Ukraine Rebels Defy Truce Extension as EU Mulls Sanctions

Separatist rebels in eastern Ukraine continued to violate a truce extended today by the country’s government after the European Union gave Russia three days to stop the insurgency or face deeper sanctions.

EU leaders in Brussels demanded yesterday that the separatists, whom Ukraine and its allies say are backed by Russian President Vladimir Putin’s government, release hostages and start talks to implement a peace plan drawn up by Ukrainian President Petro Poroshenko by June 30. While rebel leaders agreed to the extension yesterday, according to news service Interfax, the Defense Ministry in Kiev said they continued to fire on Ukrainian government positions overnight.

“Despite peace initiatives by Ukraine’s leadership and a unilateral cease-fire, the situation in the Eastern regions continues to escalate,” the ministry said in a statement. “Insurgents are ignoring the peace plan to ease the situation in Ukraine’s east and keep attacking troops.”

More on the Crisis in Ukraine:

The EU leaders said that failure to meet their demands will result in “further significant restrictive measures” against Russia, according to a statement issued yesterday.

“If no visible progress is made on these points, then we are prepared to take further decisions, including drastic measures,” German Chancellor Angela Merkel said after the meeting. “We expect progress to come really in the hours ahead.”

U.S. Sanctions

The U.S. also blames Putin for supporting rebels and stoking violence the United Nations says has killed more than 400 people in the country of more than 40 million. The U.S. is preparing sanctions against Russia on technology aimed at exploiting and producing oil and gas products, a major part of that country’s economy, according to three people briefed on the plans.

White House press secretary Josh Earnest said the conditions “are very specific steps that the Russians can take by Monday” or face more economic costs.

While the separatists are intent on controlling the territory they’ve seized, the U.S. was pushing Ukraine into conflict with Russia, Russian Foreign Minister Sergei Lavrov said, adding that Putin seemed to be trying to ease tensions and said the government in Kiev must consult with the regions on devolving power.

Free-Trade Agreement

A Snapshot of Ukraine's Past and Future

“There are our partners from overseas, our American colleagues who, based on plentiful evidence, still prefer to push the Ukrainian authorities along the confrontational road,” Lavrov said on state-run television today.

Poroshenko also signed a free-trade pact yesterday with the 28-member EU to bolster solidarity from richer nations to Ukraine’s west. He said the agreement showed Ukraine’s “sovereign choice in favor of future membership of the EU.”

“We’re just looking to modernize our country,” Poroshenko said in an interview in French daily Le Figaro published today. “We introduce freedom, democracy and rule of law, European values, and we’re being attacked because of it.”

The rejection of the accord by the man Poroshenko replaced, Viktor Yanukovych, triggered deadly protests in Kiev last November that ousted the pro-Russian administration. Russia responded by annexing Crimea from Ukraine and has voiced support for Russian speakers in Ukraine’s southeast, who it says are under attack by their own government.

EU Market

About 67 percent of Ukrainians would vote to join the EU in a referendum, according to a June 6-11 Razumkov Center poll of 2,012 voters, versus 20 percent who wouldn’t.

While the deal doesn’t offer the membership, it gives Ukrainian companies better access to the world’s biggest trading bloc and will boost exports by 1 billion euros ($1.4 billion) a year, according to an EU estimate. In exchange, Ukraine pledged to use EU funds to meet product, safety and consumer standards, bolster human rights and fight graft.

Putin, who is trying to establish a Eurasian trading bloc made up of former Soviet states to rival the EU, has said the agreement will damage Russia’s economy. His government has said those who sign agreements with the EU may face repercussions.

Still, the economic deal has been overshadowed by fighting on the ground. While rebel representatives agreed to exchange captives, release international monitors and resume talks, they refused to give up border posts, former Ukrainian President Leonid Kuchma, present at peace talks yesterday, said in Kiev.

Prisoner Exchange

“Should conditions of the cease-fire not be adhered to, Ukraine has the right to end the cease-fire prematurely in areas where it is not adhered to,” Poroshenko and other government officials said in a joint statement.

The EU has imposed asset freezes and travel bans on 61 people connected with unrest in Ukraine and Russia’s seizure of Crimea in March. It has stopped short of broader curbs on investment and trade that might damage the European economy as it shakes off the effects of the debt crisis.

“The onus is now on Russia,” U.K. Prime Minister David Cameron said in Brussels. “If we don’t see concrete progress, we will remain willing to impose further sanctions on Russia.”

Russia’s economy can also withstand sectoral sanctions, although a worst-case scenario would result in an economic contraction, higher inflation, and declining incomes and government reserves, Russian Economy Minister Alexei Ulyukayev said on state-run TV today.

Displaced People

The UN estimates that about 54,000 people have fled to other places inside Ukraine, while 110,000 displaced Ukrainians have arrived in Russia this year.

Rebel activity “decreased significantly” overnight, military spokesman Oleksiy Dmytrashkovskyi said by phone today, while militants fired on three government positions, including with mortars. More than 20 Ukrainian soldiers died in rebel attacks since the cease-fire began, Interior Minister Arsen Avakov said yesterday.

Russia’s failure to comply with the EU deadline could lead to additional asset freezes and travel bans after June 30. A move toward stage three sanctions could come as early as mid-July, when the leaders are scheduled to meet again.

EU sanctions require a consensus of the bloc’s 28 governments, making it possible for countries such as Austria, Slovakia or Italy to stand in the way. Austria deepened its economic ties with Russia this week by signing an accord with OAO Gazprom (OGZD) for direct pipeline access to Russian gas.

“The important thing is that for the very first time in history we -- the EU and Ukraine -- agreed on a common stance vis-a-vis Russia,” Polish Prime Minister Donald Tusk told reporters in Brussels yesterday.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Volodymyr Verbyany in Kiev at vverbyany1@bloomberg.net

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

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