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Ukraine Faces Russia as U.S., EU Bring Sanctions Threat

Photographer: Stepan Kravchenko/Bloomberg

A Ukrainian lieutenant colonel and a pro-russian activist discuss a retreat of the Ukranian military's armored personnel carrier from Donetsk to the base in Dnipropetrovsk. Close

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Photographer: Stepan Kravchenko/Bloomberg

A Ukrainian lieutenant colonel and a pro-russian activist discuss a retreat of the Ukranian military's armored personnel carrier from Donetsk to the base in Dnipropetrovsk.

Top diplomats from Ukraine and Russia will meet today for the first time since clashes erupted in Ukraine’s restive east, accompanied by U.S. and European Union counterparts poised to impose new sanctions if talks fail.

On the eve of the four-way session in Geneva, U.S. President Barack Obama vowed that Russia will face increasing economic penalties unless President Vladimir Putin backs away from supporting separatist militias in Ukraine and pulls Russian troops from the border.

“Putin’s decisions are not just bad for Ukraine, over the long-term they’re going to be bad for Russia,” Obama said in an interview with CBS News aired last night. He said Russia’s economy already is weighed down by uncertainty created by the Ukraine confrontation and by the prospect of tougher sanctions.

The session in Geneva will allow the U.S. to test whether Russia is serious about a diplomatic resolution to the crisis, according to a State Department official who spoke on condition of anonymity in advance of the talks. If not, U.S. officials have raised the prospect of sanctions targeted at more of what they call Putin’s cronies and possibly at entire sectors of the Russian economy, from energy to banking.

Photographer: Genya Savilov/AFP via Getty Images

Armed men wearing military fatigues stand guard by Armoured Personnel Carriers outside the regional state building seized by pro-Russian separatists in the eastern Ukrainian city of Slavyansk on April 16. Close

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Photographer: Genya Savilov/AFP via Getty Images

Armed men wearing military fatigues stand guard by Armoured Personnel Carriers outside the regional state building seized by pro-Russian separatists in the eastern Ukrainian city of Slavyansk on April 16.

Visa bans and asset freezes imposed on individuals by the U.S. and EU already have had an impact. Russia’s Micex Index (INDEXCF) of equities has lost 12.1 percent this year, though it rose 0.9 percent yesterday.

Ukrainian Forces

The unrest also has hurt Ukrainian asset prices. The hryvnia is the world’s worst performer against the dollar this year among more than 100 currencies tracked by Bloomberg, with a 28 percent loss. It surged for a second day yesterday after an emergency interest-rate increase, gaining 5.3 percent to 11.3 per dollar.

In advance of the Geneva talks, Ukrainian authorities used armed force this week for the first time since taking power in February in an effort to regain control from the armed separatists in its eastern Donetsk region.

While government forces retook an airfield near Kramatorsk two days ago that the government said was occupied by armed “extremists” operating under Russian orders, their efforts in the region stalled yesterday. The government sent armored vehicles, only to have some of them seized by pro-Russian activists who also disarmed a number of soldiers.

“The guys don’t want any escalation,” one of the activist leaders, Vadim Chernyakov, told reporters. “They had an order to come to Kramatorsk. They should be praised for the fact that they didn’t use weapons against the people.”

Base Attacked

About 500 pro-Russian separatists attacked a Ukrainian military base in the eastern city of Mariupol yesterday with guns and Molotov cocktails, according to TV 5. The Ukrainian television channel said 12 people were injured, without providing details.

As nearby countries such as the Baltic nations worry about security, the North Atlantic Treaty Organization vowed to beef up defenses and upgrade contingency plans.

“We will have more planes in the air, more ships on the water and more readiness on the land,” Secretary General Anders Fogh Rasmussen said yesterday in Brussels after the 28 NATO allies approved the changes.

Obama said NATO will stand by its member countries and that Putin knows that U.S. and allied forces are “significantly superior” to Russia’s.

“They’re not interested in any kind of military confrontation with us,” he said in the CBS interview.

‘Last Chance’

The Geneva meeting of foreign ministers will bring together Ukraine’s Andriy Deshchytsia and Russia’s Sergei Lavrov as well as John Kerry of the U.S. and Catherine Ashton, the EU’s foreign policy chief.

The outcome depends on “whether the Russians come prepared to try to defuse the crisis,” said Steven Pifer, a former U.S. ambassador to Ukraine.

Fyodor Lukyanov, head of the Council on Foreign and Defense Policy in Moscow, said “the Ukrainian crisis is getting closer to its culmination, when the last chance to rescue the situation is highly professional diplomacy.”

The deal needs to include rights for all Ukrainians, guarantees on Russian gas prices for Ukraine and gas transit to Europe, a nonaligned status for the country and Russia’s recognition of the May 25 presidential elections, Lukyanov said in a commentary in the government daily Rossiiskaya Gazeta.

Ukraine, the U.S. and the EU will make the case that Russian calls for decentralization and the rights of Russian speakers inside Ukraine can be resolved constitutionally, the U.S. State Department official said.

Russian Speakers

While the other parties to the talks won’t accept Russia’s contention that Ukraine’s regions have the right to secede -- and even be annexed by Russia, as Crimea has -- the Ukrainians have conceded that their current political structure is “too centralized,” said Pifer, a senior fellow at the Brookings Institution, a policy research organization in Washington.

“There can be some diffusion of power and authority, which would give the provincial governments and even cities more authority, and that’d be a good thing from the perspective of effective, efficient, accountable governance,” he said.

Putin has said that Russian military action, in parts of Ukraine that are largely populated by the country’s Russian-speaking minority, is justified in order to safeguard rights that aren’t being protected by the interim Ukrainian government. The United Nations human rights office said on April 15 that it found no evidence of “widespread nor systemic” persecution of Ukraine’s ethnic Russians.

‘No Sense’

The U.S. decision to hold off on more sanctions until today’s talks made “no sense” because “nothing will be accomplished,” said Anders Aslund, a Swedish economist who served as an economic adviser to the Russian government from 1991 to 1994 and to the Ukrainian government from 1994 to 1997.

“There is no interest in Russia in international law or abiding by international agreements so to get another agreement, so to go into talks with someone who doesn’t pay attention to international agreements -- it makes no sense whatsoever,” Anders, a senior fellow at the Peterson Institute for International Economics in Washington, said in an interview.

State Department spokeswoman Jen Psaki said this week that the Obama administration is considering measures that target sectors “such as financial services, energy, metals and mining, engineering and defense.”

‘Financial War’

Pifer of Brookings said neither the U.S. nor the EU “has declared a major financial war on Russia yet, but the markets are already conducting it.”

Russian Finance Minister Anton Siluanov on April 15 downgraded his projection for gross domestic product growth in 2014 to a maximum of 0.5 percent or none at all.

“Last year they were predicting 2.5 to 3 percent and they’re not the only ones,’ Pifer said. ‘‘Goldman Sachs, the World Bank -- everybody is revising estimates for Russian growth in 2014 downward. I can’t imagine that there are very many American or Europeans CEOs who are going to their boards now with proposals for big investments in Russia.”

To contact the reporters on this story: Sangwon Yoon in Washington at syoon32@bloomberg.net; Stepan Kravchenko in Kramatorsk, Ukraine at skravchenko@bloomberg.net

To contact the editors responsible for this story: John Walcott at jwalcott9@bloomberg.net; Balazs Penz at bpenz@bloomberg.net Larry Liebert, Michael Shepard

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