Cut the budget deficit and raise energy prices, Biden tells Ukraine

Graham Stack in Kyiv

In a speech in Kiev yesterday July 23, on the last of his Ukraine visit, US vice president Joe Biden told Ukraine to do exactly what the IMF says, and on two specific points: “The Fund requires that your government, and your government agreed to critical reforms to cut the budget deficit, revive a striving [sic*] banking system, and phase out energy subsidies, which I know from experience is a very difficult thing to do. Carrying out this agreement requires very hard choices and tough action, but it will help put you on the road to growth and competitiveness.”

Biden told Ukraine that, “moving toward market pricing for energy is brave, but also absolutely necessary pre-condition.”

Biden argued that shifting to market prices would strengthen Ukraine’s energy security. However, it also the Russian position that Ukraine must shift to market prices for gas.

If the US is resetting its relationship with Russia, it appears the US is also rethinking its relationship with Ukraine.

Biden as expected committed to Ukraine’s independence and sovereignty, and praised Ukraine’s democracy as the ‘the freest country in the region.” He emphasized however NATO or EU membership would be entirely Ukraine’s choice, and that the US would not push Ukraine to join. “The USA supports Ukraine’s deepening ties to NATO and to the European Union. But again, we recognize they are your decisions, your choices, not ours whether you choose the EU or seek to, or NATO. We recognize that how far and how fast to proceed on your choices is, again, a uniquely Ukrainian choice — it is not ours.”

Yesterday, Biden warned that the sustainability of Ukraine’s democracy was threatened by economic collapse and pervasive corruption.

“Mature democracies survive because they develop institutions such as a free press, a truly independent court system, an effective legislature – all of which serve as a check on the corruption that fuels the cynicism and limits growth in any country, including yours,” Biden said. Referring to Ukraine’s economic problems, Mr Biden asked: “Can you name me a place where democracy has flourished where the economic system has failed?”

He also harangued ruling politicians for their failure to work together. “Communications among leaders has broken down to such an extent that political posturing appears to prevent progress.”

Committing the US to respect for national sovereignty is a retreat from the neocon supremacist position, and, although delivered with an anti-Russian twist in the Georgian context, in facts coincides with longheld Russian and Chinese demands for the US to abide by international law.

Underlining the shift, Biden said the US was committed to a “multi-polar world” – an expression straight out of the Putin / Primakov phrasebook.

Say no to NATO, US experts tell Ukrainians

Graham Stack in Kyiv for Russia Profile

Following the Russian-U.S. reset, a new American policy institute has opened in Kiev to dissuade Ukraine from its bid to Join NATO. Its fellows argue that Ukrainian NATO membership would be bad for both the United States and Ukraine. But while their message is in tune with Ukrainian public opinion, they face an up-hill struggle convincing the foreign policy establishment in both countries.

“Ukraine’s NATO membership is not in Ukraine’s interests. Nor is it in U.S. interests. All that it will create is a nuclear trip wire at the heart of Europe,” argued Anthony Salvia, director of the American Institute in Ukraine (AIU), a non-commercial organization founded this year in Kiev, funded by U.S. citizens. “In Ukraine, U.S. opinion is often represented as being monolithically in favor of Ukraine’s future membership of NATO,” he added. “We’re here in Kiev to show this is definitely not the case.”

AIU is unique in being an American organization campaigning overseas against NATO expansion. “Other American organizations in Ukraine, many of which are funded by the U.S. government, actively promote Ukraine’s entry into NATO at the earliest possible date, despite the fact the majority of Ukraine’s population is opposed to NATO accession,” said Salvia, who served in Ronald Reagan’s White House.

The AIU is aligned, but not affiliated, with the Nixon Center, headed by legendary former U.S. Secretary of State Henry Kissinger, and which publishes the influential journal “National Interest”. In March 2009, the Nixon Center released a review of Russian-U.S. relations arguing that Ukrainian or Georgian NATO membership “could decrease rather than increase Europe’s overall security.” The review called for U.S. policy makers to “work closely with U.S. allies to develop options other than NATO membership to demonstrate a commitment to [Ukrainian and Georgian] sovereignty.”

