April 10 (Bloomberg) -- Russian President Vladimir Putin threatened to shut off gas deliveries through Ukraine unless European leaders took steps to stabilize the country as NATO accused Russia of stoking ethnic unrest in its eastern regions.
With about 40,000 combat-ready troops massing along the border with Ukraine, Russia is trying to subvert its neighbor’s government and force it to devolve power, North Atlantic Treaty Organization Secretary-General Anders Fogh Rasmussen said today in Prague. Rasmussen is using “Cold War-era rhetoric” in a bid to “close the ranks” between member countries in the face of a “sham external threat,” the Russian Foreign Ministry said on its website.
“Russia is stirring up ethnic tensions in eastern Ukraine,” Rasmussen said. “If Russia is serious about a dialogue, the first step should be to pull back its troops.”
Putin’s threat to shut off gas supplies to Europe through Ukraine exacerbates the worst standoff between Russia and the U.S. and its European allies since the fall of the Iron Curtain. Ukrainian Prime Minister Arseniy Yatsenyuk’s pro-European cabinet has accused Russia of instigating tension in the regions near the Russian border in the run-up to next month’s presidential election.
Acting President Oleksandr Turchynov offered to exempt from criminal prosecution those activists who disarm and free administrative buildings seized in Ukraine’s eastern cities. Chanting “Russia! Russia!” the protesters dug in behind barricades in Donetsk as security forces threatened to reclaim the local government headquarters.
Yatsenyuk will pay a visit to eastern cities of Donetsk and Dnipropetrovsk tomorrow, his spokeswomam Olga Lappo said by phone.
Putin said Ukraine is heading toward default and that Russian gas export monopoly OAO Gazprom would halt shipments through the country if it continued to fall behind in payments, according to a letter he wrote to 18 heads of European states.
“During the past four years Russia has been subsidizing Ukraine’s economy by offering slashed natural gas prices worth $35.4 billion,” Putin said in the letter.
The U.S. condemns “Russia’s effort to use energy as a tool of coercion against Ukraine,” Jen Psaki, a State Department spokeswoman, said today in Washington.
Ukraine wants to reduce its gas dependency on Russia after an 80 percent price increase by Gazprom. Its unpaid debt raises the risk of disrupted flows to Europe, which gets about 15 percent of its supply through the country of 45 million people.
Ukraine’s economy, which has endured two contractions since 2008, is already facing a recession the government says will wipe out 3 percent of gross domestic product this year.
The hryvnia has lost 35 percent against the dollar in 2014, the world’s worst performance among currencies tracked by Bloomberg. It plunged 3 percent today to 12.51 per dollar. The yield on the government’s dollar debt due April 2023 fell 23 basis points to 9.29 percent, according to data compiled by Bloomberg.
Yatsenyuk’s government is trying to unlock $27 billion in financing for the next two years from the International Monetary Fund, a deal IMF Managing Director Christine Lagarde said could go to the Washington-based lender’s board for approval as early as the end of the month.
In Kiev, parliament approved two laws required to secure the aid. The first was a law aimed at improving transparency in state procurement, where, according to Yatsenyuk 40 percent of past funds were lost to corruption. The second bill will allow for authorities to raise utility tariffs that now ask households to pay less than a fifth of the energy’s actual cost.
Finance chiefs from the Group of Seven countries are discussing the crisis in Ukraine at talks in Washington today. The U.S. and its economic allies are weighing financial assistance for Ukraine and tougher sanctions against Russia if it intervenes militarily against its neighbor.
“Russia is putting substantial economic, military and political pressure on Ukraine, and we do not expect Russia to step back until its demands are met,” Vadim Khramov, a London-based analyst at Bank of America Corp., said in an e-mailed report. “We expect Ukraine to resist Russia’s latest demands but to eventually take steps to satisfy Russian demands as a solution to the crisis.”
The Foreign Ministry in Moscow recommended Russians not travel to countries that have extradition treaties with the United States because of the risk of detention or arrest. The U.S. legal system is “biased” against Russian citizens, the ministry said on its website.
Gazprom will switch Ukraine to prepayment on gas shipments and “in the event of further violation of the conditions of payment, will completely or partially cease gas deliveries,” Putin said in his letter.
“What about the European partners?” Putin wrote. “Instead of offering Ukraine real support, there is talk about a declaration of intent. There are only promises that are not backed up by any real actions.”
Yesterday, the Russian president backed calls by the Foreign Ministry to overhaul Ukraine’s constitution by adopting a federal system of governance it says may ease tensions in the country’s east. Ukraine refuses, saying the move would be a precursor to the nation’s breakup.
Echoing Rasmussen’s comments, U.S. Defense Secretary Chuck Hagel said today that Russian troops near Ukraine are “dangerous” and worsen, rather than ease, tensions.
“They have violated the territorial integrity of a sovereign nation, Hagel said in the Mongolian capital, Ulaanbaatar. ‘‘The uncertainty they continue to project with their provocative actions heightens tensions. It’s dangerous and it’s irresponsible. They must behave within international law and norms.”