James Sherr
Associate Fellow, Russia and Eurasia Programme

Ukraine's decision to abandon the proposed Association Agreement with the EU hands a victory to those who believe that Europe stops at Ukraine's border. For Russia, it is a triumph. For Ukraine, it is a strategic error that is likely to have long-term consequences.

Since the country gained independence in 1991, every Ukrainian president has sought a path into the EU. The Association Agreement due to have been signed  this week in Vilnius would have launched a Deep & Comprehensive Free Trade Area that would have changed the economic map of Europe. EU High Representative Catherine Ashton described it as the 'most ambitious agreement ever offered a partner country'. Until the end of last month, President Yanukovych's determination to sign the accord seemed unquestioned.

The factors that changed his mind are forbidding and stark. First, the EU's terms included a path out of prison for his most formidable rival, former prime minister Yulia Tymoshenko. Today, the popularity of Yanukovych, who won a free election in 2010, is at rock bottom. Polls suggest that he would lose even a rigged contest against Tymoshenko in the next presidential elections scheduled for 2015.

Second, Yanukovych is desperate for money. President Vladimir Putin presented him with a raft of countermeasures that would have crippled and possibly crushed a Ukrainian economy only three months away from insolvency. Not only would these hit gas and exports, they were specifically fine-tuned to damage the financial and industrial interests most closely tied to Yanukovych. The benefits of association are long-term, whereas Russia's threats, like Yanukovych's horizons, are short-term. To raise the ante, Putin apparently offered Yanukovych $20 billion to cut the cord with the EU.

Yanukovych's acceptance of these terms reveals a set of priorities and standards fundamentally out of kilter with the rest of Europe. For him, power is an absolute. The national interest is simply a variable. Since his election in 2010 he has built a personalized and predatory system that penalizes entrepreneurship, disenfranchises talent and seizes the assets of the defiant and vulnerable. No greater contrast can be imagined with the Central European countries that secured admission to the EU in three enlargements. Many will now conclude that Europe, as a community of rules and values, has reached its natural limits.

Yet Yanukovych's priorities are also out of kilter with a country that increasingly loathes him and has been demonstrating it in the biggest mass protests since the 2004 Orange Revolution. Cynical as the Ukrainian president’s priorities are, they are also based on illusions.

The first is that he can still keep the EU in play. He is now asking the EU and IMF to provide $20 bilion in compensation for Russia's retaliation. Even if this gambit is not designed to fail, it almost certainly will. The EU has invested enormous energy in the association project and maintained its momentum in the teeth of the eurozone crisis. Yet despite the latest turn of events, Brussels has reiterated its offer as well as its terms. Prime Minister Mykola Azarov’s sudden outrage that the EU and IMF propose to offer Ukraine substantially less aid than they do to Greece, Italy and Portugal will earn him no friends. Neither will his indignant rejection of IMF conditionality. The EU’s principal players are in no mood for an auction, and they know blackmail when they see it.

The second illusion is economic. Establishment of the free trade area with a market of 360 million people would, in Ashton's words, have 'sent a clear signal to investors worldwide and international financial institutions'. Yanukovych has now sent a very different signal. The reaction has already been swift and is likely to be drastic.

The third and greatest illusion concerns Russia. Yanukovych knows that Ukraine's entry into Moscow’s rival integration project, the Eurasian Customs Union, would transform him from an independent actor into a vassal. Putin is now pandering to his hope of avoiding this Hobson's choice. Yet how long he does so is now up to Putin. The Western vector of his 'multi-vector policy' is rapidly disappearing.

The usual nostrums about Russia's limitations take no account of Kremlin thinking. Whatever Putin's internal performance, his foreign policy has been sure-footed and confident. He now sees that the EU's game in the East has collapsed. The EU's greatest threat, the integration of what the Kremlin sees as 'little Russia', has collapsed with it. Russia's power might be declining, but it is used tenaciously and to the full. Where the stakes are high, the current leadership is willing to sustain damage for the sake of strategic gain.

While Ukraine enters uncharted waters, the immediate reality for the EU is a Russia yet more difficult to deal with and an Eastern Partnership in tatters. Much now depends on how Brussels responds to two other Partnership countries, Moldova and Georgia. For this reason, Vilnius still matters.

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