Ukrainian Jets Circle Donetsk as Rebels Regroup After Rout

May 28 (Bloomberg) -- It may be internationally recognized as part of Ukraine but Crimea, post-annexation, is starting to feel very Russian. Bloomberg's Ryan Chilcote visited Crimea to find out what life was like for the region. (Source: Bloomberg)

Ukraine stepped up air patrols over Donetsk as a convoy of pro-Russian rebels moved through the city with an anti-aircraft gun in tow, threatening renewed violence after clashes left dozens dead.

Mayor Oleksandr Lukyanchenko urged residents of the central part of the city of 1 million people to stay indoors and away from their windows after shots were fired near the local headquarters of the State Security Service. The train of insurgents included two armored personnel carriers, the mayor’s spokesman, Maksym Rovinskyi, said by phone from Donetsk.

Troops killed “dozens” of separatists in an operation to reclaim the main airport in the self-proclaimed Donetsk People’s Republic, dealing the deadliest blow to the uprising to date, Interior Minister Arsen Avakov said yesterday. President-elect Petro Poroshenko has vowed to wipe out the rebels and re-establish order after winning office May 25. He must stabilize a shrinking economy while confronting insurgents who’ve captured swaths of the Donetsk and Luhansk regions.

More on the Crisis in Ukraine:

Russia’s goal was and is to keep Ukraine so instable that we accept everything that the Russians want,” Poroshenko said in an interview with German newspaper Bild that was published today. “I have no doubt that Putin can end the fighting with his direct influence.”

Gas Debt

As the violence continues, Ukrainian officials are locked in negotations over gas supplies and debt to avert a threatened shutoff from Russia, the world’s largest producer of the fuel. Russia has twice cut gas flows to Ukraine since Putin came to power in 2000, leading to shortages throughout Europe.

Under a proposal by the European Union, Ukraine’s state energy company, NAK Naftogaz Ukrainy, would pay Russia’s gas exporter OAO Gazprom $2 billion by May 30 and a further $500 million by June 7. That would partially cover Ukraine’s outstanding debt, which Gazprom Chief Executive Offficer Alexey Miller said today will reach $5.2 billion by June 7.

A Snapshot of Ukraine's Past and Future

Ukraine, which gets half of its gas from Russia, will give its answer by tonight, Energy Minister Yuri Prodan said after talks in Berlin. About 15 percent of Europe’s gas supply flows from Russia through Ukraine, which is counting on $17 billion from the International Monetary Fund to avoid bankruptcy. Gazprom raised the price it charges Ukraine by 81 percent after Kremlin-backed President Viktor Yanukovych fled the country.

Threats Exchanged

“It is very possible that a deal will be struck by the weekend but threats are still being exchanged against a tense political backdrop,” said Chris Weafer, a founder of Macro Advisory in Moscow. “A gas deal or not will provide the clearest signal of the hoped-for pragmatic relationship between Russia and Ukraine and the start of an improvement in Moscow’s relationship with the EU.”

EU leaders meeting in Brussels last night decided to put off further sanctions on Russia after Putin showed a willingness to work with Ukraine’s new leader and pulled back some troops from the Ukrainian border.

“The possibility of de-escalation is here, finally,” French President Francois Hollande told reporters after the summit ended. “But we still need this strict reminder.”

In their final statement, the leaders said the EU was working on “possible targeted measures” and agreed “to continue preparations” in case further steps are needed.

No, Thanks

President Barack Obama called Poroshenko yesterday to congratulate him on his electoral victory and offer “the full support of the United States as he seeks to unify and move his country forward,” the White House said in an e-mailed statement. The two leaders agreed to continue talking when Obama visits Europe next week, according to the statement.

The Foreign Ministry in Moscow said today that Russia is being asked to provide humanitarian aid to people in eastern Ukraine affected by the conflict. Russia is seeking Ukraine’s help in allowing supplies to be delivered across the border and expects “the fastest possible answer,” the ministry said in a statement posted on its website.

Ukraine said thanks, but no thanks.

“We will consider it, but Ukraine doesn’t have a shortage of anything,” Yevhen Perebyinis, a spokesman for Ukraine’s Foreign Ministry, said by phone. “Pro-Russian militias aren’t allowing us to deliver goods. People can’t get salaries and pensions. State institutions can’t work because of them.”

Smuggling, Abducting

Militias in Donetsk attacked an anti-aircraft missile unit with mortar shells and sniper fire at about 11:15 a.m. local time, the Defense Ministry said in a statement. No casualties were reported.

Ukraine is pushing full-speed ahead with its operation to rid the country of insurgents, First Deputy Prime Minister Vitaliy Yarema said yesterday. “We’ll continue this operation until there are no terrorists on Ukraine’s territory.”

Border guards stopped four trucks laden with ammunition from entering the country from Russia last night, Foreign Minister Andriy Deshchytsia said in an interview with Bloomberg TV in Kiev today.

Deshchytsia also said authorities have located the four foreign election monitors who went missing late on May 26. The observers, from the Organization for Security and Cooperation in Europe, where abducted by “Russian Cossacks” and are being held in the Luhansk region, Deshchytsia said, declining to elaborate because talks on freeing them were continuing.

Bond Rally

Ukrainian Eurobonds are set for the best monthly rally in four years. The yield on debt due April 2023 fell 23 basis points yesterday and strengthened again today, pushing the yield down to 8.76 percent at 3:30 p.m. in Kiev, the lowest level since April 4, data compiled by Bloomberg show. The hryvnia was little changed at 11.91 per dollar.

Poroshenko said two days ago that government forces won’t quit until separatists are completely defeated.

“They won’t last two or three months,” the president-elect said. “They’ll last a few hours.”

Putin, who has repeatedly denied aiding the insurgency, told Italian Prime Minister Matteo Renzi in a phone call yesterday that the military operation must stop.

Russia is reducing the number of soldiers stationed on its border with Ukraine to about 20,000 now from about 50,000, Interfax cited Ukraine’s border service as saying today. The Russian troops are leaving behind military infrastructure, suggesting they may return, according to Interfax.

Back in Donetsk, streets were virtually empty for a second day. Stores around the city were closed and stalls at the usually bustling Radio Rynok, a central market, were shuttered. Few drivers ventured out on Artema Street, the main avenue.

‘Better Organized’

Separatists abandoned a road block on the highway between Donetsk and Krasnoarmiysk to the northwest. Troops blocked all major roads heading north of Donetsk to the rebel stronghold of Slovyansk, where fighting continued today. The government will send a second battalion of the volunteer National Guard to join the operation in the east, Deputy Interior Minister Serhiy Yarovy said, according to Interfax.

Ukraine has the “resources to deal with a local insurgency, and its security services are getting better organized,” Arkady Moshes, head of the EU’s Eastern Neighborhood and Russia program at the Finnish Institute of International Affairs, said by phone. “The elections showed that voters are tired of ongoing violence, giving the new president a mandate to act in a forceful way and end this.”

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Daria Marchak in Kiev at dmarchak@bloomberg.net; Jake Rudnitsky in Donetsk, Ukraine at jrudnitsky@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; James M. Gomez at jagomez@bloomberg.net Brad Cook, Elizabeth Konstantinova

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