“The U.S. should refrain from making promises to Ukraine it cannot honor, but which might embolden Ukraine to provoke a conflict. The Ukrainians should realize that the US will never fight Russia over Ukraine,” argued Doug Bando, senior analyst at the conservative Cato institute, and a recent AIU guest speaker in Kiev. The August 2008 Georgian war looms in the minds of all those warning against extending NATO deep into the unstable former Soviet Union. “Ukraine must learn to rely on its own resources for securing its sovereignty, and not to trust to U.S. promises,” said Bando.

“Ukrainian NATO membership, by ruining relations with Russia, would make Ukraine less secure than it is, not more. And it would also harm U.S. security, by ruining the chances for cooperation with Russia over vital issues such as Afghanistan, North Korea and Iran, all issues that the new administration has said it will prioritize,” agreed Salvia.

“There are other mechanisms available for strengthening Ukrainian security,” he added. “One is a new European security treaty, similar to that being proposed by Dmitry Medvedev. The other is for European Union membership. The Kremlin is basically open toward Ukraine’s future EU membership, especially if it is an alternative to Ukraine’s NATO membership”.

Reset in Action

The AIU is in fact part of a wider battle waged over the new U.S. administration’s Russia policy. U.S. President Barack Obama has famously called for “pressing the reset button” in Russian-U.S. relations, but he is advised on Russia by Zbigniew Brzezinski and Michael McFaul, both historic advocates of a tough line with Russia. “We hope Obama listens to a wider range of opinion,” said Salvia.

Underlining the potential of cooperation with Russia, on the other hand, last week’s Moscow summit between Obama and Russian President Dmitry Medvedev saw the Russians sensationally agree to the United States transiting weaponry through Russia to Afghanistan.

And equally sensationally, although little noticed in the West, Obama, speaking to Moscow students, said that NATO membership would require a majority of any country’s population to be in favor – which is not the case in Ukraine. He also said that America would not press any country to join the alliance.

Ukraine’s bid for NATO membership, and Russia’s adamant opposition to this, put the United States in a bind. Washington is unwilling to openly privilege Russian interests over Ukrainian. Changing the situation on the ground in Ukraine could help U.S. policy makers out of this dilemma, hopes the AIU.

It should also not be too hard, given that Ukraine public opinion is solidly anti-NATO. Polls have consistently shown support for joining NATO to hover at around only 20 percent of respondents, with over 50 percent against.

But at the other end of the scale, Ukraine’s powerful foreign policy bureaucracy has an entrenched ideological commitment to joining the military alliance, according to Yelena Biberman, a U.S. embassy policy specialist engaged in research on Ukraine’s foreign ministry.

“Foreign ministry officials are ideologically anti-Russian and nationalist to the extent that they may not always be able to objectively assess Ukraine’s real national interests,” said Biberman, who has interviewed many top foreign ministry officials. “They believe that Russia is inherently imperialistic and bent on regaining control over Ukraine as a step to rebuilding its empire, and NATO membership is the only way to stop this. Even for a new Ukrainian president, it will be very hard to change their perspective.”

This means that for AIU, it is work with opinion makers in the media that matters most. “We don’t engage in lobbying, but work exclusively in the public field holding conferences, talks and round table discussions,” said Salvia. “What we are trying to tell Ukrainians is simply that you can be pro-America and pro-European without having to want to join NATO.”

Would the real Ukraine please stand up?

Graham Stack in Kyiv for Russia Profile (www.russiaprofile.org)

Opinion polls show Ukraine to be a Russian-leaning country very different from the one described by Western media and Ukrainian foreign policy elites.

“If we were to fantasise, and pretend that {Russian Prime Minister} Vladimir Putin would run for the post of Ukrainian president, then according to opinion poll results he would win right off,” says analyst Alexei Lyashenko of Kyiv’s polling institute Research & Branding (R&B). “His only serious competitor would be {Russian President} Dmitry Medvedev.”

