Ukraine Fights Separatists in East, Approaches Russian Gas Deal

Ukraine stepped up fighting pro-Russian separatists in the east of the country as it moved closer to a deal with Russia that would keep gas flowing to Europe.

One Ukrainian soldier and several insurgents were wounded as government troops repelled an attack on the Donetsk Airport, Vladyslav Seleznyov, spokesman for Ukraine’s anti-terrorist operation, said by phone today. Russia urged the Vienna-based Organization for Security and Cooperation in Europe to step up presence of international monitors as fighting in the east has intensified, the Foreign Ministry in Moscow said on its website.

“Pro-Russian separatists attack Ukrainian forces check-points all the time in Slovyansk,” Seleznyov said. “They are trying to find their way out as they feel that the circle around them is tightening. They attacked Donetsk airport several times today. All attacks were repelled.”

The Ukraine conflict escalated after the toppling of a pro-Russian government by protesters in February, and President Vladimir Putin’s annexation of Crimea a month later. Leaders in Kiev and their U.S. and European Union allies accuse Putin of encouraging tumult in the eastern regions, while Russia says Ukraine’s army should stop targeting its own citizens.

Gas Talks

After talks brokered by the European Union in Berlin, Ukraine made yesterday its first payment in months to Russia’s OAO Gazprom (OGZD), transferring $786 million to pay for gas received in February and March. While debts and future payments remain in dispute, EU Energy Commissioner Guenther Oettinger welcomed the move as “building blocks for a package that, given the evident goodwill of all parties today, doesn’t seem out of reach.” Talks are due to continue on June 2 and Ukraine doesn’t rule out arbitration as a solution.

“Those talks will end either with a signing of an agreement or with filing for an arbitrage,” Ukrainian Prime Minister Arseniy Yatsenyuk said at a cabinet meeting in Kiev yesterday. Ukraine “will never accept” Gazprom’s “price of almost $500” per 1,000 cubic meters.

In eastern Ukraine, about 80 pro-Russian insurgents attacked a border guard base in the Dyakove village in the Luhansk region, wounding three servicemen, the border guard service said on its website today. A government forces’ Su-27 fighter jet helped repel the attack. Rebels probably used the night assault to distract attention while guns were being smuggled from Russia across other sections of the border, according to the statement. Two days earlier, the separatists downed a military helicopter, killing a general and 13 soldiers.

OSCE Teams

The OSCE lost contact with two teams of monitors in the Luhansk region in the past few days and still hasn’t heard from them, Iryna Gudyma, OSCE spokeswoman in Kiev, said by phone today.

Fighting in the east has taken its toll on civilians as well, a 47-year-old man was shot into his shoulder yesterday and a 53-year-old woman was wounded by an explosion, Donetsk police said on its website today. It warned people to avoid the area around the airport “as it is dangerous for their life.” Ukraine banned flights to Donetsk airport until June 6, according to the Infrastructure Ministry in Kiev.

Russia has withdrawn at least two-thirds of the tens of thousands of troops it massed near the Ukraine border, U.S. Colonel Steve Warren, a Pentagon spokesman, told reporters yesterday. He said remaining forces also “appear to be packing up.”

’National Catastrophe’

Russia still hasn’t taken the necessary steps to ease tensions, and should “use its influence” over the rebels, Deputy National Security Adviser Ben Rhodes said in Washington.

His comments mirrored a call by Russia’s Foreign Ministry for the U.S. and other countries to use their influence over the Kiev government to stop Ukraine from “sliding into a national catastrophe.”

Rhodes said President Barack Obama will meet with Ukrainian President-elect Petro Poroshenko during a trip to Europe next week. Poroshenko, who won elections on May 25 with 55 percent of the vote, has vowed rapid action to suppress the separatists.

“Ukraine’s most pressing problems include insurgency in the east, the dispute with Russia over gas payments, adhering to its International Monetary Fund program, and maintaining reserves while meeting external funding needs,” Fitch Ratings said yesterday. It estimated Ukraine’s economy would contract 5 percent this year.

Kiev Square

In Kiev today, protesters, who have set up camp on the capital’s main square, set on fire several tires to oppose efforts by the city authorities to remove the tents and barricades that were used by demonstrators to oust President Viktor Yanukovych in February after he broke off a European integration pact.

While there’s no indication the conflict will end as fast as Poroshenko has pledged, there were signs this week of infighting among the rebels.

A group of heavily armed gunmen seized control of the headquarters of the self-declared independent authority in Donetsk from another faction. Alexander Maltsev, a spokesman for separatist leader Denis Pushilin, said by phone that the move was “a cleanup of our ranks” intended to prevent a repeat of recent looting in the city.

Russian Reinforcements

The allegiances of the groups aren’t always clear, and Ukraine’s government has pointed to a growing number of Russians involved in the conflict, including some from the Caucasus. The U.S. has expressed concern that the separatists are receiving arms and reinforcements from Russia.

The gas talks in Berlin highlight one of the areas where the Russia-Ukraine dispute may have a wider impact. Ukraine carries about 15 percent of Europe’s annual demand through its Soviet-era pipelines.

Ukraine accuses Russia of using gas as a political weapon by ramping up prices, and says it may seek international arbitration.

Gazprom says Ukraine has run up $5.2 billion in debt and must pay $1.7 billion in advance for next month’s gas or risk a shutdown. That would tighten the economic squeeze on a country that’s facing a 7 percent contraction this year, according to the European Bank for Reconstruction and Development, and has sought a $17 billion IMF bailout.

Russian Energy Minister Alexander Novak said after yesterday’s talks that there’s “very little time left to reach an agreement.”

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Elena Mazneva in Moscow at emazneva@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net; Balazs Penz at bpenz@bloomberg.net Elizabeth Konstantinova, Peter Chapman

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