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Ukraine-EU deal alters little, except Vladimir Putin's blood pressure

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Why Vladimir Putin is so agitated by Ukraine's trade deal with the EU
Ukraine's Europe trade deal won't end its economic malaise anytime soon

Ukrainian President Petro Poroshenko is entering into a trade agreement with the European Union on Friday that has already sparked a rebellion, toppled a president and ignited an armed conflict with pro-Russia separatists.

Kiev's alignment with the 28-nation Western alliance won't lift Ukraine from its economic devastation for decades, and Ukrainian industries' deep entanglement with the Russian military-industrial complex ensures that each will remain a vital trading partner to the other for years to come.

So why is Russian President Vladimir Putin so agitated by Ukraine's European drift?

Analysts say it has more to do with his geopolitical ambitions than economics, as "losing" Ukraine to the Western alliance deals a blow to Putin's image as powerful leader of a resurgent Russia and defender of Russians throughout the former Soviet territory.

Putin has cast the EU-Ukraine association agreement as a threat to his nation's economy and security and vowed to do whatever is necessary to protect Russian economic interests. That has raised the specter of intensified fighting in eastern Ukraine and more Kremlin territorial seizures to clear a path from the Russian mainland to the strategic Crimean peninsula, which Moscow annexed in March.

Ukraine's antiquated heavy industries in the eastern part of the country were built decades ago, when Ukrainian-made jet engines were fitted onto Russian-made warplanes for the collective defense of the Soviet Union. Coal and uranium from Ukrainian mines fed steel foundries and nuclear plants in Russia, and Moscow depended on missile components produced in Ukraine to assemble its intercontinental ballistic arsenal.

"A lot of industry in Ukraine, particularly defense industries, are oriented toward supplying Russia, while in the European Union they follow NATO standards" in armaments and equipment production, said Keith Savard, senior managing economist at the Milken Institute. "Europe is not going to be keeping those industries in Ukraine employed, as I just don't see much substitutability there."

Nor is the energy trade between the two former Soviet republics likely to change, Savard said, despite the current battle between Russia's Gazprom monopoly and Ukraine over the price the former charges the latter for natural gas. Kiev has traditionally relied on discounted gas from Moscow in return for political concessions, such as refraining from pursuing membership in rival Western alliances. But cheap gas has fostered waste and allowed the Ukrainian government to supply subsidized energy to households, a practice that has led to massive public debt.

Gazprom, whose majority shareholder is the Russian government, has boosted gas prices for Ukraine by 80% since April. Savard predicts that a compromise will be reached to compel Ukraine to raise consumer energy prices and to prevent a new "gas war" in which Kiev could cut the flow of Russian gas exports to Western Europe. (Half the volume travels through Ukrainian pipelines.)

Moscow doesn't need or want conflict with Ukraine over the EU deal, Savard said, it just wants to remind Kiev of the nations' mutual dependencies.

"Russia wants to have a seat at the table. They don't want to be pushed aside," said the economist, who monitors post-Soviet developments. "I don't know how else to explain the fuss they are making over this agreement."

Putin has acted out against Kiev's Westward drift since it began four years ago with negotiation of the association agreement, which will allow tariff-free trade of most goods. Moscow slapped barriers on select Ukrainian food imports, such as cheese and chocolate, to pressure then-President Viktor Yanukovich to abandon the negotiations. It hoped to compel Kiev to drop the EU pursuit in favor of joining Putin's Eurasian Union, an Eastern bloc that includes Kazakhstan and Belarus.

Yanukovich eventually bent to Kremlin pressure and announced in November that he wouldn't sign the EU agreement. That unilateral decision to stay in Moscow's orbit prompted Ukrainians to rebel against corruption and bad governance, driving Yanukovich from office in February.

Putin used the pretext of government disorder in Kiev to invade and annex southern Ukraine's Crimean peninsula in March, securing control of the Russian naval base in Sevastopol. No country has recognized Crimea as part of Russia, but neither has any outside power been willing to help Ukraine recover it.

The fighting in eastern Ukraine's Donetsk and Luhansk regions is widely believed to be supported by Moscow, as many of the separatist leaders are Russian citizens and veterans of other post-Soviet regional conflicts. Putin denies having a hand in the separatist actions, which are spurred in part by fear that Ukraine's EU alignment will eventually mean closing their uncompetitive mines and factories.

Matthew Rojansky, head of the Kennan Institute think tank in Washington, which focuses on Russia and Ukraine studies, said Putin might be concerned that Ukraine's EU association will allow Kiev to import duty-free European manufactured goods, then re-export them to Russia at lower prices than Russia's inefficient manufacturers charge.

"Ukraine would become a conduit for relatively cheap and much-higher-quality European goods, which would force the Russian state to step in and subsidize inefficient Russian producers more than they are already doing," Rojansky said.

Whether that is a legitimate concern remains to be seen, he said, because Russia and Ukraine are too economically intertwined to provoke a full-fledged trade war.

"Russia is not going away, and Ukraine is not going to be Germany tomorrow, or even in 20 years," said Rojansky, who predicted that Putin and Poroshenko would have to come to some mutually beneficial accommodation, if they haven't already.

"They will remain interlinked for the foreseeable future," he said. "These are two economies that are linked at the hip."

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