The R&B poll published May 25 show that for all the rhetoric about westwards-bound Ukraine breaking free of Russia’s malign influence and Putin’s imperialism, the reality on the ground is very different.

“In fact, Vladimir Putin’s rating in Ukraine is nothing new, but quite steady,” adds Lapshen. “It was over 50% even during the Orange Revolution.”

Opinion poll results published in May indicate that 58% of Ukrainians have a positive relationship to Vladimir Putin, and 56% to current Russian President Dmitry Medvedev. 21% have a neutral relationship to the Russian PM and ex-president, and 16% negative, with the respective figures 25% and 14% for Medvedev.

R&B’s survey also finds that 35% of Ukrainians would like to see Ukraine united with Russia, Belarus and Kazakhstan, compared to 22% who wished to join the EU, and 10% who wanted a restored Soviet Union.

These results were confirmed by a poll published June 17 by the Kyiv International Institute of Sociology (KIIS). According to KIIS president Valery Khmelko, 23% of Ukrainians desire full unification with Russia – compared to only 12% of Russians wishing the same.

Doubtlessly due to the 2008-2009 political and economic crisis wracking Ukraine, the number of Ukrainians desiring ‘reunification’ has risen over the last year from 20% to 23%, and the number of Russians in favour has fallen from 19% to 12%.

“These findings also indicate that the ‘prevailing willingness of Russians to append Ukraine to their country forming one state’ is an erroneous idea as the overwhelming majority of Russians do not want such a union,” notes KIIS president Khmelko.

While only a quarter of Ukrainian respondents want full unification with Russia, 68% want an EU-style border-free regime with Russia, with Russia and Ukraine being ‘independent but friendly states’ without a visa regime or custom controls.

Only 7.8% of respondents were in favour of Ukraine’s relations with Russia becoming the same as relations with other countries, i.e. with border controls, customs and visas.

This in fact contrasts even with sentiment in Russia, where respondents are far more cautious about union with Ukraine. Perhaps due to the Ukrainian leadership’s antagonistic policies towards Russia, amplified by the Russian state-controlled media, only 50% of Russian respondents want to see a border-free regime between the countries. 29.1% want relations with Ukraine to be the same as for other countries.

“Ukrainians’ attitude to Russia is much better than Russians’ attitude to Ukraine; over 90% of people in Ukraine have a positive attitude to Russia – and it has become even better over the past year,” points out Khmelko.

According to Lyashenko, the Ukrainian affection for Putin and Medvedev is most concentrated in East Ukraine, where 75% are positive. However, even in the West Ukraine districts where Russian is hardly spoken, around 25% of respondents described their relationship to the Russian leaders as positive.

Surprisingly, in contrast to geography, age group does not influence the attitude towards Russia and its leaders, according to the polls.

“Ukrainians preference for Russian state-controlled television, and the desire for strong leadership in crisis times, also play a role,” says Lyashenko.

“But the main cause that Medvedev and Putin score so high,” he adds, “ is the endless conflicts and score-settling in Ukrainian politics that make them look good.”

None of the current Ukrainian leaders can compete with Putin and Medvedev in terms of popularity. Pro-Russian head of opposition Party of Regions Viktor Yanukovych currently enjoys a 25% rating, Prime Minister Yulia Tymoshenko 14%, and new face Arsenyi Yatsenyuk 13%.

Only 2% of Ukrainians would vote for President Yushchenko, the most anti-Russian top Ukrainian official, in upcoming elections January 2010.

Neither do Ukrainians have much sympathy for Georgian President Mikheil Sakhashvili, whom Yushchenko vocally supported during the country’s conflict with Russia over South Ossetia August 2008. According to Lyashenko, 45% have a negative opinion of Saakashvili, and only 11% a positive opinion.

According to an opinion poll published in Polish daily Rzeczpospolita in March 2009, 56% of Polish respondents fear Vladimir Putin, and 58% believe that Russia is conducting a foreign policy that endangers Poland’s national security. This despite the fact that Poland has no border with Russia, excluding Kaliningrad, and is a member of both NATO and the EU.

