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EU May Target Putin Spy Chiefs as Ukraine Heads for Vote

Russian Federal Security Service (FSB) Director Alexander Bortnikov. Photographer: Sasha Mordovets/Getty Images
Russian Federal Security Service (FSB) Director Alexander Bortnikov. Photographer: Sasha Mordovets/Getty Images

July 25 (Bloomberg) -- The European Union is preparing to sanction Russia’s most senior spies and security officials as it seeks to step up its response to the conflict in Ukraine, where the premier quit after the ruling coalition broke apart.

Alexander Bortnikov, director of the Federal Security Service which replaced the Soviet-era KGB, and Mikhail Fradkov, the head of the Foreign Intelligence Service, are on the provisional list of sanctioned Russian officials, according to a draft document obtained by Bloomberg News. In Kiev, the government is scheduled to hold an extraordinary meeting at noon today after Prime Minister Arseniy Yatsenyuk resigned. President Petro Poroshenko called for a confidence vote and said that he expects the cabinet to carry on with its work.

Yatsenyuk’s government, which took charge of Ukraine in February, secured a $17 billion loan from the International Monetary Fund and has battled a pro-Russian insurgency in the east of the country, which it says is supported by the authorities in Moscow. With the U.S. pushing Europe to toughen its stance toward Russia a week after a Malaysian passenger jet was shot down over rebel-held territory in Ukraine, the EU moved to expand sanctions and to penalize some officials who served alongside President Vladimir Putin in the Cold War.

“Russia is hardly likely to appreciate the prospect of early elections, which will cement the ongoing shift of opinion in Ukraine firmly against Russia,” Timothy Ash, chief emerging-markets economist at Standard Bank Plc in London, said by e-mail. “On the ground in Donbas, this is likely to intensify the battle, as both sides will be eager to cement their positions before these elections.”

Russian Artillery

With the Ukrainian government trying to choke the insurrection in the country’s easternmost regions, the U.S. said it had evidence of artillery being fired from within Russia to attack Ukrainian military positions. Speaking at a daily briefing in Washington, U.S. State Department spokeswoman Marie Harf said the U.S. has also learned that Russia plans to “deliver heavier and more powerful multiple rocket launchers to the separatist forces.”

U.S. President Barack Obama and Netherlands Prime Minister Mark Rutte, in a phone conversation last night, “agreed that all evidence indicates Russia is still arming and supplying separatists” who continue are battling Ukrainian armed forces, the White House said in a statement.

More Sanctions

The two leaders also agreed that as a result, “the international community will need to enact additional sanctions,” the statement said.

U.S. officials have said the Malaysian plane, on which the majority of passengers were Dutch, was hit by a missile probably fired from a Russian-supplied launcher. Putin has responded that his opponents are using the crash for “selfish political gains,” and officials in Moscow have suggested that the plane was hit by Ukrainian government forces.

The U.S. and Canada, as part of a toughening stance, will oppose World Bank projects in Russia, adding economic pressure on the country over its actions in Ukraine.

The U.S. will vote against Russia-related loans and investments that come before the board, Treasury Department spokeswoman Holly Shulman said. Melissa Lantsman, a spokeswoman for Canadian Finance Minister Joe Oliver, said her country also opposes such projects. European governments are discussing doing the same, a European official said, asking not to be named because the discussions are confidential.

Micex Index

The planned EU sanctions weren’t as far-reaching as some investors had expected. The Micex Index added 0.2 percent to 1,408.80 by the close in Moscow, having fallen as much as 0.9 percent. Ukraine’s dollar bonds slipped.

The updated list is due to be published in the EU’s Official Journal today in the “late afternoon,” the bloc said in a statement in Brussels after national-government representatives agreed to add further people and entities. In its statement, the EU didn’t disclose any names or the number of new people and entities targeted.

The EU measures would touch close KGB associates of Putin, a former colonel in the intelligence service who served in East Germany. Like 61-year-old Putin, Bortnikov, 62, joined the KGB in 1975. The list also includes the head of the Security Council, Nikolai Patrushev, and Kremlin-backed Chechen leader Ramzan Kadyrov.

The new sanctions list, which was due to be expanded even before the downing of the Malaysian Air jet killed 298 passengers and crew, targets companies and entities linked to the pro-Russian insurrection and the annexed Crimea peninsula. The list of 15 individuals and 18 entities is separate from proposals circulated yesterday by the European Commission to put further pressure on Putin’s government.

Black Boxes

Data from the downed Malaysian jet’s black boxes has been successfully downloaded, with the examination of bodies also under way as crash experts seek evidence of a missile strike.

The U.K. Air Accidents Investigation Branch gained access to the Boeing Co. 777’s flight-data readings yesterday after yesterday retrieving cockpit-voice recordings, according to Dutch authorities who are leading the probe in recognition of the fact that almost 200 victims were from the Netherlands.

Specialists from the Dutch National Forensic Investigation Team are working in Kharkiv in government-controlled Ukraine after some of the 298 dead were moved there by train, with bodies being flown on to the Netherlands.

Legislative Failure

As Ukraine’s allies sought to ramp up pressure on Russia, Yatsenyuk told the parliament in Kiev yesterday that he’s stepping down after losing his partners’ backing and failing to pass legislation. Former world boxing champion Vitali Klitschko’s UDAR and Svoboda, a nationalist group, said they’d leave the coalition and seek a snap parliamentary ballot, according to statements yesterday on their websites.

The government expected lawmakers to approve changes to the 2014 budget, which envisages social-spending cuts and army spending increases, needed to qualify for the IMF’s next tranche. The 450-seat legislature rejected putting the amendments on the agenda.

Volodymyr Hroisman was appointed acting premier, according to Interior Minister Arsen Avakov, although no official announcement has yet been made.

“The coalition has fallen apart, laws haven’t been voted on, soldiers can’t be paid, there’s no money to buy rifles, there’s no possibility to store up gas,” Yatsenyuk told lawmakers. “What options do we have now?”

Approval Needed

Ukraine’s parliament must approve Yatsenyuk’s resignation, according to the constitution. The breakup of the coalition “was probably agreed on by political parties seeking elections and the president,” Yuriy Yakymenko, the head of political research at Kiev’s Razumkov Center, a non-governmental policy group, said by phone.

The new EU blacklist covers nine separatist organizations and militias in eastern Ukraine and nine state-owned Crimean companies that were seized by Russia after it annexed the Black Sea peninsula in March.

Under the plan discussed yesterday in Brussels, the 28-member bloc is also considering a ban on European purchases of bonds or shares sold by Russia’s state-owned banks among the options for stepped-up sanctions on the Kremlin, according to a proposal presented to member states.

Discussions about these possible measures will resume today, the EU said. Previously, the bloc had blacklisted 72 people and two state-owned Crimean companies. People on the list face asset freezes and travel bans; companies and organizations face asset freezes, barring them from doing business in the EU.

The EU plans to add further names to the list, widening its net to catch people and companies with ties to “Russian decision-makers” responsible for the March takeover of Crimea and infiltration of eastern Ukraine.

Those additional names -- dubbed the “cronies list” by EU officials because it would take aim at confidants of Putin -- will be announced in the coming days.

To contact the reporters on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net; Volodymyr Verbyany in Kiev at vverbyany1@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Paul Abelsky

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