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23rd Feb 2019

EU to approve €1.1bn Ukraine aid package

  • Ukraine's state gas firm Naftogaz owes about €1.5bn to Russia's Gazprom (Photo: qwertyuiop)

The European Commission will officially agree to offer Ukraine €1.1 billion in emergency aid on Thursday (5 March), officials told EUobserver.

The move amounts to a top-up of €500 million to a previous offer of €610 million.

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US secretary of state John Kerry said on a visit to Kiev this week that Washington will add loan guarantees worth $1 billion (€750 million) into the pot.

The International Monetary Fund (IMF) is expected to contribute as well, amid reports the total fund will add up to around €4 billion.

Most of the money is to gon macro-financial assistance, but energy commissioner Gunther Oettinger told press on Tuesday the commission is willing to earmark some of the funds to help Ukraine pay an outstanding gas bill of some €1.5 billion to Russian supplier Gazprom.

The loans are to be offered the day before EU leaders gather in Brussels on Thursday for a crisis summit on the Cold-War-style stand off between Ukraine and Russia.

But the loan package is just an appetiser.

With commission and IMF officials in Kiev this week to assess its broader need, Ukraine's interim government says it will need €25 billion over the next two years.

Prime Minister Arseniy Yatseniuk has said his government would "meet all IMF conditions" attached to a bailout, potentially including the privatisation of part of Ukraine's oil and gas industry.

Ukraine’s EU ambassador told EUobserver it is also willing to increase domestic gas prices - a key sticking point on former IMF conditions in its talks with ousted leader Viktor Yanukovych last year.

The government, which has called itself a “kamikaze … suicide” administration is making the promises despite the fact the austerity is likely to make it unpopular in the run-up to snap elections on 25 May.

Ukraine is on the verge of bankruptcy after Russia pulled the plug on a Yanukovych-era promise to buy $15 billion (€11 billion) of Ukrainian government bonds and cut gas prices in return for his rejection of the EU’s association and free trade agreement.

If events have helped to bring the Ukrainian economy to its knees, they also threaten to make an already weak Russian economy even more sickly, however.

Russia's central bank raised its main interest rates from 5.5 percent to 7 percent on Monday after a day of market turmoil saw the ruble fall to an all-time low against the euro and the US dollar, gobbling up an estimated €7.5 billion of the country's currency reserves.

"The decision is directed at preventing risks to inflation and financial stability associated with the increased level of volatility in the financial markets," the central bank said in a statement.

Like other emerging market economies, both Russia and Ukraine were hit last summer when the US Federal Reserve mooted the idea that it would begin to scale back its bond-buying programme.

But analysts believe that a protracted run on the ruble, which has already lost 10 percent of its value against the dollar this year, could help tip a Russian economy which grew by just 1.3 percent in 2013 back into recession.

The Russian central bank has already revised down its initial growth projections of 2.5 percent to 1.5 percent for 2014.

The next EU-Russia summit, which had been earmarked for 4 June, had been seen as an opportunity to discuss a new trade agreement between Brussels and Moscow, but economic relations have remained frosty despite Russia joining the World Trade Organisation (WTO) in 2012.

The Eu commission has had a running series of trade disputes with Moscow, with the two sides having filed claims and counter-claims against each other to the WTO on items ranging from steel products and ammonium nitrate, which is mainly used in fertilisers, to car recycling tax.

Gas and oil products account for more than 70 percent of the EU's €212.9 billion of imports from Russia, but Russia is not in a strong enough position to fight a trade war.

The EU imports far more goods than its sells to Russia - €212.9 billion in exports compared to imports worth €123 billion -

Oettinger told reporters on Tuesday "there is no reason for concern" if Gazprom, the state-owned Russian energy firm which supplies much of Europe, turned off the taps.

"At the moment in the member states the gas situation is good, the supply for industry and households has been maintained. Our storage capacities are fuller than a year ago,“ said Oettinger, following a meeting of EU energy ministers.

But for its part, Lithuania, which is entirely dependent on Russian gas, is less sanguine.

Its energy minister, Jaroslav Neverovic, told Bloomberg on Tuesday: “The situation in Ukraine has us all worried.”

He noted that the Baltic state, itself formerly part of the Soviet Union, will try to speed up measures to link up to the Polish and Swedish electricity grids and to a Polish pipeline. “We have to take measures to ensure security of supply, first of all by speeding up the building of links among ourselves,” he said.

Estonia and Finland are also keen to link their gas supply networks and to build liquid gas terminals in the Baltic region.

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