Tymoshenko prefers Kremlin to Yushchenko

Graham Stack for business new europe

In a further sign of her startling pro-Moscow shift, Ukrainian Prime Minister Yulia Tymoshenko called on President Viktor Yushchenko to clarify with Russia the price for gas for 2009. She said this was an essential precondition to her finalizing the 2009 budget.

“The budget can be clarified after the final price for the natural gas is fixed. I think that if the Ukrainian president is talking so much about “Moscow’s hand,” then let him try to receive gas from this “hand” at moderate prices in the short term,” Tymoshenko said after a government session, as quoted by Interfax.

In a veiled threat not to pass the budget before an agreement is reached, Tymoshenko said the Rada would not clarify the budget until a final price had been arranged with Russia.

Underscoring the shift in Tymoshenko’s position regarding Russia – a shift that has triggered a secret service investigation into her dealings and accusation of treason – Tymoshenko explicitly put the blame for deteriorating relations with Russia on President Viktor Yushchenko, not the Kremlin.

Tymoshenko’s current position regarding gas prices is a u-turn on her position at the start of 2008 on paying Ukraine’s gas debts to Russia.  In talks over size and payment of Ukraine’s gas debt, Yushchenko took a conciliatory position and Tymoshenko a stridently anti-Kremlin position.

Now they have reversed their roles.

“President Viktor Yushchenko is personally responsible for all the radical decisions made with regards to Ukraine,” Interfax cites Tymoshenko as saying at a news conference Wednesday September 17 , referring to alleged Russian initiaives to restrict the free trade regime with Ukraine.

Tymoshenko went on to actively back Kremlin claims about an information war being waged against Russia by the West and Western allies.

“When information wars are declared on some countries, and when states are insulted and humiliated, Ukraine anticipates a return blow. Therefore, Viktor Yushchenko will be personally responsible for all the bad trends in relations between Ukraine and Russia, in my opinion,” Tymoshenko said, according to Interfax.

Gas price conflict next up

Yesterday Alexander Shlapak, an aide to Ukrainian President Viktor Yushchenko, admitted that the Ukrainian government’s gas price projection of $250-260/tcm in its 2009 budget now appears to be unrealistic and will need to be raised at least to $300/tcm.

“However we note that this expectation is still below the projected European market price of $340/tcm for 2009. Negotiations between Russia and Ukraine over pricing have yet to be completed,” write UralSib analysts.

Several months ago Gazprom signed an agreement to purchase Central Asian gas in accordance with its “net-European” gas price formula (average gas price in Europe minus excise taxes, transportation costs and Gazprom’s margins).

Since Ukraine consumes almost all of the Central Asian gas, a gas price for the Ukraine below the EU market price less transport differential would make Gazprom sales to Ukraine loss-making, argue UralSib analysts.

Ukraine is threatening to use as a bargaining chip the tariffs it charges for Russian gas transit to Europe.

Yesterday Uriy Kolbushkin, Deputy CEO of Ukraine’s gas distribution monopoly Naftogaz, said that Natfogaz could increase gas transportation tariffs for Russian gas by over double to 86 hryvnya for 1000 cubic meters for 1km starting from 2009, according to Vedomosti.

UralSib analysts writes, “we note that Ukraine provides transit for about 80% of Russia’s total gas exports to the EU. If Gazprom increases gas prices for Ukraine too aggressively, the Ukraine may respond by raising transportation tariffs and Gazprom’s margins would be squeezed.”

Russia is making it clear that the gas price hike for Ukraine is not political. Yesterday Gazprom also announced a price hike for Armenia, a loyal Russian ally. However the price hike for Armenia looks like being more gradual, according to UBS.

Orange eats itself, what’s the next course?

At the Verkhovna Rada’s session this morning, Speaker Arseniy Yatseniuk announced that the ruling coalition composed of the Yulia Tymoshenko Bloc and the Our Ukraine-People’s Self Defense Bloc (NU-NS) was officially dissolved.

