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Ukraine Moves on Rebels as Obama, Merkel See Sanctions

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May 2 (Bloomberg) -- Ukraine sent armored vehicles and artillery to retake Slovyansk, a separatist stronghold, as President Barack Obama and German Chancellor Angela Merkel set a May 25 trigger for possible economic sanctions against Russia.

Forces were dispatched to Slovyansk to drive out pro-Russian militants and free hostages, Interior Minister Arsen Avakov said. Rebels shot down two helicopters, killing two pilots, the Defense Ministry said. Acting Ukrainian President Oleksandr Turchynov said in a statement “many” rebels were killed, wounded or captured. In Odessa, dozens died after a trade-union building was set afire, the Interior Ministry said.

Obama and Merkel told a news conference at the White House today that Russia must pull back support for the separatists so Ukraine’s May 25 presidential election can go ahead unimpeded. If the vote can’t be held, “we will not have a choice but to move forward” with more sanctions, Obama said. Merkel called the election “crucial” and said she’s ready to support economic sanctions if needed. The United Nations Security Council held an emergency meeting at Russia’s request.

“We have a range of tools at our disposal” to hit various Russian industries with sanctions, Obama told reporters. “We are stepping up our planning.” If Russia doesn’t change course in Ukraine, “it will face increasing costs,” both economic and diplomatic, he said.

Markets React

“When we will reach a particular tipping point is very hard to say in advance,” Merkel said. “But all I can say is that the elections on May 25 are a decisive juncture for me and if there is further destabilization, things will get more and more difficult.”

Amid the escalating tension in Ukraine’s easternmost, largely Russian-speaking regions, the yield on Ukrainian government debt rose 25 basis points to a six-week high of 10.90 percent, data compiled by Bloomberg show. Russian bonds fell, with the yield on ruble-denominated government debt due February 2027 jumping 20 basis points to a seven-week high of 9.67 percent. The ruble slid 0.3 percent against the central bank’s target dollar-euro basket.

Penalties imposed by the U.S. and European Union have so far targeted officials, individuals and companies tied to Russian President Vladimir Putin’s inner circle. The next step would be action against sectors of the Russian economy, including banking and energy. Those penalties would have consequences mostly for European countries, which have more extensive economic ties with Russia than the U.S. does.

Military Moves

Today’s operation marked the broadest attempt by Ukrainian authorities to retake ground from as many as 1,000 armed gunmen who’ve seized buildings in more than 10 cities. Some have demanded a referendum on joining Russia.

“They threw everything they had at us,” Igor Strelkov, a pro-Russian militia commander in the Donetsk region, where Slovyansk is located, said on Russia’s state-owned Rossiya 24 television.

“We’re ready to hold talks with protesters or their representatives,” Avakov said on the government website as troops surrounded Slovyansk. “But terrorists and armed separatists will only get the inevitable payback.”

Interior Ministry troops took control of nine rebel checkpoints in Slovyansk, detaining four rebels, according to Avakov, who called the operation “effective.” While the city is blockaded, fighting hasn’t reached its center, Rossiya 24 reported.

‘Saboteur Groups’

Ukraine’s Defense Ministry said the use of advanced weapons showed the separatists were “professional saboteur groups” rather than peaceful protesters. In a statement, it called their tactics “characteristic of foreign military or mercenaries.”

Deadly violence also erupted in southern Ukraine. Avakov said on Ukrainian TV Channel 5 that 35 people died when the trade-union building in the port city of Odessa was set ablaze during clashes between pro-Ukrainian and pro-Russia forces. The ministry earlier said 31 people died and 50 were injured.

The Interfax news service reported four deaths after a rally in Odessa in favor of a united country was attacked by pro-Russian protesters. Ukrainian television stations said about 20 people were hurt.

Obama is seeking to coordinate a united U.S.-EU response to Russia’s actions in Ukraine. Merkel has a pivotal role. Germany is Europe’s largest economy and had $89 billion in trade with Russia in 2012. Putin has threatened to escalate economic warfare if further sanctions are imposed.

Geneva Accord

Russia’s Foreign Ministry said it was “outraged” by today’s fighting in the east. The Ukrainian move kills all hope of implementing an April peace accord reached in Geneva between Ukraine, Russia, the U.S. and the EU, said Dmitry Peskov, Putin’s spokesman.

During the UN Security Council meeting in New York, Russian Ambassador Vitaly Churkin repeated the Kremlin’s stance that the interim Ukrainian government in Kiev is illegitimate.

Ukrainian authorities are using “heavy military force against peaceful protesters in a criminal misadventure,” while Russia is making efforts to de-escalate and settle the crisis, Churkin said. He said the U.S. and its European allies should “stop toying with the destiny of the Ukrainian people.”

French Ambassador Gerard Araud likened Russia to a “pyromaniac firefighter” that has “unleashed the demon of nationalism and armed mobs in Ukraine.” Churkin is “a vodka-loving James Bond,” Araud said.

Ukraine says Russia is trying to destabilize the former Soviet republic to undermine the presidential election. Turchynov signed a decree yesterday to reinstate the military draft.

Putin says Russian speakers in eastern Ukraine are at risk after the ouster of his ally, President Viktor Yanukovych, in February. Russia, which used that reasoning as it annexed the Black Sea Crimean peninsula the next month, has 40,000 troops massed on its neighbor’s border, according to NATO.

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Jonathan Allen in Washington at jallen149@bloomberg.net; Patrick Donahue in Berlin at pdonahue1@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Steven Komarow at skomarow1@bloomberg.net Larry Liebert, Michael Shepard