Published time: November 22, 2013 16:41
Edited time: November 23, 2013 09:00

Reuters/Marian Striltsiv

Ukraine’s decision to halt its European ambitions and again cozy up to Russia days before it was scheduled to sign an EU agreement has sent all sorts of mixed signals, and here are some theories on why they made the move back to Moscow.

Ukraine hasn’t explicitly said it won’t sign at the Vilnius summit on November 28, but doing so would trigger a trade blockade from Russia, which in the short-term could effectively cripple its economy.

Thursday Ukrainian ministers delivered their decision to suspend the EU trade deal in favor of tri-lateral talks that also include the country's number one trading partner, Russia.

1. Ukraine needs money- and fast

Ukraine is on the brink of an economic default, and Russia is the only ally who can, or at least can promise, to get them money quickly enough to keep the economy afloat.

In August Ukraine failed to clinch an IMF bailout loan of $10-15 billion. Europe has its own bankrupt nations to deal with, and may not be willing to shell out for Ukraine.

Joining the EU trade association doesn't guarantee economic aid and could bring more risks by losing business with Russia, whose economy is more than 10 times its size and gobbles up 25 percent of Ukraine's exports.

Knowingly cutting trade with Russia could be a self-fulfilling "trade suicide" and a major deficit could send the economy into default.

Moody’s rating agency has put Ukraine at a “very high default risk” and depreciating currency reserves and a massive deficit mean it could be the next Greece or Cyprus.

2. Ukraine doesn't want a trade war with Russia

Opening up its market to nearly tariff-free trade with Europe would be a great long-term investment for Ukraine, and could save exporters nearly $500 million over the next ten year, the European Commission has projected.

Ukraine’s Energy Minister Yuri Boyko said his country can’t afford a trade war with Russia, and can’t count on the EU to help out financially if one begins. 

"We have not received a clear signal from our European partners that these losses, which we have been receiving over the past four months, would be compensated," said Boyko, Interfax reported.

Cutting out the Russian market could cost Kiev $2.5 billion, according to a Ukrainian estimate. Russian economic ministers have come up with a much more devastating estimate of 35 billion euros.

The Kremlin issued stern warnings it would shut its border with Ukraine if it signed with the EU. Russia has twice stopped thousands of cargo vehicles at the border, causing major delivery delays. If Ukraine signs with the EU, Russia has said it will need extra time to inspect import.

Russia imposed a ban on Ukrainian Roshen chocolate in August over concerns the confectionery didn’t meet food safety standards, it could cost the company $200 million.

3. Pipes

To join the EU, Ukraine would have had to increase domestic gas tariffs, a policy it didn’t want to give up.

Russia and Ukraine have a very complicated gas history, as Russia sells its neighbor gas for around $400 per 1000 cubic meters, one of the highest prices in Europe. Russia has shut off the pipes twice over late payments, leaving Ukraine without heat in the winters of 2006 and 2009. 

Ukraine imports more than half of its gas from Russia, but under Viktor Yanukovych, has scaled down Gazprom imports 40 percent.

Another piece of the gas puzzle is Ukraine’s gas pipelines, which are in decrepit condition and in need of repair. Gazprom has offered to buy the lines, an offer state-owned Naftogaz has so far rejected.

Russia has threatened it won’t upgrade Ukraine’s rapidly aging pipe system, which delivers about a quarter of Europe’s Russian gas.  

4. 2015 election

Ukraine's parliament failed to pass legislation that would free former Prime Minister Yulia Tymoshenko and prove that Ukraine was no longer practicing ‘selective justice’, so the decision was left to Yanukovych, who decided to leave his main political rival behind bars. Russian-speaking Yanukovych faces re-election in 2015, in about 15 months.

Tymoshenko was the sidekick to former President Viktor Yushchenko and help organized thousands of protestors in the 2004-2005 Orange Revolution that resulted in Yushchenko’s pro-western presidential victory.

Tymoshenko lost the 2010 election to Yanukovych, the leader of Ukraine's Party of Regions, by about a 10 percent margin.

Yushchenko’s orange experiment failed to produce fruit and Yulia was sent to prison for a gas deal she brokered with Gazprom in 2009. She is serving a seven-year sentence on abuse-of-office charges.

She was also accused of murder, a charge later dropped.

5. Putin sweetened the deal

Presidents Putin and Yanukovych didn’t publicly meet before the decision.

However, several secret meetings took place between the power brokers of the two historically-tied nations that have recently grown apart.

What was said, or agreed to, may not become known for some time, but a number of promises could have been made. Putin could have offered financial assistance to Ukraine’s economy, which is teetering on default, or possibly a special gas discount from state-owned energy company Gazprom. Pipelines may have been sold or re-rerouted.

Putin, who has long been opposed to Ukraine joining NATO, may have made this a concession in return for trade loyalty.

Yanukovych reportedly traveled to Moscow for a meeting on November 9 to discuss economic and bilateral trade, but official coverage has been quiet.

The two also met on September 22-23 in Sochi for a conference, and just days later on September 26 for scheduled joint military exercises. On July 27th Putin was in Kiev to celebrate the Baptism of old Russia, an important holiday for the Orthodox Church.

Yanukovych is still planning to attend the Vilnius summit.