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Putin bails out Ukraine to assert Kremlin power

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(MOSCOW) - President Vladimir Putin's move to pull Ukraine back from the brink of default with a multi-billion dollar aid package is aimed at preserving Kremlin power in its neighbour as Kiev battles a pro-EU uprising, analysts said.

Putin announced after a Kremlin summit with Ukrainian counterpart Viktor Yanukovych that Russia would buy $15 billion of Ukrainian bonds by the end of 2014 and knock one third off the price of Russian natural gas exports to Ukraine.

Economists said that the colossal Russian bailout will be enough to save Ukraine from the risk of default next year, without Kiev having to turn to the IMF or the European Union for extra funds.

But Putin will above all gain a new economic foothold in Ukraine, which the Russian strongman deems an indispensible part of the Kremlin's sphere of influence over two decades after the collapse of the USSR.

"Russia's influx of fresh money will ensure that Ukraine will easily fulfil its payment obligations next year," said Citibank economist Ivan Tchakarov in a note to clients.

Neil Shearing of Capital Economics in London said that the $15 billion eurobond buy alone will be enough to "plug the black hole" in the Ukraine's balance of payments for the next 18 months.

The assistance will come at no small cost to Russia which will use around one third of the remaining money in a national welfare fund to pay for the eurobonds.

Indicating the political nature of the decision, Russia will have to break its own rules as the fund can only be used to invest in countries with AA ratings or better, Russian business daily Vedomosti noted.

Ukraine's ratings are estimated as deep into junk.

Ukrainian Energy Minister Eduard Stavytsky said the gas price discount would be worth $7 billion to the Ukrainian government.

Vedomosti said Russian state gas firm Gazprom could be compensated for its losses from the national budget.

'Putin cannot lose control over Ukraine'

Yet the stakes in the Ukrainian crisis are sky-high for Putin as he seeks to woo Kiev after its aborted move to sign an Association Agreement with the European Union in November.

Putin's main motive with the mega bailout was to prevent the country of 46 million moving closer to Europe as the pro-West protests persist in Kiev, said analyst Maria Lipman of the Carnegie Centre in Moscow.

"This is not done out of the kindness of Putin's heart. This is to strengthen Russian influence over Ukraine and make the country more dependent on Russia," she said.

"From Putin's point of view, it is absolutely unacceptable to lose control over Ukraine."

Many saw Ukraine joining Russia's Customs Union trade bloc as the condition for rescuing its languishing economy. But Putin claimed at the Kremlin signing ceremony with Yanukovych that the two men had not even discussed the issue.

It remains a mystery what, if any, conditions Moscow has attached to its generosity, with Ukrainian opposition politicians accusing the government of "pawning" national assets as collateral for Russia's purchase of Ukrainian debt.

But it may be enough for Putin -- still scarred by the memory of Ukraine's 2004 pro-democracy Orange Revolution uprising -- to have shown Russia has the political and financial clout of a great power to influence its neighbours.

The Ukrainian eurobonds that Russia is buying from Kiev will have a maturity of two years, which alone will give Moscow leverage over Ukraine even after the next presidential elections in early 2015.

Stop-gap solution, more woe ahead

Putin's largesse may allow Yanukovych to keep the economy running up to the elections and even give him a fighting chance of winning. Yet economists warned that the bail-out can only provide temporary relief for Ukraine's economic pain.

Ukraine's economy is in urgent need of structural reform, with the IMF constantly pressing the government to reduce its social assistance programme. The deal with Russia is hardly going to spur the government towards rapid action.

"Such a deal would delay all the requisite structural reforms that Ukraine needs to undertake, including a more flexible currency and lesser dependence on cheap imported gas," said Tchakarov of Citibank.

Swedish Foreign Minister Carl Bildt, who championed the drive for Ukraine to sign the integration deal with the EU, made no attempt to hide his disgruntlement.

"Russian emergency loans to Ukraine risk further delaying urgent economic reforms and necessary EU modernisation," he said on Twitter.

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