Ukraine’s Vote at Risk as Violence Spreads in East

May 5 (Bloomberg) -- Bloomberg Contributing Editor Richard Falkenrath examines the state of the crisis in Ukraine as violence intensifies and the response of the United States and Europe on Bloomberg Television’s “Bloomberg Surveillance.

Ukraine’s presidential election is driving another rift between Russia, the European Union and the U.S. as Vladimir Putin’s government questions the legitimacy of the vote.

Hours after Ukraine’s deadliest day since President Viktor Yanukovych was ousted in February, Putin’s spokesman, Dmitry Peskov, pointed to the violence as proof that proceeding with the vote planned for May 25 is “absurd.” U.S. President Barack Obama and German Chancellor Angela Merkel said the success of the election will decide whether the U.S. and the EU impose further sanctions on Russia for its actions in Ukraine.

Discord over the election is pushing the sides further apart. A failed ballot would highlight the central government’s difficulties in asserting control as unrest spreads from the easternmost regions to the south.

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“There is little doubt that the legitimacy of the elections on May 25 will be questioned and most probably not accepted by Moscow and many ethnic Russians in eastern and southern Ukraine,” Lilit Gevorgyan, senior economist at IHS Global Insight in London, said by e-mail. “Ukraine is entering a critical phase in the crisis, where chances of so-called humanitarian intervention by Russia are increasingly high.”

Photographer: Brendan Hoffman/The Washington Post via Getty Images

Pro-Russian protesters occupy and ransack the military prosecutor's office in Donetsk, on May 4, 2014. The assault in the Donetsk region marked the biggest operation yet by the Ukrainian government to retake ground from as many as 1,000 armed gunmen who’ve seized buildings in more than 10 towns and taken several dozen captives. Close

Pro-Russian protesters occupy and ransack the military prosecutor's office in Donetsk,... Read More

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Photographer: Brendan Hoffman/The Washington Post via Getty Images

Pro-Russian protesters occupy and ransack the military prosecutor's office in Donetsk, on May 4, 2014. The assault in the Donetsk region marked the biggest operation yet by the Ukrainian government to retake ground from as many as 1,000 armed gunmen who’ve seized buildings in more than 10 towns and taken several dozen captives.

Honest, Transparent

Ukraine remains determined to hold “honest and transparent elections,” acting President Oleksandr Turchynov told Merkel in a phone call today, according to a statement published on the Ukrainian parliament’s website. Only voters in Crimea, seized by Russia in March, will probably face “real difficulties” during the ballot, Turchynov said.

With Ukraine on an offensive to uproot insurgents from its eastern industrial region, dozens were killed in Odessa on May 2 after Russia sympathizers seeking to escape clashes took refuge in a building later engulfed by fire.

Standoff in Ukraine

The drumbeat of Russian criticism grew after violence escalated, with Peskov telling reporters that Putin is “deeply outraged at the actions of the authorities in Kiev, actions that can only be described as criminal.”

Attitudes are also hardening in the U.S. and Europe. Russia has set out to create “a center of instability, indeed anarchy in parts” of Ukraine, Andrew Wood, a former U.K. ambassador to Moscow, said on BBC. The conflict is “due to Russian aggression and due to Russian-led protesters,” Prime Minister Arseniy Yatsenyuk said in an interview with BBC.

France and Japan agree that everything “must be done to ensure the conditions for a peaceful and democratic vote” on May 25, French President Francois Hollande said today in a joint statement with Japanese Prime Minister Shinzo Abe.

Photographer: T.J. Kirkpatrick/Getty Images

Ukraine Prime Minister Arseniy Yatsenyuk. The conflict is “due to Russian aggression and due to Russian-led protesters.” Prime Minister Arseniy Yatsenyuk said. Close

Ukraine Prime Minister Arseniy Yatsenyuk. The conflict is “due to Russian aggression... Read More

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Photographer: T.J. Kirkpatrick/Getty Images

Ukraine Prime Minister Arseniy Yatsenyuk. The conflict is “due to Russian aggression and due to Russian-led protesters.” Prime Minister Arseniy Yatsenyuk said.

Putin’s Sabotage

“Putin is trying everything he can do to disrupt the elections,” U.S. Representative Eliot Engel of New York, the top Democrat on the House Foreign Affairs Committee, said on CNN’s “State of the Union” program. “Putin has to understand that if he continues this nonsense, sanctions will bring his economy to its knees. His economy right now is floundering.”

Punitive measures imposed on Russia 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 Russian industries, including banking and energy.

Stocks, Currencies

Measures now in place fueled capital outflows as well as losses in Russia’s stock market and currency, according to the U.S. The benchmark Micex Index (INDEXCF) has dropped 14 percent this year, compared with a 0.2 percent decline in the MSCI Emerging Markets Index. Ukraine’s hryvnia is the world’s worst-performing currency this year, having weakened 29 percent against the euro.

The ruble appreciated 0.2 percent to 35.8085 per dollar at 5:28 p.m. in Moscow, extending last week’s 0.4 percent gain against the U.S. currency. The ruble’s retreat of more than 8 percent this year is the second-worst among 24 developing-country peers monitored by Bloomberg, after Argentina’s peso.

At a joint news conference in Washington, U.S. President Barack Obama andMerkel said on May 2 that Russia must pull back support for the separatists so Ukraine’s election can proceed.

U.S. Secretary of State John Kerry said the next day that he spoke to Russian Foreign Minister Sergei Lavrov by phone to tell him Russia must stop supporting separatists. In a website statement following the conversation, Lavrov said he told Kerry of a “fratricidal conflict” brewing and urged the U.S. to pressure Ukraine to stop its offensive.

’Destabilization Strategy’

“The elections will go ahead regardless,” Dmitri Trenin, director of the Carnegie Moscow Center, said by e-mail. “The outcome will be recognized by the U.S., EU and much of the rest if the world; Russia will refuse to recognize, pointing to the civil war-like conditions in the country. The West will call this refusal part of Russia’s destabilization strategy.”

The assault in the Donetsk region marked the biggest operation yet by the Ukrainian government to retake ground from as many as 1,000 armed gunmen who’ve seized buildings in more than 10 towns and taken several dozen captives. Fighting in Kramatorsk, in the Donetsk region’s north, left seven people dead, the website Kramatorsk.info said.

Unrest in Odessa, where Interfax said two people were injured yesterday, is taking place about 160 kilometers (100 miles) from the EU’s southeastern frontier in Romania. It’s also Ukraine’s most important conduit to the Black Sea after Russia took control of Crimea last month.

“The persistence of unrest and violence serves Russia’s aims well,” Otilia Dhand, an analyst at Teneo Intelligence in London, said by e-mail. “Moscow’s ultimate aim remains to push for the federalization of Ukraine and to secure greater leverage over the country’s future institutional and governing arrangements.”

Ukraine’s Resolve

Ukraine has the resolve to proceed with the ballot, and only a Russian invasion, a declared state of emergency or the spread of unrest to half the country would potentially pose a sufficient threat to scrap the vote, according to Volodymyr Fesenko, the head of Penta Political Analysis Center in Kiev. The scenarios are unlikely, with the election set to generate high turnout, he said.

“Russia will not recognize any result of this election, whether there’s unrest in Ukraine or not,” Fesenko said in a phone interview yesterday. “If that’s the case, why should we act with caution?”

To contact the reporters on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net; Sara Khojoyan in Yerevan at skhojoyan@bloomberg.net; Paul Abelsky in Prague at pabelsky@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Will Kennedy at wkennedy3@bloomberg.net James M. Gomez

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