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Ukraine Strives to Fix Crisis as Ambush Shows War Closer

May 14 (Bloomberg) -- Russian Foreign Minister Sergei Lavrov discusses the conflict in Ukraine with Bloomberg's Ryan Chilcote at the Foreign Ministry building in central Moscow.(Source: Bloomberg)

Ukraine urged Russia to condemn separatists in its eastern regions after seven government troops died in an ambush in a signal that the ex-Soviet republic may be sliding closer to outright civil war.

After weeks of skirmishes between government troops and rebels in Ukraine’s eastern Luhansk and Donetsk regions, more than 30 attackers struck a convoy yesterday near the city of Kramatorsk, killing six paratroopers. One of the eight who were wounded also died on the way to the hospital, Interfax reported. Acting Defense Minister Mykhaylo Koval said Ukraine’s east was embroiled in an “undeclared war with Russia.”

The ambush was the rebels’ deadliest attack against Ukraine’s military since they began a campaign to secede after Russia annexed Crimea in March. It followed a pact by activists in Luhansk and Donetsk to join forces and signaled the conflict is intensifying, said Dmitry Orlov, director general of the Agency for Political and Economic Communications in Moscow.

More on the Crisis in Ukraine:

“The violence in Ukraine is building into regular warfare between militia and the Ukrainian armed forces, and that means the threat of civil war is growing,” Orlov said by phone today. “Even so, we can’t yet say that this threat is close to becoming reality. It’s just a small part of Ukraine’s population that supports these hostilities.”

Photographer: John Moore/Getty Images

Ukranian military soldiers stop cars at a highway checkpoint near Slovansky, Ukraine on May 13, 2014. Close

Ukranian military soldiers stop cars at a highway checkpoint near Slovansky, Ukraine on May 13, 2014.

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Photographer: John Moore/Getty Images

Ukranian military soldiers stop cars at a highway checkpoint near Slovansky, Ukraine on May 13, 2014.

Russia ‘Engaged’

The North Atlantic Treaty Organization says Russian President Vladimir Putin is supporting the separatists with special forces and intelligence agents. It says his government has also failed to make good on a pledge to move about 40,000 troops back from Russia’s frontier with Ukraine, a country of 45 million people sharing borders with European Union and NATO member states Poland, Slovakia, Hungary and Romania.

Ukrainian Prime Minister Arseniy Yatsenyuk urged Russia to condemn the insurgent groups and do all it “can to stabilize the situation.” The crisis has fueled the worst standoff between Russia and its Cold War foes since the fall of the Iron Curtain, with the U.S. and EU slapping sanctions on companies and people close to President Vladimir Putin.

A Snapshot of Ukraine's Past and Future

Russia is engaged “in supporting Russian-led protesters and terrorists,” Yatsenyuk said in Brussels yesterday.

Economic Danger

The escalation ended a five-day rally in Russian stocks. The Micex Index (INDEXCF) slid 0.1 percent to 1,383.66 at 2:26 p.m. in Moscow. The ruble strengthened 0.4 percent to 34.6881 per dollar, according to data compiled by Bloomberg. Ukraine’s hryvnia was 0.8 percent weaker to the dollar, bringing its loss to 31 percent since the start of the year.

The conflict could kill growth in the region, the European Bank for Reconstruction and Development said today, slashing its growth forecast for the 30 economies from Russia to Poland to an average 1.3 percent this year, compared with a January prediction of 2.8 percent.

With the prospect of increased sanctions, “Russia would slip into recession and average growth in the region would grind to a halt in 2014-15,” the EBRD said in a statement at its annual shareholders’ meeting in Warsaw. It saw Ukraine’s economy shrinking 7 percent this year.

Europe is trying to increase diplomatic efforts, with German Foreign Minister Frank-Walter Steinmeier visiting Kiev and Odessa yesterday in a bid to broker talks between the central government and pro-Russian separatists.

Ukrainian Unity

“The EU is committed to Ukraine’s unity, sovereignty, independence and territorial integrity,” EU Enlargement Commissioner Stefan Fule said today at the EBRD meeting.

Yatsenyuk and acting President Oleksandr Turchynov also prepared to host a meeting today of lawmakers, regional state administration heads, religious leaders, and former presidents to find a way out of the crisis, Ukraine’s government said in a statement on its website yesterday.

Representatives of the Organization for Security and Cooperation in Europe will also attend. It’s unclear whether any separatists will be present, as the government said it won’t talk with gunmen and “terrorists.”

Russia will face new sanctions if Ukraine’s scheduled presidential election on May 25 is disrupted, French President Francois Hollande said yesterday in Tbilisi, Georgia, which fought a war with Russia over a breakaway region in 2008.

Leaders from the Group of Seven rich nations’ club will take the decision on deeper sanctions at their June 4-5 summit in Brussels, according to a French official, who asked not to be named because the deliberations are private.

Bond Sale

EU foreign ministers this week froze the assets of companies for the first time in the conflict, including oil and natural-gas producer Chernomorneftegaz, after they were expropriated during Crimea’s annexation. They added 13 people to a list of individuals facing asset freezes and travel bans for destabilizing Ukraine and threatened more measures, along with the U.S., to target entire Russian industries.

In Kiev, Ukrainian Finance Minister Oleksandr Shlapak said the government will sell $1 billion of U.S.-backed bonds at a yield of as much as 2.9 percent “in the near future” to help shore up the government’s coffers.

“I’m sure we’ll get the U.S.-backed money before the election,” Shlapak told Bloomberg in an interview.

‘Deep Crisis’

The EU will soon give Ukraine a first 600 million euros ($823 million) of a 1.6 billion euro aid package, European Commission President Jose Manuel Barroso said yesterday.

The aid pledges followed an agreement by the self-styled Donetsk People’s Republic and neighboring Luhansk to unite yesterday, a day after they declared themselves sovereign states. Donetsk said 90 percent of voters backed splitting from Ukraine in a May 11 referendum that was rejected by the U.S. and EU as illegitimate and marred by irregularities. Luhansk reported a similar result.

Russia’s Foreign Ministry said yesterday that a “reluctance of the Kiev authorities to engage in real dialogue with the representatives of the regions” was an obstacle to de-escalation and said the referendum results showed the country was in “deep crisis.”

Ukraine’s presidential election can’t be considered fully legitimate because of the government’s military operation Interfax reported, citing Russian State Duma Speaker Sergei Naryshkin. He said not holding election would be even worse.

‘Undeclared War’

German Chancellor Angela Merkel said she was “not interested” in the results of the referendums, which echo events that preceded Russia’s annexation of the Black Sea peninsula Crimea from Ukraine in March. The rebels have seized administration buildings and television towers in at least 10 cities and towns in the country’s east.

“In our eastern regions we have an undeclared war,” Koval told reporters in Kiev yesterday. “Our neighboring country unleashed the war, sending special forces and saboteurs into our territory.”

A majority of Ukrainians, or 56 percent, believe their country is at war with Russia, according to a poll by the Kiev-based Razumkov Center. About 53 percent want to join the European Union -- ousted President Viktor Yanukovych’s refusal to sign an EU association agreement triggered the crisis -- whereas two-thirds see Russia as “brotherly” and “friendly,” according to the April 25-29 poll of 2,012 people.

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Daria Marchak in Kiev at dmarchak@bloomberg.net; Anatoly Medetsky in Moscow at amedetsky@bloomberg.net

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

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