G-7 Leaders Pledge Further Steps Against Russia Over Ukraine

March 24 (Bloomberg) –- Bloomberg Television's “Lunch Money” Host Matt Miller breaks down the ongoing chess match between Russia and Ukraine. (Source: Bloomberg)

The Group of Seven major powers decided to hold a summit in Brussels in June instead of a planned G-8 meeting in Sochi in the latest sanction against Russia for President Vladimir Putin’s annexation of Crimea.

“We will suspend our participation in the G-8 until Russia changes course,” President Barack Obama and his fellow G-7 leaders said in a statement after a meeting in The Hague this evening. “This clear violation of international law is a serious challenge to the rule of law around the world and should be a concern for all nations.”

The U.S. and its allies have expressed growing concern that Russia is building up its forces on the border with Ukraine after taking control of the Black Sea peninsula. It’s the worst standoff between the former Cold War enemies since the Soviet Union collapsed. Ukraine said today it deployed more troops to the frontier.

Full Coverage of the Ukraine Crisis:

Russian Foreign Minister Sergei Lavrov dismissed the G-7 move. “The G-8 is an informal club without memberships,” he told reporters in The Hague. “If western nations feel that the formula of G-8 no longer works, so be it.”

After Putin completed the annexation of Crimea and the two sides exchanged sanctions, attention has shifted to whether Russia will seek to claim other parts of Ukraine. U.S. officials have warned of Russian troop reinforcements, raising concern that it may be preparing to carve off more areas of the east and south.

Photographer: Dmirty Serebryakov/AFP via Getty Images

A pro-Russian protester takes down a Ukrainian flag as they storm a Ukrainian air force base in the small city of Novofedorivka, Saki district, western Crimea, on March 22, 2014. Close

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Photographer: Dmirty Serebryakov/AFP via Getty Images

A pro-Russian protester takes down a Ukrainian flag as they storm a Ukrainian air force base in the small city of Novofedorivka, Saki district, western Crimea, on March 22, 2014.

‘Not Done’

“As long as Russia is flagrantly violating international law and the order the G-7 has helped to build since the end of the Cold War, there’s no need for the G-7 to engage with Russia,” U.S. Deputy National Security Adviser Ben Rhodes told reporters before the G-7 talks. “We’re looking to send a message that we’re not done with building out the types of sanctions that we would impose on Russia for its actions.”

The ruble gained 0.5 percent to 42.2472 against the central bank’s dollar-euro target basket by 6 p.m. in Moscow, when the central bank stops its market operations. Government bonds due February 2027 rose, pushing the yield down nine basis points to 9.33 percent. The benchmark Micex stock index lost 0.7 percent to 1,297.91 after climbing as much as 2 percent. The Micex has lost 13 percent since Nov. 21, the start of protests that ousted Kremlin-backed Ukrainian President Viktor Yanukovych and triggered the crisis.

Russian Outflow

A Snapshot of Ukraine's Past and Future

Photographer: Viktor Drachev/AFP via Getty Images

A Russian flag waves in front of a Ukrainian military ship moored in the bay of Sevastopol, on March 22, 2014. Close

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Photographer: Viktor Drachev/AFP via Getty Images

A Russian flag waves in front of a Ukrainian military ship moored in the bay of Sevastopol, on March 22, 2014.

Investors pulled out $5.5 billion from Russian equities and bonds this year through March 20, already approaching the total outflow of $6.1 billion for the whole 2013, according to data compiled by EPFR Global, a Cambridge, Massachusetts-based firm tracking fund flows.

The U.S. is seeking to put pressure on Russia’s equity and currency markets, Rhodes said in an interview.

“We’re careful to calibrate it,” he said. “We’re not seeking to totally collapse the Russian economy.”

Graphic: What Crimea Is Costing Putin

The EU expanded its list of Russians and Ukrainians punished with asset freezes and travel bans to 51 on March 21. The U.S. widened its list to 27 Russians and four Ukrainians the previous day. Obama also authorized potential future penalties on Russian industries, including financial services, energy, metals and mining, defense and engineering.

‘Global Impact’

“These sanctions wouldn’t only hurt the Russian economy, they could also have an impact on the global economy,” Obama said in an interview with Dutch newspaper De Volkskrant published today. “We would have preferred it not come to this. But Russia’s actions are simply unacceptable. There have to be consequences. And if Russia continues to escalate the situation, we need to be prepared to impose a greater cost.”

Russia today banned entry to 13 Canadian lawmakers and officials in retaliation for sanctions.

Russian banks, including state-run VTB Capital, say the world’s ninth-biggest economy will shrink for at least two quarters as penalties for annexing Crimea rattle markets, curb investment and raise the cost of borrowing.

“Europe and America are united in our support of the Ukrainian government and the Ukrainian people,” Obama said at a news conference with Dutch Prime Minister Mark Rutte. “We’re united in imposing a cost on Russia for its actions.”

Ukraine has so far mobilized more than 10,000 people for its army, with the priority being to protect its borders and complete the withdrawal of forces from Crimea, the head of the country’s Security Council, Andriy Parubiy, told a news conference in Kiev.

Entire Border

U.S. intelligence and military officials said there are now Russian forces on virtually the entire border with Ukraine.

Troops in some areas, including near corridors leading to major Ukrainian cities, have been reinforced with armor, attack aircraft and helicopters, said the officials, who requested anonymity to discuss classified intelligence reports. There are signs the forces are receiving substantial logistical support, which might signal preparations for sustained operations.

It’s hard to assess whether Russia is preparing for an invasion or is trying to intimidate the pro-EU government in Kiev, the officials said.

Naval Base

In Crimea, annexed after a Kremlin-backed referendum last week, Russian forces stormed the Feodosiya naval base at 4:30 a.m. today, a Ukrainian Defense Ministry spokesman, Vladyslav Seleznyov, said on Channel 5 television.

German Chancellor Angela Merkel spoke with Putin by phone over the weekend and warned him about destabilizing Moldova, her spokesman, Steffen Seibert, said. The parliament of Transnistria, a self-proclaimed republic wedged between Moldova and Ukraine with a Russian military presence, followed Crimea’s annexation by also asking to join Russia.

Russia wants its neighbor to adopt a federal constitution that guarantees political and military neutrality, grants powers to Ukrainian regions and makes Russian a second official language.

“Ukraine needs wide-scale constitutional reform with the participation of all regions,” Lavrov told reporters. “We can’t force this on Ukraine’s leaders but that’s our assessment of the situation.”

To contact the reporters on this story: Mike Dorning in The Hague at mdorning@bloomberg.net; Julianna Goldman in The Hague at jgoldman6@bloomberg.net; Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Eddie Buckle, Mark Williams

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