This spells the end not just to the  ’democratic coalition’, but to ‘Orange’ itself.

Four years after the Orange revolution stopped former prime minister, now opposition leader Viktor Yanukovych becoming president in rigged elections, the two main figures in Orange, President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, are now  as distant from each other as each is to Yanukovych.

Moreover, Timoshenko and Yanukovych possibly share something very important  against Yushchenko:  at the heads of strong parties, both might stand to gain from shifting political power from the presidency to Ukraine’s parliament, the Rada.

It is still unclear whether the current political crisis is a repeat of 2007’s early elections and coalition reshuffle, or something very different: a concerted effort by the Rada majority to seize power from the president.

What does seem clear is that the Orange coalition  between Tymoshenko’s Bloc Yulia Tymoshenko (BYuT) and Yushenko’s Our Ukraine-People’s Self-Defence (NU-NS) will not be renewed.

Early elections are the most likely outcome.

According to the Constitution, parliamentary parties have 30 days to form a new coalition, after which point the president has the right, not the obligation, to dissolve parliament and call new elections.

Brokerage Galt & Taggart analysts write, “with the majority of parties already renting billboard ad space and organizing election offices around the country, pre-term parliamentary elections remain the most likely scenario.”

Ukrainskaya Pravda reports today that Prime Minister Yulia Tymoshenko, head of the eponymous bloc, has already ordered her deputies to mobilise for elections.

Tymoshenko is reported to have told deputies that she sees the Orange being reformed as 10% with a 90% chance for  elections.

Confirming the low probability of any coalition being formed, BYuT deputy Andrei Shkil said today that both Yushchenko’s party Our Ukraine and the Ukraine Communist Party were refusing to hold talks with BYuT on forming a coalition, according to korrespondent.net.

Early elections will benefit BYuT. BYuT stands to pick up votes both from NU-NS, suffering from the single digit ratings of ineffective president Yushchenko, as well as from the oppositional pro-Russian Party of Regions: Tymoshenko has conspicuously flirted with a pro-Russia position during the Georgian crisis.

However, all members of the current coalition will do all they can to avoid the blame for another bout of expensive early elections.

Thus Yushchenko has called for a renewal of the ‘democratic coalition’, by taking the small Lytvyn Bloc on board.

BYuT has also been in talks with the Party of Regions (PR). But an alliance with PR would prove unpopular among Tymoshenko’s core constituency. The possibility of a coalition of BYuT with the Party of Regions (PR) was not even discussed at today’s BYuT parliamentary faction meeting, according to Millenium analysts.

A BYuT-PR coalition would, however, create a huge majority in the Rada, sufficient to override the presidential veto on legislation and allow the Rada to continue shifting power from president to parliament.

“A coalition between BYuT and the Party of Regions would serve to unite Ukraine’s east and west, but it is unlikely to be supported by the Donbas business elite, including Rinat Akhmetov, Serhiy Taruta and Vitaliy Hajduk,” write Galt&Taggart analysts.

Millenium analysts agree that “a coalition  between BYuT and the Party of Regions would be very unlikely due to diverging opinions of these political forces on most policy matters.”

“We continue to see an anticipated election as the most likely scenario,” says Millenium analyst Bogdan Kochubey.

Rencap’s Geoff Smith, however, says BYuT-PR could work out: “Tymoshenko and Yanukovych have a chance to prove that they have tired of deadlock,that they accept that power must be shared and exercised with restraint,that they realize how urgently effective government, reform and privatization are needed.” says Smith. “It could be beautiful – but don’t hold your breath.”

What we don’t know:

We don’t know what Tymoshenko wants.  Does she want simply to shore up her majority in parliament at the expense mainly of Our Ukraine, to free herself on dependence on Yushchenko? In this case, elections are on the cards. But Ukraine would remain a presidential republic, with Yushchenko responsible for foreign policy and able to veto laws.

