Western nations face a daunting task to help stabilise a near bankrupt Ukraine after a popular uprising toppled its Russian-backed president, and will need to placate a wounded Moscow.
The biggest challenge falls to the European Union, which helped broker an end to violent repression in Kiev last week, after Ukrainians rebelled against President Viktor Yanukovich.
The EU now faces the pottery shop rule: you break it, you own it. Yet it is far from clear that west European members want to take ownership of rescuing the sprawling former Soviet republic of 46 million people.
The European Commission’s economics chief, Olli Rehn, promised substantial financial support on Sunday and went out on a political limb by saying the country should be given the prospect of joining the EU one day.
“From a European point of view it is important that we provide a clear European perspective for the Ukrainian people who have shown their commitment to European values,” Rehn said after a meeting of the world’s financial leaders in Sydney.
“European perspective” is EU-speak for a membership prospect. Not all of the 28 member states support that view.
Rehn made clear that Brussels stood ready to provide more than the 610 million euros ($838 million) in immediate assistance that was on offer last November when Yanukovich spurned a far-reaching economic pact with the EU, preferring Vladimir Putin’s promise of a $15 billion bailout from Russia.
The International Monetary Fund also said it was ready to assist a new Ukrainian government if Kiev were to request help, but IMF Managing Director Christine Lagarde said “important economic reforms” which Yanukovich rejected would still be a condition for a loan package.
These include removing gas subsidies that benefit Ukraine’s business oligarchs but also the poor, and raising sales tax.
“We obviously hope the situation settles … we will be ready to engage, ready to help,” Lagarde said in Sydney.
As for Washington, officials said on Friday before Yanukovich fled that a unity government in Kiev would have its “strong support” in seeking an IMF-backed programme to stabilize the economy. There was no mention of bilateral U.S. help.
IMF insiders say the Fund would be wary of lending to an interim Ukrainian government given the country’s history of weak economic reforms.
EU officials have said that by front-loading amounts planned over a seven-year period under the proposed association agreement, Kiev could receive more than 2 billion euros quickly once a deal was signed.
The EU could also bring forward access to its own market of 500 million consumers before full ratification, but Ukraine doesn’t have much to sell.
All that would require a Ukrainian government empowered to sign the deal, which would probably have to wait until after a presidential election now set for May 25.
Some experts such as Michael Leigh, a former top civil servant in the European Commission’s enlargement department, say the agreement was flawed and should be rewritten to offer more incentives and pose fewer demands in terms of Ukraine adopting swathes of EU legislation and standards.
Economists say implementing the proposed Deep and Comprehensive Trade Area could further weaken the Ukrainian economy initially, hitting uncompetitive industries that have sold most of their output to Russia.
There are also big political risks, with the release of jailed opposition leader Yulia Tymoshenko raising the prospect of bitter rivalry for power in Kiev.
EU officials recall her period as prime minister after Ukraine’s 2004/5 pro-democracy Orange Revolution as hardly less corrupt than Yanukovich’s tenure. Ukraine is 144th on watchdog Transparency International’s index of perceived corruption.
“Political uncertainty has arguably increased – including around the outcome of the presidential election set for 25 May – bringing with it a potential increase in the probability of a sovereign default,” Nomura political analyst Alastair Newton said.
One immediate concern is to ensure Ukraine holds together and the mostly Russian-speaking industrial east and Black Sea coast does not break away.
“The territorial integrity of Ukraine is fundamental. It is guaranteed by Russia and all other European countries,” Swedish Foreign Minister Carl Bildt said on his Twitter account.
The risk appeared to ease on Saturday, when pro-Yanukovich officials, meeting in the eastern city of Kharkiv, rejected any idea of a split. Some of them subsequently fled to Russia as supporters of the uprising demonstrated in some eastern towns.
Russia, the clear loser of the latest round of this geopolitical tug of war, has a major naval base at Sebastopol in the Ukrainian province of Crimea. It could also tip Ukraine into default by calling in the billions Kiev owes Moscow and its gas monopoly Gazprom.
In previous crises, it has cut off gas supplies to Ukraine, severely reducing flows to central and west European countries that rely on pipelines running through the country. But energy experts say Gazprom is in a weaker position now.
EU officials fear Putin may also retaliate by cutting trade and energy supplies and revive frozen territorial conflicts in two other ex-Soviet republics that have signed agreements with the bloc – Moldova and Georgia.
U.S. President Barack Obama and German Chancellor Angela Merkel have been working the telephones to Putin to try to persuade Moscow to accept a peaceful transition in Ukraine. The Kremlin has alternated between silence and comments disputing the legitimacy of Yanukovich’s ouster.
The White House said on Friday that Putin had agreed that U.S. and Russian envoys would go together to Kiev to help ensure a smooth implementation of a transition agreement signed by Yanukovich and opposition leaders.
But that was before Yanukovich was deposed.
“If there’s an economic package it will be important that Russia doesn’t do anything to undermine that economic package and is working in cooperation and support of it,” British Foreign Secretary William Hague told BBC TV.
Asked if he was worried that Russia might send in tanks to defend the interests of Russian-speakers in eastern Ukraine, Hague warned against “external duress” or Russian intervention.
Moscow is holding back the second $2 billion tranche of its promised $15 billion bailout until the situation in Ukraine clarifies, Russian Finance Minister Anton Siluanov said in Sydney.
Whether the dramatic events in Kiev will soften any hearts in western Europe towards offering Ukraine a membership prospect remains to be seen.
Polish Prime Minister Donald Tusk, whose country played a central role in the negotiations, highlighted the stakes for the EU in a country that borders his own.
“We are dealing in Ukraine with the first sacrifices of life for the integration of Europe. Today it is tragic, but in the future this will be a true hope for Ukraine,” he said on Friday.
Yet much of western Europe is suffering enlargement fatigue after the bloc admitted 13 new mostly ex-communist central and east European members since 2004.
EU co-founder France, in particular, would rather keep Ukraine and Turkey, which has been negotiating for accession in slow motion since 2005, in an outer ring of partners outside the bloc. Germany’s Merkel is also cool.
The EU has found it politically difficult enough to bail out its own members during the bloc’s debt crisis. Spending big on an outsider, albeit on its border, will be more fraught still.