Kerry Warns Putin on Ukraine as Russia Opens Troop Drills

April 25 (Bloomberg) -- President Obama answers a question about Russian President Vladimir Putin and discusses sanctions against Russia in Seoul, South Korea.

President Barack Obama was set to discuss a possible expansion of sanctions with European leaders after U.S. Secretary of State John Kerry said Russia is running out of time to ease tensions in Ukraine.

Obama, who’s visiting South Korea, planned a conference call with leaders including German Chancellor Angela Merkel. In Washington yesterday, Kerry accused President Vladimir Putin’s government, which began new military exercises on Ukraine’s border, of using the “barrel of a gun and the force of a mob” to impose its will on its neighbor.

“If Russia continues in this direction, it will not just be a grave mistake, it will be an expensive mistake,” Kerry said at the State Department. Russia has failed to live up to commitments under an accord signed in Geneva a week ago, and continued lack of cooperation would bring consequences, he said.

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The conflict -- the biggest between Russia and its former Cold War enemies since the collapse of the Soviet Union -- escalated yesterday when Putin warned Ukraine against continuing an anti-separatist offensive that killed five rebels. The accord signed April 17 by Ukraine, Russia, the European Union and the U.S. is on the brink of collapse. Russia unexpectedly raised its key interest rate today after Standard & Poor’s cut the country’s credit rating.

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A pro-Russian militant takes up a defensive position at a roadblock outside the village of Khrestyshche on April 24, 2014. Close

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A pro-Russian militant takes up a defensive position at a roadblock outside the village of Khrestyshche on April 24, 2014.

Rate Increase

The Russian central bank increased its one-week auction rate to 7.5 percent from 7 percent. All but one of 23 economists in a Bloomberg survey had forecast no change. The ruble has lost more than 8 percent this year against the dollar, the second-worst performance among 24 emerging-market currencies tracked by Bloomberg after Argentina’s peso.

Russia’s Micex Index (INDEXCF) of stocks fell for a fifth day after S&P lowered Russia’s sovereign rating to BBB-, the lowest investment grade, from BBB. It was down 1.1 percent at 3:38 p.m. in Moscow, taking its decline to 11 percent since Putin’s intervention in the Ukrainian Black Sea peninsula of Crimea started March 1.

Standoff in Ukraine

The yield on the Ukrainian government’s dollar-denominated notes due in 2023 rose for a fifth day, climbing 0.05 percentage point to 10.1 percent, the highest since March 20.

Obama told a news conference in Seoul today that Putin increasingly sees the world through a “Cold War prism,” though he’s “not a stupid man.”

The U.S. president said that a united front on sanctions may be difficult to achieve when he talks to European leaders as they consider the consequences for their own economies.

Photographer: Kirill Kudryavtsev/AFP/Getty Images

A member of the Ukrainian special forces takes position at an abandoned roadblock in Slovyansk, Ukraine, on April 24, 2014. Close

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Photographer: Kirill Kudryavtsev/AFP/Getty Images

A member of the Ukrainian special forces takes position at an abandoned roadblock in Slovyansk, Ukraine, on April 24, 2014.

‘Some Variation’

“There’s some variation inside of Europe,” Obama said. “That is as much of an issue as is any differences between our assessments and theirs.”

The U.S. joined the EU in imposing sanctions after Russia annexed Crimea last month. Michael Mann, the spokesman for the EU’s foreign-policy chief, Catherine Ashton, said work is continuing on further sanctions. “There is no set deadline for that to be completed, but it is at a very advanced stage,” he told reporters in Brussels.

Ukrainian Prime Minister Arseniy Yatsenyuk accused Russia of seeking to disrupt the country’s presidential elections set for May 25, remove the pro-European government in Kiev and seize Ukrainian territory.

“All those plans will fail,” Yatsenyuk told a cabinet meeting in Kiev today. “Russian military aggression on Ukrainian territory will lead to military conflict all across Europe. The world has not yet forgotten World War II, while Russia wants already to start World War III.”

‘Full-Throated Effort’

Kerry said Russia has “refused to take a single concrete step” toward implementing the Geneva agreement. He reiterated U.S. contentions that Russia is using its special forces and intelligence service in eastern Ukraine, saying evidence contradicts Putin’s “fantasy” about who’s responsible for the violence.

“Our intelligence community tells me that Russia’s intelligence and military intelligence services and special operators are playing an active role in destabilizing eastern Ukraine with personnel, weapons, money, operational planning and coordination,” Kerry said. “This is a full-throated effort to actively sabotage the democratic process through gross external intimidation.”

Russian Foreign Minister Sergei Lavrov accused the U.S. of making “unilateral” demands on the government in Moscow to disarm the separatist militias. In comments on Russian state television today, he said pro-Russian leaders in the east would be ready to abide by the deal if the Ukrainian government moved to clear Kiev’s Independence Square of its supporters and disarmed the nationalist Pravyi Sektor group.

‘Immediate Halt’

“And of course the first step, in line with the Geneva agreement, should be a halt to violence and today this means the immediate halt to the deployment of the army against the people,” Lavrov said.

Ukraine’s defense minister, Mykhaylo Koval, said the Russian army, conducting exercises, came close to the frontier yesterday without crossing it. Ukraine’s army is “fully ready to fight any aggression,” he told reporters in Kiev today.

Koval described the offensive against separatists in the eastern city of Slovyansk, where the five rebels died yesterday, as “a surgical operation,” saying that the security forces are aiming to “liquidate separatists and protect the lives of peaceful citizens at the same time.”

‘Second Phase’

Acting Ukrainian President Oleksandr Turchynov’s chief of staff, Serhiy Pashynsky, said special troops had begun a “second phase” of the anti-separatist operation, putting in a complete blockade of Slovyansk to prevent the arrival of rebel reinforcements, according to a statement on the presidential website.

One member of the government forces has died and nine have been wounded since the operation started last week, according to the official in charge of Ukraine’s anti-terrorist center, Vasyl Krutov. A helicopter pilot was injured when his aircraft came under fire today, setting the fuel tank alight, he said in Kiev.

Russia has 200 tanks and Grad artillery systems on the border, Ukraine’s permanent representative to the United Nations, Yuriy Sergeyev, told the Voice of America.

To contact the reporters on this story: Terry Atlas in Washington at tatlas@bloomberg.net; Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Henry Meyer in Moscow at hmeyer4@bloomberg.net

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

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