Obama Warns Putin of Cost to Russia for Annexing Ukraine

The U.S. and Ukraine pressed Russia to cancel or postpone a March 16 referendum that would allow it to annex Crimea, warning that Western powers will exact an economic toll if Russia doesn’t back off.

U.S. President Barack Obama called for Russian leader Vladimir Putin to at least agree not to follow through on a ballot result allowing Russia to absorb the Black Sea peninsula, saying unless he pulls back, the U.S. and its allies “will be forced to apply a cost to Russia’s violations of international law and its encroachments on Ukraine.”

“This is a global problem,” the head of Ukraine’s acting government, Arseniy Yatsenyuk told reporters as he met Obama in Washington. “If Russia goes further, this would totally and entirely undermine the global security.”

With the approach of the referendum in Crimea on reuniting with Russia, Obama and U.S. allies in Europe are ratcheting up the threat of sanctions if Putin doesn’t take steps to defuse the situation. It’s the worst confrontation between Russia and the West since the end of the Cold War.

Yatsenyuk, who will address the United Nations Security Council in New York today, said Ukraine will “never surrender” to Russia. He called on Putin to “tear down this wall,” a reference to Ronald Reagan’s message to Mikhail Gorbachev delivered in a 1987 speech just before the collapse of the Soviet Union.

Talks Possible

Yatsenyuk told reporters after his meeting with Obama that Putin’s refusal to pull back the troops who seized the Crimean peninsula after an uprising in Kiev toppled the Moscow-backed president, Viktor Yanukovych, would be a signal that the Russian leader wants to “revise the outcome of the Second World War” and destabilize the existing order in Europe.

Obama also signaled the U.S. may not oppose negotiations with the government in Kiev on “different arrangements” for the autonomous region of Crimea in the future. U.S. Secretary of State John Kerry will meet in London tomorrow with his Russian counterpart, Sergei Lavrov, to seek a way forward.

Sanctions could “get ugly fast if the wrong choices are made,” Kerry said at a congressional hearing in Washington yesterday. “And it can get ugly in multiple directions.”

The U.S. and other members of the Group of Seven industrialized countries said in a statement yesterday that a Russian annexation of Crimea “could have grave implications.”

While the U.S. has moved some military assets into the region, the main pressure point on Russia is economic.

European Sanctions

The U.S. has already imposed a visa ban on some individuals, whom it hasn’t identified, and Obama has authorized the imposition of financial sanctions.

European Union foreign ministers are ready to move to a second stage of sanction proposals on March 17 and to a third stage if Russia doesn’t take steps to defuse the crisis, German Chancellor Angela Merkel said in Germany’s parliament today. She said 21st century conflicts can’t be solved with methods from the 19th and 20th centuries and Russia is risking “massive” political and economic damage.

The threat of financial sanctions and simmering tensions in the region has caused investors to register concern.

Gold advanced to the highest level in almost six months as haven demand rose, while contracts for May delivery of wheat, an export of Ukraine, have risen 25 percent from a January low of $5.515. Russia’s ruble rose 0.2 percent against the dollar to 36.43 at 10:06 a.m. in Moscow, according to data compiled by Bloomberg. It has fallen 9.9 percent versus the dollar this year, the second worst among major currencies tracked by Bloomberg.

Aid Packages

The U.S. and its allies are also seeking to bolster Ukraine, which needs as much as $15 billion in loans to repay billions in foreign debt after investors withdrew funds and central bank reserves plummeted.

The EU has outlined an 11 billion-euro ($15 billion) package of loans and grants tied to Ukraine agreeing on measures to fix its economy with the International Monetary Fund. A U.S. offer of $1 billion in loan guarantees has been tied up in Congress in a dispute with House Republicans over increasing the U.S. quota for the IMF.

Yatsenyuk said his country must “modernize and overhaul” its military, while it seeks to resolve the conflict with Russia “in a peaceful manner.”

Putin has refused to back down. His government contends ethnic Russians in Crimea are at risk after the ouster of Yanukovych, an assertion Ukraine’s new leaders deny. Putin supports Crimea’s recently appointed administration, which has organized the March 16 referendum.

Two Months

The Black Sea region’s premier, Sergei Aksenov, said Crimea can be integrated into Russia within two months if voters approve.

Russia has stepped up its military maneuvers on the border with Ukraine, the Russian Defense Ministry said today, according to the Interfax news service. Russian forces control the roads leading to the peninsula, have taken charge of a ferry crossing at Kerch and blocked harbors, according to Ukrainian border guards. Kiev’s Boryspil airport said on its website that Simferopol, the southern region’s capital, has canceled flights linking the two cities.

The U.S. Defense Department said yesterday it would send 12 F-16 aircraft to Poland by the end of the week to demonstrate its commitment to defend its allies in the region. Other fighter jets have been dispatched to Lithuania.

Obama and Yatsenyuk both said Ukraine doesn’t need to choose between Russia and the West. Obama argued that a Ukraine with close economic ties with Europe would make Russia stronger rather than weaker.

“But obviously Mr. Putin has some different ideas at this point,” he said.

Before it's here, it's on the Bloomberg Terminal.