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Explainer: Can Moscow Afford Its Deal With Ukraine?

Russia's generous offer of cheaper gas and financial aid is seen by many as an attempt by President Vladimir Putin (right) to shore up his embattled Ukrainian counterpart Viktor Yanukovych (left) and keep Kyiv in the Kremlin's orbit.
Russia's generous offer of cheaper gas and financial aid is seen by many as an attempt by President Vladimir Putin (right) to shore up his embattled Ukrainian counterpart Viktor Yanukovych (left) and keep Kyiv in the Kremlin's orbit.
Russia has offered Kyiv financial aid and cheaper natural gas in an apparent attempt to keep Ukraine in its sphere of influence. But how much financial sense does the deal make for Moscow itself? Here are five questions to consider.

What did Russia agree to provide Ukraine and what did Kyiv promise in return?

Russia has promised to buy $15 billion worth of Ukrainian Eurobonds, with the money to be invested in tranches over the coming months. That amount will help Kyiv to meet the some $17 billion it needs for debt repayments it will face next year.

At the same time, Russia has promised Ukraine a deep discount on natural gas purchases. Under the accord, the Russian state-controlled gas monopoly, Gazprom, will cut the price that Ukraine must pay by about one-third from $400 per 1,000 cubic meters at present to about $268 per 1,000 cubic meters.

What Kyiv has promised Moscow in return is for now a closely guarded secret known only to the two parties themselves.

Press and public speculation ranges from the possibility that Moscow will acquire control of Ukraine's pipelines that transport Russian energy to Europe to the possibility it will receive new advantages for its Black Sea Fleet, which rents the use of a military base on Ukraine's Crimean Peninsula. But for now, the speculation is just that: speculation.

Where will Russia's $15 billion come from?

Russian Finance Minister Anton Siluanov has said the money will come from Russia's National Welfare Fund, an off-budget reserve fund that accumulates oil and gas revenues. That fund currently totals some $100 billion dollars and under its operating rules, is intended to be invested rather than simply accumulated as money in a current account.

However, experts say that investing in Ukrainian Eurobonds bends the National Welfare Fund's own investment rules.

Those rules say that up to 60 percent of the Fund can be invested in financial instruments of other countries but that those instruments should have a high Standard and Poor rating. Ukraine's Eurobonds have a low rating, which reflects the international financial markets' fears of how secure an investment they represent.

That raises the question of whether the $15 billion investment in Ukraine is more in the Kremlin's political interest than it is in Russia's own domestic interest.

Moscow wants to keep Kyiv in its orbit and one day see Ukraine join the Russian-led Customs Union rather than sign an Association Agreement with the European Union. But the National Welfare Fund is not supposed to be about geopolitics so much as funding things like Russia's own infrastructure projects and pension plan.

Can Russia afford this amount from its reserve fund without sacrificing other important programs funded from the same source?

For now, the answer is yes, because $15 billion is a small fraction of the total size of the National Welfare Fund. But for some observers, the overt use of the fund to achieve Russian foreign policy goals sets a worrisome precedent.

"From my point of view, that amount and even much more should have been invested in the pension fund in order to get rid of deficiencies, and so that the pension fund could play the role of a big fund and so on and so forth," says Yevgeny Yasin, a former Russian economics minister. "But that won't happen when a political consideration [takes priority]. In our country, there is always somebody who makes a decision based on political issues. Such a decision imposes more difficult challenges for the pension fund."

How will Gazprom's finances be affected by offering Ukraine a deep discount on oil?

Experts say that, under the deal, Gazprom stands to lose money, at least in the short term. That is because, with the discount, Russia's state gas company will earn some 30 percent less than before from Ukraine.

"Experts have already calculated this negative effect," says Alexei Portansky, a professor at Moscow's Higher School of Economics. "It will be around $3.5 billion a year."

But, in the long run, Gazprom could make up its loss by selling more gas to Ukraine than it does currently. That possibility comes from the fact that Kyiv presently buys gas from Moscow under a so called "take or pay" arrangement by which it is committed to purchase a fixed amount and, if it fails to do so, must pay a penalty for the shortfall.

In recent years, Ukraine has fallen well short of purchasing the agreed amount and frequently been assessed penalties. Now, with the price of gas strongly discounted, Kyiv would have an incentive to buy more gas, but whether it will actually do so remains to be seen.

Is the Moscow-Kyiv deal the biggest example yet of Russia using its financial clout to achieve its foreign policy goals?

Many observers say that the deal could indeed be a record for Moscow agreeing to pay so much money in such a short time to another state to reach a geopolitical goal.

However, this is not the first time Moscow has relied upon its own massive regional economic clout to keep neighboring states in its orbit.

Accoriding to Portansky, the most notable example is Belarus.

"Russia already has paid a huge sum to support the economy of Belarus during the last ten years, billions and billions of dollars," he says. "So, that is another example where Russia accepts paying a huge sum to maintain a partner."

The question now is how much Russia is willing to continue to pay in the future to hold its ailing former Soviet-neighbors within its political and economic orbit.

Russian President Vladimir Putin has said he hopes to see the Russian-led Customs Union grow one day into a larger Eurasian Union in the east that will rival the European Union in the west.

How much that could cost Russia remains unknown but, for now at least, Moscow seems to regard the cost as no object.

With reporting by RFE/RL's Russian Service. RFE/RL correspondent Merkhat Sharipzhanov also contributed to this report

RFE/RL has been declared an "undesirable organization" by the Russian government.

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