As Ukraine looks west to Europe, Russia's shadow looms

Reuters

* Ukraine hopes for association with EU at end of next month

* Russia threatens to retaliate with protectionist measures

* Former PM's imprisonment obstacle to Ukraine-EU pact

By Luke Baker and Justyna Pawlak

BRUSSELS, Oct 1 (Reuters) - When Russia wants to get itspoint across, it tends not to leave room for misunderstanding.

Put out by Europe's efforts to build closer relations withsix countries in east Europe and the Caucasus - former Sovietrepublics that Russia regards as in its sphere of influence -Moscow has been steadily turning up the heat.

Armenia was the first to cave, turning its back on an"association agreement" with the European Union and agreeinginstead to join Russia's customs union - a trade zone withBelarus and Kazakhstan launched in 2010.

Moscow has also homed in on defence or trade vulnerabilitiesin Georgia, Moldova and Azerbaijan, although the first tworemain likely to move ahead with closer EU ties at a specialsummit in Vilnius in late November. Belarus, despite frictionwith Moscow, remains firmly in Russia's camp for now.

The big question is Ukraine, economically and politicallythe most important of the partnership countries. Despitepressure on trade, including key gas supplies from Russia, whichsees Ukraine as culturally its own, Kiev is determined to lookWest and seal closer links to Europe next month.

That's not what Moscow wants to hear, or will accept.

"What we have seen during the past few weeks is brutalRussian pressure against the partnership countries of a sortthat we haven't seen in Europe for a very long time," saidSweden's Foreign Minister Carl Bildt last month, describingMoscow's actions as "economic warfare".

Russia has said it is merely protecting its interests."Russia is in no way trying to infringe on anyone's sovereignright to make decisions about their international activity,"President Vladimir Putin said in September.

Nearly all the partnership countries do the vast majority oftheir trade with Russia and rely on it for gas. Moscow isconcerned about a flood of European goods entering the countryif Kiev signs a free trade agreement with the EU.

Trade is particularly sensitive: Russia was Ukraine'sbiggest trading partner but not any longer. Now it is the EU,with 27 percent of Ukraine's exports and 34 percent of itsimports, and the volume growing by double digits annually.

Russia is also wary of the EU's broader agenda. Drawing incountries in the region could over time help Europe secure adegree of influence over vital gas and oil supply routes towardsthe West at the expense of Russia's dominance.

As a result, Putin has threatened to impose punitive tariffsand other restrictions on imports via Ukraine if it goes aheadwith the EU agreement.

"We would somehow have to stand by our market, introduceprotectionist measures," Putin said last month. "We are sayingthis openly in advance."

As if to underline the message, Russia has taken stepsagainst Lithuania, an EU member state that currently holds theunion's presidency, imposing extra customs checks on Lithuaniantrucks and heavy losses for Lithuania's large trucking industry.

And in the back of the minds of all the partnershipcountries is the 2008 war between Russia and Georgia, whenMoscow made very clear its power over a former republic.

TYMOSHENKO

While Ukraine has not bowed to the threats and uses everyopportunity to reiterate its commitment to the European blocthat four of its seven neighbours have already joined, it is notas if closer EU ties are an open-and-shut case.

With nearly 46 million people and a $330 billion economy,Ukraine is easily the biggest prize among the easternpartnership states. But Europe cannot afford to compromise onjustice and human rights solely to pull one country closer intoits orbit, no matter how strategically important it may be.

Ukraine has to carry out a range of judicial, electoral andbusiness reforms to secure the association agreement, as well asfinding a solution to the case of Yulia Tymoshenko, the formerprime minister now imprisoned for abuse of power following a2011 trial the EU said was based on selective justice.

EU officials are satisfied with the progress made onreforms, and expect all of the 'benchmarks' to have been met bythe Vilnius summit on Nov. 28-29. But Tymoshenko is a much moreintractable problem with no clear solution.

Germany has said it wants the former prime minister, who isreceiving treatment for back problems while under guard inhospital, released or at least allowed to travel abroad fortreatment before it can back the association agreement.

