virtually collapse and Russia would have a huge problem to solve on its borders.

 

April 28, 2010
photo: Facundo - Fotolia.com

 

 

 

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