Does she want to change Ukraine into a parliamentary republic, thus usurp power from Yushchenko? She would then have the top job without having to wait a year for presidential elections. A year is an eternity in politics, her current popularity is only slightly in front of Yanukovych’s, and next year could see economic problems ahead. To make the changes, she would need to hook up again with Party of Regions, but not necessarily in a formal coalition. But what would be in it for Party of Regions?

What’s the significance of her shift to moderation regarding Russia, and her obvious ambivalence about Nato membership? Is this preelection manoeuvering to  win the pro-Russian vote from Party of Regions? Or a concession towards the Party of Regions? or an attempt to stave off a potentially crippling gas price hike?

Tymoshenko might be hoping for a landslide elections victory, eliminating Our UKraine and cutting swathes into the PR vote. That would set her up in a position to change the constitution and move to a parliamentary republic with herself as prime minister.

Tymoshenko interrogated for almost 5 hours

Prime Minister Yulia Tymoshenko’s interrogation September 11 at the Ukrainian Prosecutor General’s Office within the framework of a criminal case into the poisoning of Ukrainian President Viktor Yushchenko lasted five hours, according to Interfax.

Immediately following the interrogation as witness in the case, Tymoshenko met with US deputy state secretary Daniel Fried to disucss the US-Ukraine partnership, questions relating to Ukraine’s transatlantic integration and Ukrainian security.

In recent weeks, Tymoshenko has been seen to be moving away from the idea of Ukrainian NATO membership. Her move towards a more pro-Russian position have triggered accusations of high treason from the president, and investigation by the Ukrainian Security Service (SBU) into whether she has acted against the national interest as prime minister.

Tymoshenko has promised to soon table constitutional amendments shifting political power and control over defence and foreign policy to the parliament away from the presidency.

Talking to journalists yesterday, President Viktor Yushchenko accused Tymoshenko of playing a leading role in a foreign-backed plot to destroy Ukraine’s democracy, bring about early elections, and derail Ukraine’s bid to join NATO.

“This is a big general plan seeking a total dismantling of the democratic regime in our country. Its final goal was to bring about early presidential and parliamentary elections and to push Ukraine off the road of democracy and integration with the West,” the president said, according to Interfax.

Yesterday, the secret service SBU interrogated former chief of the presidential administration Viktor Medvedchuk.

“Ukrainian citizen Viktor Medvedchuk has been summoned by SBU investigators for interrogation within the framework of a criminal case in order to prevent an encroachment on our constitutional order”, SBU acting head Valentyn Nalyvaichenko told reporters in Kyiv yesterday September 11.

A number of other proceedings have been launched with regard to Medvedchuk, Nalyvaichenko added. Members of President Yushchenko’s entourage have accused Medvedchuk of liaising between Moscow and Tymoshenko.

Yesterday Ukraine Interior Minister Yury Lutsenko declared his loyalty to President Yushchenko in the event of politically-linked use of force. However, he said he would never allow security forces to fight each other.

“Even if the presidential entourage and the war party headed by [Presidential Secretariat head Viktor] Baloha push the commander in chief into any radical orders for the Interior Forces, I will not make the slightest attempt to prevent any order from being carried out. But I guarantee that, as along as I am minister, not a single security structure operative will confront another security structure operative,” Lutsenko said, as cited by Interfax.

Graham Stack / bne

Ukraine in suspense over Tymoshenko’s Nato position

Ukraine in suspense over Tymoshenko’s Nato position

Graham Stack in Moscow
September 8, 2008

Ukraine’s Nato aspirations have moved to the frontline of Russia’s showdown with the West, but the biggest unanswered question is what Prime Minister Yulia Tymoshenko’s current position is on the country’s bid for membership of the organisation.

Joining Nato has been a core part of President Viktor Yushchenko’s platform, which Tymoshenko reluctantly signed up to while they were still political allies following the 2005 Orange Revolution. However, after Tymoshenko made a Faustian deal on September 2 with opposition leader and her revolutionary nemesis Viktor Yanukovych, who heads the Regions of Ukraine party, she seems to be shifting her stance and preparing to drop these Nato membership ambitions.