That position is broadly supported by Britain, France, theNetherlands and the Nordic countries, while several eastEuropean member states are more flexible on what the terms ofany deal on Tymoshenko should be.

For Ukrainian President Viktor Yanukovich it is a deeplyemotive issue. There is an ingrained animosity between him andhis former political rival and a fear, analysts say, ofretaliation by her against him if she is set free.

What's more, Ukraine says it is not possible to releaseTymoshenko unconditionally as it would violate the law, anargument officials in Brussels acknowledge has some truth.

The hope was an agreement could be reached by Oct. 21, whenEU foreign ministers hold a regular monthly meeting. But EUofficials are not convinced the date will hold. They are alsonot sure a deal can be clinched by the meeting after that onNov. 18 - just 10 days before the eastern partnership summit.

"If you ask me, I think this will go right down to the wire,or at least very close to it," said a senior EU officialdirectly involved in the negotiations.

Asked if Tymoshenko might still be in custody in Ukraine onNov. 29, when Kiev should be signing the association agreement,two EU officials involved in trying to resolve the disputeacknowledged that might be the case.

"But she may not still be there in early December," one ofthem said, hinting at the possibility of a compromise thatinvolves her leaving the country soon after the summit.

REPERCUSSIONS

Both Ukraine and the EU appear determined to seize themoment and sign the agreement, no matter what the reservations.The message that would send to the wider region, including theresource-rich Caucasus, would be a powerful one.

From the EU's point of view, Ukraine is an opportunity thatcannot be missed: Kiev wants closer association and if Europedoes not act now, it may well lose it to Russia and the customsunion forever, the tide of history ebbing away.

The failure to draw in Ukraine would likely diminish theEU's sway over other countries covered by the easternpartnership policy, undermining its goals of spurring democraticreforms in the region and safeguarding political stability.

"We cannot accept any attempt to limit these countries' ownsovereign choices," European Commission President Jose ManuelBarroso told the European Parliament in his annual address lastmonth. "We cannot turn our back on them."

The hope in Europe is that opening trade routes will improvecooperation on other issues such as security and, over time,demonstrate the benefits of democratic governance.

In the near-term, Europe needs help in addressing crime -countries such as Moldova lie on important trafficking routestowards the EU. In the Caucasus, territorial disputes such asthat between Armenia and Azerbaijan could hurt Europe's energyaims and pull it into conflict with Russia.

"The fundamental interest in the eastern partnership is tohave a zone of stability to the east of the European Union andnot be faced with state failure ... in which case there could bespillover into the EU,' said Michael Leigh, a senior adviserwith the General Marshall Fund in Brussels.

PAY THE PRICE

But for all its planning, Europe also knows retribution, inthe shape of an energy squeeze, is likely from Russia.

Moscow, which has a long-standing disagreement with Ukraineover gas, has said it will raise Ukraine's gas prices andofficials do not rule out it doing the same for the EU, whichgets nearly 40 percent of its gas from Russia.

Moscow has in the past, during disputes with Ukraine, cutoff the flow to EU member states, several of which are entirelydependent on Russia's supplies, and could do so again.

"We would not be surprised if they play the gas card, it'samong the factors we are taking into account," said the EUofficial involved in the Ukraine negotiations.

But the EU's calculation also is that Russia, which relieson Europe for revenue from its gas, will not impose restrictivemeasures for very long.

Knowing the immediate retaliatory impact of the associationagreement will be felt first in Ukraine, where living standardsare well below the EU average, Brussels is ready to take stepsto support the country. These include allowing the free-tradebenefits to kick in immediately - rather than Kiev having towait until all 28 EU members have ratified the agreement.

For Ukraine, with its economy based on steel, chemicals andagricultural products, free trade with a bloc of 500 millionEuropean consumers and businesses is a huge boon.

But while the association agreement will bring extensivetrade benefits and in time a deal on visas, Ukraine is seen astoo different in too many respects to join the list of countriesin line to join the European Union any time soon.

In that respect, Ukraine faces years in a twilight zone.Closer to Europe, but with Russia breathing down its neck, and along way from the protective cloak of full EU membership.

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