April 10 (Bloomberg) -- President Vladimir Putin told his government to develop plans to replace imports from Ukraine and said Russia can’t subsidize its neighbor permanently, increasing economic pressure as the government in Kiev battles separatists.
Russia “continues to provide economic support and subsidize Ukraine’s economy with hundreds of millions and billions of dollars,” Putin told a cabinet meeting outside Moscow yesterday. “This situation, of course, can’t go on forever.”
Putin urged talks before possibly requiring Ukraine to make advance payments for natural gas, and Prime Minister Dmitry Medvedev said the country owes Russia $16.6 billion in energy debts. Ukraine’s government, which is trying to accelerate approval for an international bailout, said yesterday it may use force to remove pro-Russian activists from official buildings in the east.
Ukraine’s pro-European cabinet accuses Russia of stoking unrest in the regions near the nations’ border in a bid to destabilize next month’s presidential election. That assessment was echoed by U.S. Assistant Secretary of State Victoria Nuland, who said the “evidence is overwhelming” that Russian intelligence agencies planned and executed the takeovers of government buildings in eastern Ukraine.
“I don’t think that we have any doubt that the preponderance of evidence indicates direct Russian involvement,” she told the U.S. Helsinki Commission yesterday.
The Ukrainian government also says Russian bans on goods such as dairy products are politically motivated. The U.S. is providing legal advisers to help Ukraine file a complaint against Russia with the World Trade Organization, Nuland said in Washington.
The U.S. also is working with Ukraine and the European Union in an effort to limit Russia’s ability to use the threat of a natural-gas cutoff, Nuland said.
“The most likely source of quick gas for Ukraine in the event of a shutoff comes in reverse flows from Slovakia, from Hungary, from Poland,” she said. “This requires some upgrading of infrastructure, it requires some investment, it requires some political decisions.”
Finance chiefs from the Group of Seven countries will discuss the crisis in Ukraine at talks in Washington today, a G-7 official said. Along with financial aid for Ukraine, the U.S. and its economic allies have been weighing tougher sanctions on Russian companies and industries if Putin’s government moves militarily against Ukraine.
The deterrent impact of the sanctions threat depends on whether Putin believes the Europeans will take such actions, said former U.S. diplomat Nicholas Burns, who was under secretary of state for political affairs from 2005 to 2008.
“If the Europeans would threaten with as loud a voice what the White House is saying, that could knock Putin back a little bit,” Burns, now a professor at the John F. Kennedy School of Government at Harvard University in Cambridge, Massachusetts, said in a phone interview. “It could cause him to reconsider what he’s doing because he needs integration, he needs capital investment, he needs trade to fuel the Russian economy. But you’re not seeing that united Western response.”
The yield on Ukraine’s 2023 Eurobonds rose six basis points to 9.52 percent by 8:44 p.m. in Kiev yesterday, data compiled by Bloomberg showed. The hryvnia, which has lost 32 percent against the dollar in 2014, the world’s worst performance among currencies Bloomberg tracks, closed 3.1 percent weaker at 12.15.
Russia’s Micex Index ended 0.3 percent lower, extending this year’s decline to 10.3 percent. The ruble lost 0.1 percent to 35.70 per dollar, leaving it 7.8 percent weaker in 2014.
U.S. Secretary of State John Kerry spoke twice yesterday with Russian Foreign Minister Sergei Lavrov about Ukraine, including plans to hold a four-way meeting next week that also includes diplomats from the EU and Ukraine, according to spokesmen in both nations.
The talks are intended to cover de-escalation, demobilization, and support for elections and constitutional reform. Russia wants more clarification on Ukraine’s goals for proposed talks, Lavrov told reporters near Moscow.
Nuland, whose responsibilities encompass Europe and Eurasia, said, “I have to say that we don’t have high expectations for these talks, but we do believe that it is very important to keep that diplomatic door open.”
Putin ordered Russia’s Industry Ministry to consider finding substitutes for Ukrainian imports days after Ukraine complained about a Russian ban on exports from six dairy companies. Russia temporarily froze shipments from Ukraine last year as its neighbor sought to sign an EU trade accord and has raised the price it charges for gas by 80 percent.
Ukrainian Finance Minister Oleksandr Shlapak said the government is trying to speed up International Monetary Fund approval for a loan that could unlock $27 billion in financing, Interfax reported. The first portion of the IMF loan will help the hryvnia to strengthen, central bank Governor Stepan Kubiv said yesterday.
Ukrainian officials are struggling to stem unrest in the eastern region of Luhansk and Donetsk, where pro-Russian separatists continued to occupy official buildings. Ukraine will find a way to solve the crisis through an “anti-terrorist operation,” according to Interior Minister Arsen Avakov, who didn’t rule out force.
The U.S., fearing that Putin might see a pretext for intervening, continues to urge the interim government in Kiev to refrain from trying to end the protests forcibly, said two U.S. officials monitoring the situation who asked not to be identified discussing diplomatic communications.
Yesterday, Putin backed calls by the Russian Foreign Ministry to overhaul Ukraine’s constitution by adopting a federal system of governance aimed at easing tensions in the country’s east. Ukraine refuses, saying the move would be a precursor to the nation’s breakup.
The U.S. and its allies say they’re concerned that Putin may be planning further incursions into eastern Ukraine after absorbing Crimea. Putin has as many as 40,000 soldiers stationed along the frontier, according to the U.S. and NATO.
The U.S. and the EU have imposed sanctions on Russia over Ukraine, hitting lists of individuals with asset freezes and visa bans that have soured the investment climate.
Russia suffered capital outflow of $51 billion from January to March, the biggest quarterly drop since the end of 2008 after the collapse of Lehman Brothers Holdings Inc. triggered the global economic crisis.