Nato membership is a hot topic following the five-day Russo-Georgian war in August, yet Tymoshenko has pointedly refrained from making any comments on Ukraine’s bid recently. During the conflict between Russia and Georgia, the notorious firebrand kept a conspicuously low profile, to the point where her opponents in the Rada started to brand her pro-Russian. She failed to join other US-backed leaders at Georgian President Mikheil Saakashvili’s side in the aftermath of the war. While she supported Georgian territorial integrity, she warned against hostility to Russia and against any retaliatory measures against Russia’s Black Sea fleet based in the Crimea in Ukraine.

Tymoshenko’s shift is so surprising it even prompted Ukraine’s security service SBU, acting on information provided by the presidential administration, into investigating her and the government on suspicion of working “against the national interest.” The SBU specifically asked the prime minister’s office to supply it with information about her negotiations with Russia over gas prices for 2009, amongst other things.

Tymoshenko moved into open opposition to Yushchenko on the first day of the new session of parliament by voting with Regions on a package of laws that will strip the president of many of his powers (including control over the SBU). While it’s very early days in the dispute, pundits are speculating that Tymoshenko has abandoned a plan to run for president in the next elections and is instead moving Ukraine towards becoming a parliamentary democracy. She has already said she intends to introduce as-yet unspecified changes to the constitution in the near future.

Yushchenko has responded by accusing her of treason and selling out Ukraine to Russia. The confrontation is scaling up fast. In a letter to the head of the SBU, leaked to a newspaper, presidential administration head Victor Baloha accused Tymoshenko of preparing a coup d’etat in Moscow’s interest, and also taking out a contract on Baloha’s life. Already nervy investors are getting cold feet: trading was suspended on the stock market, the PFTS, on September 5 after the index plunged 7% and three-quarters of the listed companies posted share price losses.

The main victim in this escalating fight could be Ukraine’s Nato bid. And there are two good reasons why Tymoshenko may end her support for membership.

Looking east

Firstly, attempting to join Nato will cost her votes. The most recent poll on the subject, released September 4, found that Ukrainian citizens prefer integration with Russia and other CIS countries to that with European and Euro-Atlantic structures. Just over half the population favours closer ties with Russia and/or the CIS countries, while only 17% want to join the EU, according to the Ukrainian National Academy of Sciences’ Sociology Institute. In polls taken earlier this year over 60% of Ukrainians were against joining Nato, whereas they remain much more receptive to the idea of eventually joining the EU.

In the run-up to last year’s parliamentary elections, Tymoshenko went out of her way to woo voters in the largely Russophile eastern part of Ukraine and has built up broad support across the country. But if she is to move Ukraine towards a parliamentary democracy, then she needs to take the concerns of ethnic Russians to heart, which means moving closer to Moscow.

Tymoshenko and her eponymous party Bloc Yulia Tymoshenko (BYuT) are still only slightly ahead of former prime minister Yanukovych and his Party of Regions in the polls. Dropping support for joining Nato could win over significant numbers of voters from Regions. To be a powerful long-term prime minister without relying on other parties, she will need a far larger majority in the Rada than she has now.

Secondly, Tymoshenko is entering tough negotiations with Russia over gas imports for 2009. Analysts say the gas price for Ukraine could double after Russia recently agreed to pay Central Asian producers European prices for their oil and gas. With Ukrainian inflation already soaring and a current account deficit looming, this could create significant economic difficulties for Tymoshenko in 2009, as she will get the blame.

For its part, the Kremlin appears in the mood to deal. Russian Prime Minister Vladimir Putin has been travelling in Central Asia to bolster support for Russia and in addition to agreeing to up the price of Central Asian oil and gas, also signed off on new pipeline deals. The Kremlin would certainly be open to softening a price hike in Ukraine’s gas bill if Tymoshenko would back Russia in its standoff with the West.

US Vice President Dick Cheney was in Kyiv in early September to show his support for Ukrainian democracy. But that democratic process may end up pushing Ukraine into closer ties with Russia, not the West.