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Why Billions in Bailout Money for Ukraine Could End Up in Russia

 / Updated  / Source: CNBC.com

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Ukraine is desperate for a financial bailout after its economy had suffered from months of protests and political conflict in the former Soviet state, and the West is eager to hand over the funds. But a lot of that cash could end up going to Ukraine's chief antagonist: Russia.

"That money could very well indirectly make it toward Russia, given the amount of economic and financial transactions between Kiev and Moscow," said Stratfor Eurasia analyst Eugene Chausovsky.

Ukraine has been in a recession since the middle of last year, and its economy has been hit by deflation. The Kiev government said last month that its budget deficit rose 21.2 percent in 2013 over the previous year.

In response to its economic struggles and Russia's invasion of the Crimea region, the European Union said on Wednesday it's ready to give $15 billion in loans and grants to Ukraine. The Obama administration has called for $1 billion in loan guarantees for the country, and House Majority Leader Eric Cantor has said Congress will consider such a package soon.

"That money could very well indirectly make it toward Russia, given the amount of economic and financial transactions between Kiev and Moscow."

Alexander Gordin, managing director of Broad Street Capital, who has had extensive business dealings in Russia and Ukraine for two decades, told CNBC that some of the money will likely be used to pay back Russian loans to Ukraine and to buy Russian natural gas. Ukraine buys 60 percent of its natural gas from Russia.

Access to natural gas is a card Russia has repeatedly played against Ukraine and other European countries, and the Atlantic Council's Adrian Karatnycky said that Sevastopol, a Crimean city that serves as the base for the Russian Navy's Black Sea Fleet, is the only reason Ukraine has gotten a reasonable price on gas in the past.

"If Crimea were ever to become Russian, which is doubtful, it will be a slow economic death to Ukraine," Karatnycky said.

Stratfor's Chausovsky said he believes that although the European Union has said that financial assistance given to Ukraine will not be used to pay for Russian natural gas, it could happen anyway.

Lilit Gevorgyan, senior economist at IHS Global Insight, said much depends on what develops with Ukraine's plans for keeping itself supplied with natural gas this year and beyond.

"However, it is expected that a large chunk of this loan will go into covering the current account gap and also financing the budget deficit," Gevorgyan said. "The Russian gas bill will also be a significant drain, although it also depends how much gas Ukraine is planning to import from Russia in 2014 and onward."

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