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Ukraine Fighting Surges as Putin Hails Rebel Fightback

Aug. 29 (Bloomberg) -- Ukrainian insurgents made more gains near the Sea of Azov as Russia dismissed NATO allegations of its involvement and said a rebel offensive is protecting civilians from army shelling.

Ukraine said the separatists are receiving reinforcements from Russia as they battle government troops in the eastern Donetsk region and toward the port of Mariupol. Russian Foreign Minister Sergei Lavrov called satellite photos that NATO said show Russian troop movements fakes. President Vladimir Putin said the militants’ fightback in the five-month conflict will save lives in cities at risk of World War II-style siege.

“Ukraine isn’t ready to kneel in front of the aggressor,” Ukrainian military spokesman Andriy Lysenko said today in Kiev. “We’re ready to fight until the end.”

The U.S. and Europe are threatening Putin with more sanctions after the North Atlantic Treaty Organization reported a surge of Russian troops and advanced equipment into the war zone. Ukrainian Prime Minister Arseniy Yatsenyuk called today for parliament to debate NATO membership. His army is on the defensive after penning in the rebels in recent weeks. Almost 2,600 people have died in the conflict, the United Nations said.

The yield on Ukraine’s dollar-denominated notes due 2017 rose 47 basis points to 12.773 percent, a three-month high. After the close, the International Monetary Fund agreed to disburse $1.4 billion to Ukraine under a $17 billion program.

‘Lehman Moment’

The ruble sank 1 percent against the dollar, weakening for a fourth day after closing at a record-low yesterday. The Micex stock index plunged 1.6 percent, extending yesterday’s 1.7 percent tumble, the steepest since Aug. 6.

Russia’s equity markets may face a “Lehman moment” if the Ukraine crisis deteriorates further, JPMorgan Chase & Co.’s Moscow-based research head Alexander Kantarovich said in a note.

Ukraine’s Aidar battalion retreated from the outskirts of Luhansk, abandoning two villages in the face of a large enemy force, the Interfax news service reported, citing a statement by the battalion’s commander. Showing the level of concern at the separatists’ advance, Valeriy Baranov, governor of the Zaporizhzhya region west of Donetsk, said the authorities would build defenses and form a military unit of 550 people.

Putin, who’s repeatedly called for a cease-fire, said talks would “easily” resolve issues such as border security. He hailed the rebel counteroffensive, likening Ukrainian military tactics to those of Nazi Germany.

‘Military-Humanitarian Operation’

“Why do they call this a military-humanitarian operation?” Putin said at a youth camp at Lake Seliger in the Tver Region outside Moscow. “What’s the purpose of today’s actions? To push artillery and rocket launchers away from big cities so people aren’t killed.”

German Chancellor Angela Merkel’s chief spokesman, Steffen Seibert, said today that reports on the Ukraine situation on the ground “amount to a Russian military intervention.” Her foreign minister, Frank-Walter Steinmeier, said the Ukrainian conflict was demonstrating a “new dimension” and that hope talks between Putin and President Petro Poroshenko could diffuse the situation had been “dashed.”

Swedish Foreign Minister Carl Bildt said on Twitter that “this is the second Russian invasion of Ukraine within a year,” referring to Russia’s seizure and annexation of Crimea in March. French Foreign Minister Laurent Fabius told France 24 television that sanctions should be used to increase pressure, though “nobody wants a war” with Russia.

Costs, Consequences

President Barack Obama said Russia faces “more costs and consequences” because it “has deliberately and repeatedly violated the sovereignty and territorial integrity” of Ukraine. Obama ruled out “a military solution to this problem.” Russia has repeatedly denied involvement in the unrest.

Ukraine, which is reintroducing the military draft, is seeking U.S. support and special partner status, Mykhailo Koval, the deputy head of Ukraine’s National Defense and Security Council, told reporters.

NATO Secretary General Anders Fogh Rasmussen today reaffirmed a 2008 Bucharest summit pledge that “Ukraine will become a member of NATO” if it so wishes and provided it fulfills the necessary criteria.

“Despite Moscow’s hollow denials, it is now clear that Russian troops and equipment have illegally crossed the border into eastern and south-eastern Ukraine,” Rasmussen told reporters in Brussels. “Russian forces are engaged in direct military operations inside Ukraine.”

Video Games

Russia is masterminding the rebel counteroffensive, with more than 1,000 of its troops operating inside Ukraine to man sophisticated weaponry and advise the separatists, NATO said yesterday. The rebels may be planning to establish a land corridor to Crimea, Brigadier General Nico Tak told reporters.

Lavrov denounced NATO’s allegations.

“There was news that space imagery shows movements of Russian troops and the images turned out to be from computer games,” Lavrov told reporters today in Moscow.

European Union leaders will discuss the crisis and possible tougher Russian sanctions at a summit in Brussels tomorrow, Merkel said. Russia faces more penalties if the escalation of fighting continues, according to French President Francois Hollande. The EU summit may be attended by Poroshenko, who’s due meet European officials in Brussels earlier in the day.

To contact the reporters on this story: Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net; Volodymyr Verbyany in Kiev at vverbyany1@bloomberg.net; Angela Greiling Keane in Washington at agreilingkea@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; James M. Gomez at jagomez@bloomberg.net Leon Mangasarian, Andrew Langley

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