Obama Joins Merkel in Setting Ukraine Election as Trigger

U.S. President Barack Obama and German Chancellor Angela Merkel threatened sanctions targeted at broad segments of the Russian economy if Vladimir Putin’s government disrupts the scheduled May 25 elections in Ukraine

The two leaders yesterday set the vote as a benchmark for determining whether the U.S. and European Union take the next step in penalizing Russia for its actions in Ukraine and sought to present a unified approach to responding to the crisis.

“When we reach a particular tipping point is very hard to say in advance,” Merkel said at a joint news conference with Obama at the White House. “All I can say is that the elections on May 25 are a decisive juncture for me and if there is further destabilization, things will get more and more difficult.”

Obama said there is “remarkable unity” between the U.S. and EU in supporting Ukraine even though wider sanctions against Russia may rebound to hit European countries.

Sanctions imposed by the U.S. and EU have so far targeted officials, individuals and companies tied to Putin’s inner circle. The next step would be action against sectors of the Russian economy, including banking and energy. Those penalties would have consequences for European countries that have deeper trade and investment ties with Russia than the U.S. does.

Obama is seeking to coordinate a united U.S.-EU response to what the allies say is Russia’s stoking of separatists who have been battling Ukrainian forces.

Merkel’s Role

Merkel has a pivotal role. Germany, Europe’s largest economy, is Russia’s largest trade partner after China, with imports of $50.7 billion worth of Russian goods and services and exports to Russia worth $38.3 billion.

According to the Committee on Eastern European Economic Relations, a German business lobbying group, 6,000 German companies do business with Russia, with 350,000 workers depending on Russian trade. Russia also supplies about 30 percent of the EU’s gas imports.

Four of the 30 non-financial companies with the largest revenue exposure to Russia are German, including Metro AG and Adidas AG, according to Morgan Stanley.

Putin has threatened to escalate economic warfare if further sanctions are imposed.

Obama said taking the next step on sanctions will mean “extensive consultations” with all 28 members of the EU.

“Some are more vulnerable than others to Russian retaliation, and we have to take those into account,” he said.

EU Impact

Both leaders said that while they prefer a diplomatic solution, they are prepared to act.

“The door remains open to solving the crisis in a dialogue with Russia,” Merkel said in addressing the U.S. Chamber of Commerce after meeting with Obama. “But if the situation in Ukraine continues to be destabilized, Europe, the U.S. and all partners will not hesitate to impose further sanctions.”

The confrontation is already squeezing Russia. The ruble’s 8.3 percent retreat this year is the second-worst after Argentina’s peso among 24 developing-country peers monitored by Bloomberg. The benchmark Micex Index (INDEXCF) of stocks has fallen 13 percent since the start of the year.

Russia’s economy is in a recession and may only expand 0.2 percent this year, down from a projection of 1.3 percent issued April 8, according to Antonio Spilimbergo, the International Monetary Fund’s mission chief for Russia. The $2 trillion economy is facing two three-month periods of contraction, Spilimbergo told reporters in Moscow on April 30.

Ukraine Violence

Dozens were killed in Ukraine yesterday after a building in Odessa was set ablaze during clashes and government forces attacked separatists near the Russian border in one of the bloodiest days since the conflict erupted.

The violence reached Odessa, where the government of Ukraine’s third-largest city said more than 40 people died and 174 were injured in a building fire and street battle that started when pro-Russian protesters in the port city attacked a rally in favor of a unified country.

Fighting between Ukrainian forces and pro-Russian separatists also ensued in Slovyansk, where the government began an offensive to retake the eastern city and to free hostages. Rebels shot down two Ukrainian helicopters, killing two pilots, the Defense Ministry said.

Russian President Vladimir Putin’s spokesman said that Ukraine’s actions kill any chance of implementing an agreement to defuse the crisis that was reached in Geneva last month between Ukraine, Russia, the U.S. and the EU.

Surveillance Friction

Obama and Merkel were in regular contact before yesterday’s meetings, exchanging assessments of Putin’s intentions.

The German chancellor has been a critical intermediary with Putin. She grew up under Communism in former East Germany and speaks Russian, while Putin speaks German from his time as a KGB officer in Dresden.

While the situation in Ukraine has drawn the U.S. and Germany closer, it hasn’t completely eliminated friction over the U.S. surveillance revealed in documents leaked by former National Security Agency contractor Edward Snowden. That included the disclosure that Merkel’s mobile phone was monitored by U.S. signals intelligence.

The two nations haven’t been able to find agreement on surveillance. Both Obama and Merkel said they would continue discussions even if they can’t fully reconcile their approaches.

“There are differences of opinion on the intensity of surveillance and the issue of security on the one hand and the security of privacy and personal rights on the other,” Merkel said. “These will be further and more deeply discussed.”

Obama said the U.S. has moved to assure the U.S. public and allies that they’re not subject to continual surveillance, while defending intelligence collection as vital to stopping terrorism.

“It has pained me to see the degree to which the Snowden disclosures have created strains” in relations with Germany, he said. “We are committed to a U.S.-German cyber-dialog to close further the gaps that may exist in terms of how we operate.”

To contact the reporters on this story: Jonathan Allen in Washington at jallen149@bloomberg.net; Arne Delfs in Washington at adelfs@bloomberg.net

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net; Alan Crawford at acrawford6@bloomberg.net Joe Sobczyk, Michael Shepard

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