Ukraine Hostages Freed in East as Kerry Blames Russia

Photographer: Anatoliy Stepanov/AFP/Getty Images

Communal service workers, front, clean the barricade as Ukrainian policemen stand guard in font of the Kharkiv regional state administration building in Kharkiv on April 8, 2014. Close

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Photographer: Anatoliy Stepanov/AFP/Getty Images

Communal service workers, front, clean the barricade as Ukrainian policemen stand guard in font of the Kharkiv regional state administration building in Kharkiv on April 8, 2014.

Pro-Russian activists released most of their hostages in Ukraine’s eastern city of Luhansk today after U.S. Secretary of State John Kerry accused Russia of using “special forces and agents” to fuel unrest.

Ukrainian security forces continued an “anti-terrorist” operation in the eastern cities of Luhansk, Donetsk and Kharkiv, the country’s second-largest, Interior Minister Arsen Avakov said today. Pro-Russian protesters are still occupying buildings in the latter two and want a referendum on joining Russia and a boycott of Ukraine’s May 25 presidential election.

“I think the way to solve this crisis will be found within 48 hours,” Avakov said in a statement on his ministry’s website. “The anti-terrorist alert in all three regions has not been canceled and at any given moment we will be able to carry out planned actions.”

Russian President Vladimir Putin, who is due to speak at a cabinet meeting this afternoon in Moscow, has ratcheted up pressure on Ukraine since he annexed the Black Sea peninsula Crimea last month. His government has ignored sanctions from the U.S. and European Union, banning Ukrainian imports, raising gas prices and massing troops along its smaller neighbor’s eastern border in the worst standoff between Russia and its former Cold War adversaries since the fall of the Iron Curtain.

Hostages Released

The unrest prompted Russia yesterday to cut its economic growth forecast this year and has triggered the selling of Russian and Ukrainian assets by investors.

The yield on Ukraine’s 2023 Eurobonds rose 14 basis points, or 0.14 percentage point, to 9.6 percent by 12:38 p.m. in Kiev, according to data compiled by Bloomberg. The hryvnia has lost 31 percent this year against the dollar, the world’s worst performing currency tracked by Bloomberg.

Russia’s benchmark Micex Index fell 0.6 percent by 1:38 p.m. in Moscow. It has lost 11 percent this year.

In Luhansk, protesters released unharmed 56 of the 60 hostages they took after seizing the region’s State Security Service headquarters on April 6, the agency, known as the SBU, said in a statement on its website today. It said protesters planted land mines and threatened police with weapons yesterday.

In an echo of protests in Crimea that preceded Russia’s absorption of the province, pro-Russian protesters demanded a referendum on seceding from Ukraine. The regional government building in Kharkiv, 40 kilometers (25 miles) from the Russian border, was cleared of separatists yesterday with 70 people detained, Avakov said.

‘Russian Provocateurs’

The U.S. and its allies say they’re concerned that Putin may be planning further incursions into eastern Ukraine after annexing Crimea. Putin has as many as 40,000 soldiers stationed along the frontier, according to the U.S. and NATO. His government is pushing Ukraine to grant more autonomy to its regions, which might preface a push to get Ukraine’s eastern regions to split from the rest of the country.

“Russian provocateurs and agents operating in eastern Ukraine” have been “sent there determined to create chaos,” Kerry told the Senate Foreign Relations Committee in Washington yesterday. “These efforts are as ham-handed as they are transparent,” Kerry said. He accused Russia of working to “create a contrived crisis with paid operatives across an international boundary.”

War Risk

Ukraine’s SBU said it had detained a Russian citizen who had met activists on behalf of Russian secret services and took part in protests.

Russia isn’t conducting any unusual or unplanned activity near its border with Ukraine, the Foreign Ministry in Moscow said in a statement today. It accused Ukraine yesterday of “military preparations, which risk sparking a civil war,” saying its neighbor’s national guard and irregular forces of Pravyi Sektor, which unites nationalist groups, were gathering in southern and eastern Ukraine.

Russia is aware of plans from several members of the North Atlantic Treaty Organization to make large military deployments near its border, news service Interfax reported Deputy Defense Minister Anatoly Antonov as saying at conference in Moscow.

Putin says he has the right to defend Russian speakers in Ukraine from “fascists” after the ouster of President Viktor Yanukovych. The risks of a Russian military intervention in east Ukraine are “higher than ever,” according to Joerg Forbrig, senior program officer for central and eastern Europe at the Berlin bureau of the German Marshall Fund of the U.S.

“If Russian forces come in, it will be much less clear-cut than in Crimea,” he said. “The next stage will probably be deployment of Russian special operations forces and provocateurs in east Ukraine, followed by incidents and then calls for the Russian military to pacify the situation.”

German Tack

Kerry said yesterday that he’s spoken with Russian Foreign Minister Sergei Lavrov to arrange talks among officials from Ukraine, the U.S., the EU and Russia to head off any escalation. European Union foreign policy chief Catherine Ashton said she’ll meet Kerry and Lavrov, along with Ukraine’s foreign minister, next week.

In Germany, which has moved more slowly on sanctions than the U.S. as companies there raise concerns about losing business, Chancellor Angela Merkel did not signal a significant shift in tack.

“Unfortunately in many instances it’s not apparent that Russia is contributing to de-escalating the situation,” she said in a speech in parliament. “Therefore we will continue to do what we’ve been doing -- keeping the line open for talks, but on the other hand to say in our view Ukraine has the right to its own path of development.”

Ukraine won’t import Russian gas until it agrees on a price with Russia, Energy Minister Yuri Prodan said today in Kiev. Slovakia will help Ukraine by reversing flow in its gas supply line, he said.

Money Flood

Kerry said yesterday that additional sanctions targeting Russia’s energy, banking and mining industry are “all on the table” if Russia intervenes further in Ukraine.

Amid the tension, Russia cut its growth forecast for 2014 to 0.5 percent to 1.1 percent, Deputy Economy Minister Andrei Klepach told reporters in Moscow yesterday, citing reduced export demand for natural gas and increased capital outflows. That compares with a 2.5 percent target set in December.

Former U.S. Senator and Secretary of State Hillary Clinton said the “flood of money out of Russia in the last several months” had been “astonishing,” and capital flows are the best way to get Putin to back down.

“That is the best way to undermine the oligarchs who support him, undermine his own economic interests,” she said.

Russia suffered capital outflow of $51 billion from January to March, the biggest quarterly drop since the end of 2008 after the collapse of Lehman Brothers Holdings Inc. triggered the global economic crisis.

Russian companies should consider delisting their shares from foreign stock exchanges and switching trading to Moscow amid the standoff, First Deputy Prime Minister Igor Shuvalov told reporters after a government meeting near Moscow. “This is a question of economic security,” he said.

Daimler AG (DAI) Chief Executive Officer Dieter Zetsche said Russia’s rhetoric “recalls the days of the Iron Curtain.”

“The sustained success of a company such as Daimler also depends on political stability, security, the rule of law and fair access to markets,” he said in a speech at an annual shareholders’ meeting in Berlin.

To contact the reporters on this story: Kateryna Choursina in Kiev at kchoursina@bloomberg.net; Jake Rudnitsky in Moscow at jrudnitsky@bloomberg.net; Nicole Gaouette in Washington at ngaouette@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; James M. Gomez at jagomez@bloomberg.net Michael Winfrey, Leon Mangasarian

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