- The Washington Times - Monday, April 26, 2010

Ukraine’s controversial decision to allow a Russian naval fleet to remain in the country for another 25 years should bring a big payoff for the country’s finances, help secure a critical new funding package from the International Monetary Fund (IMF) and even deepen Kiev’s ties to Western Europe, a top Ukrainian official said in an interview.

Serhiy Tihipko, Ukraine’s new vice prime minister for economy, said he was not happy with the secretive way the Russian deal had been negotiated but that the result — an estimated $4 billion cut next year in fuel bills for oil and natural gas imports from Russia — will be immediately beneficial to the economy and the country’s finances.

The presence of the Russian fleet in the Black Sea port of Sevastopol, the result of a leasing deal dating back to the breakup of the Soviet Union, “is a very painful issue for most Ukrainians,” Mr. Tihipko told The Washington Times on Friday, speaking through an interpreter on a visit to Washington for the annual spring IMF and World Bank meetings.

“What I am against is that the agreement had been done under the table and that I, as a citizen of Ukraine, was not consulted,” he said. “But in the end, it is a price we can afford to pay.”

Mr. Tihipko, a former banker who came in third in the country’s presidential vote in January, said the expensive previous gas supply deal with Russia had to be renegotiated anyway, and the deal struck by new President Viktor Yanukovych and Russian President Dmitry Medvedev will boost Ukraine’s fortunes in a number of ways. Ukraine, Mr. Tihipko argued, was paying the highest energy prices in the region, hurting consumers and undercutting the competitiveness of the country’s private sector.

Based in part on new revenues and savings from the energy accord, Ukraine’s Cabinet on Friday said it had completed a draft budget to be presented to the country’s parliament next week, with the lower energy costs accounting for $40 billion in savings over the next 10 years. Even before the gas deal, Mr. Tihipko said, Ukraine’s rebounding economy grew at an annual rate of 6 percent in March, after severely contracting in 2009.

The budget is also critical to Ukraine’s hopes to secure a $12 billion line of credit over the next 2½ years from the IMF to finance further economic reforms.

The IMF had suspended the last payments of a previous $16.4 billion program late last year after the government of former Prime Minister Yulia Tymoshenko passed into law a number of spending increases. The Ukrainian government has said it will produce a budget that keeps the deficit under 6 percent of gross domestic product to qualify for renewed IMF help. Mr. Tihipko said Kiev hopes to have the new IMF credit line in place by May.

In another sign of improving finances, Deputy Finance Minister Andriy Kravets said Friday the country was considering a new issue of 10-year Eurobonds in June, hoping to obtain lower borrowing rates as investor confidence in the country improves.

The economics minister said last week’s deal with Russia also will provide a boost to the country’s top economic priority — signing an association membership deal with the European Union. Mr. Tihipko said the Yanukovych government, which enjoys a small but stable majority in parliament after years of gridlock among the country’s major power players, hopes to conclude the membership deal by the end of the year.

But the Sevastopol trade-off remains politically volatile in Ukraine, with critics seeing it as part of Mr. Yanukovych’s larger drive to move closer to Moscow and away from the West. Both Mr. Medvedev and Russian Prime Minister Vladimir Putin hailed the agreement as proof of warming ties between Moscow and Kiev after years of tension.

Mrs. Tymoshenko, a leader of the pro-Western Orange Revolution of 2004 and 2005 who now heads the biggest opposition group in the parliament, called the fleet lease extension “a strategic mistake.”

“This is not simply treason. This is the beginning of the systematic ruining of the independence of our state,” she warned in a news conference last week.

The lease for the Russian navy base in Sevastopol was to expire in 2017, and Ukraine’s former pro-Western governments had pledged not to renew the arrangement. The base issue became even more heated in 2008, when it was learned that ships from Sevastopol had been used to support the Russian military action against Georgia, whose pro-Western and pro-U.S. government had strongly backed the Orange Revolution.

In exchange for a 30 percent cut in energy exports to Ukraine, Russia now will be able to berth its fleet at the Ukrainian port through at least 2042.

Both the Russian and Ukrainian parliaments will be asked to approve the accord this week. Opponents reportedly plan demonstrations in Kiev on the day of the debate.

Should the agreement pass, it also might mean the end for what has become an annual New Year’s Eve drama in which Russia and Ukraine face off over unpaid fuel bills and control of key pipelines into Western Europe as old contracts expire.

The most serious confrontation, in the first days of 2006, led to a brief midwinter shutdown of pipelines supplying countries across Eastern and Central Europe.

“I don’t think there will be any more like that,” Mr. Tihipko said with a smile.

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