Ukraine PM seeks to calm Russian fears over EU deals

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Published September 21, 2013

| Reuters

Ukraine's prime minister sought on Saturday to calm Russian fears over Kiev's plans to sign a free trade pact with the European Union, saying in practice there would be no threat to Russia's home market.

Moody's Investor Service cut Ukraine's sovereign credit rating on Friday, partly on concern over relations with Russia.

Speaking at an international conference in the Black Sea resort of Yalta, Mykola Azarov also expressed frustration at Russia's refusal to reduce the price of its gas sales to the ex-Soviet republic and said Kiev may be obliged to reduce further the volume of its gas imports.

Azarov's government approved plans this week to sign landmark agreements in November with the EU on political association and free trade - drawing new threats of retaliation from Russian President Vladimir Putin.

Russia says it fears its market could be flooded by competitive EU goods entering Ukraine free of import duties and being re-exported across the long border with Russia. It says it will introduce counter-measures to mitigate damage and has invited Kiev to join a Russian-led customs union.

In the latest expression of Kremlin unhappiness, an aide to Putin told the Yalta gathering that Ukraine would face huge financial problems if it signed the agreements and he urged the Kiev leadership to hold a people's ballot on the issue.

Saying 40 percent of Ukrainians were against the signing, Sergei Glazyev, who has made hawkish comments about Ukraine's pro-Europe policy before, said: "Let us ... ask the Ukrainian people what choice they prefer."

Azarov, in his speech, dismissed the threat of illegal transit of EU goods into Russia as "hypothetical" and one which in practice would not happen.

"We are convinced that the signing (of the agreements with the EU) does not hold any risks (for Russia)," he said, adding that he would give personal assurances of this to Russia and its trade allies in the Moscow-led Customs Union.

But he had sharper words for Russia over its refusal to bring down the price of gas supplies to Ukraine which hangs heavily on the country's cash-strapped economy.

Ukraine pays what it sees as an exorbitant price of more than $400 per thousand cubic meters under a 2009 contract which Russia has refused to revise despite pleas by the Azarov government.

In a bid to break away from reliance on Russia, Ukraine is trying to secure alternative energy sources by stepping up domestic gas production, reaching shale gas and off-shore deals with Western companies, and possibly bringing in liquefied gas from foreign suppliers.

Azarov said Ukraine was pressing ahead with "a serious restructuring" of its energy policy to diversify energy sources.

"Over 3 1/2 years we have reduced our purchases of Russian gas from 41 billion cubic meters to 25 billion and we are frankly telling our Russian partners that if the contract, which they managed to acquire in 2009, is not re-drafted, changed, then we will go even further down the road of reducing purchases of Russian gas," he said.

Ukrainian President Viktor Yanukovich on Friday re-iterated that Kiev was committed to signing the key agreements with the EU at a late November summit in Vilnius, Lithuania, marking a pivotal shift away from its former Soviet master Russia towards integration with Europe.

But he refused to say whether he would free from prison his political rival, former prime minister Yulia Tymoshenko, who the EU says is a victim of 'selective justice'.

Tymoshenko was jailed in 2011 for seven years for abuse of office after a trial which she says was a vendetta by Yanukovich, and her continued imprisonment could still threaten the signing of agreements in Vilnius.

Moody's cut Ukraine's sovereign debt rating by one notch to Caa1 from B3, citing concerns over foreign currency reserves, new debt issuance and potentially worsening ties with Russia.

Moody's said it welcomed the forthcoming EU trade pact as positive overall for Ukraine in the medium term, but added: "The short-term credit negative impact of a negative reaction by Russia outweighs these benefits."

(Writing By Richard Balmforth; editing by Ralph Boulton)

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