Kerry Blames Russian Agents as Ukraine Acts in Kharkiv

U.S. Secretary of State John Kerry accused Russia of using “special forces and agents” to spark unrest, as Ukrainian authorities sent security forces to Kharkiv to clear the country’s second-biggest city of separatists.

“Russian provocateurs and agents operating in eastern Ukraine” have been “sent there determined to create chaos,” Kerry told the Senate Foreign Relations Committee in Washington yesterday. “These efforts are as ham-handed as they are transparent,” Kerry said. He accused Russia of working to “create a contrived crisis with paid operatives across an international boundary.”

Russia and the U.S. are on a collision course after tensions flared anew in Ukraine. With Russian forces deployed on the border, the U.S. and its allies say they’re concerned that President Vladimir Putin may be planning further incursions into eastern Ukraine after annexing the Black Sea peninsula of Crimea. The Russian government said its neighbor’s crackdown on separatists in the east risks sparking civil war.

An “anti-terrorist operation” was under way in Kharkiv, 40 kilometers (25 miles) from the Russian border, with the subway closed and the center sealed off, Interior Minister Arsen Avakov said yesterday.

Hostages Released

In Luhansk, 330 kilometers southeast of Kharkiv, pro-Russian protesters who seized a building of Ukraine’s state security service took hostages, planted mines and made threats with explosives and weapons, the service said yesterday on its website. The service said early today that talks led to the release of 51 hostages without violence or injuries.

“Talks are on with those who seized the building to minimize risk for lives and safety of Luhansk civilians,” the service said on the website. “Also people that are blocking the building allowed some lawmakers to visit them.”

Russia cut its forecast for 2014 economic growth yesterday, as did the International Monetary Fund.

The unrest has prompted investors to sell Russian and Ukrainian assets. Ukraine’s 2023 Eurobonds fell to the lowest level in two weeks yesterday, with the yield rising 19 basis points to 9.46 percent. The hryvnia weakened 1.1 percent to a record 11.825 per dollar.

Ruble-Bond Auction

The Finance Ministry in Moscow canceled today’s ruble-bond auction after yields jumped the most in three weeks yesterday. The benchmark Micex share index rose 0.2 percent yesterday, though it’s slid 6.4 percent since Putin’s intervention in Crimea on March 1. Gold climbed to the highest price in almost two weeks while crude oil also rose.

“We’ve already deported a number of Russians who’ve been in eastern Ukraine provoking the situation and violating Ukrainian laws,” Ukrainian Foreign Minister Andriy Deshchytsia said in a Bloomberg Television interview. “The Ukrainian government has enough power and authority to control the situation.”

Pro-Russian protesters demanded a referendum on seceding from Ukraine, state-run Rossiya 24 television reported. The regional government building in Kharkiv was cleared of separatists yesterday, with 70 people detained, according to Avakov. None of them are Russian citizens, he said.

Russian Economy

Ukraine’s national guard and irregular forces of Pravyi Sektor, which unites nationalist groups, were gathering in southern and eastern Ukraine, the Foreign Ministry said.

“We call for the immediate halt of all military preparations, which risk sparking a civil war” in Ukraine, the ministry said in a statement on its website.

Amid the tension, Russia cut its growth forecast for 2014 to 0.5 percent to 1.1 percent, Deputy Economy Minister Andrei Klepach told reporters in Moscow yesterday, citing reduced export demand for natural gas and increased capital outflows. That compares with a 2.5 percent target set in December.

The IMF said Russia’s gross domestic product will expand 1.3 percent, down from a 2 percent prediction made in January. Chief Economist Olivier Blanchard said in a Bloomberg Television interview the fund may lower its forecast further, perhaps to less than 1 percent.

Russian companies should consider delisting their shares from foreign stock exchanges and switching trading to Moscow amid the standoff, First Deputy Prime Minister Igor Shuvalov told reporters after a government meeting near Moscow. “This is a question of economic security,” he said.

Energy, Banking

Kerry said yesterday that additional sanctions targeting Russia’s energy, banking and mining industry are “all on the table” if Russia intervenes further in Ukraine.

“The president is completely poised to move forward with the sector or other sanctions,” the secretary of state said in his Senate testimony. “If we bring sector sanctions, then Russia is going to really hurt.”

The latest demonstrations have resembled the actions of pro-Russian protesters who seized Crimea’s assembly and paved the way for Russia to annex the peninsula last month. Putin says he has the right to defend Russian speakers in Ukraine from “fascists” after the ouster of President Viktor Yanukovych.

Any further Russian move into Ukraine “would be an historic mistake” and “a serious escalation,” North Atlantic Treaty Organization Secretary General Anders Fogh Rasmussen said in Paris. “It’s obvious that the evolving security situation in Ukraine makes it necessary to review our defense plans.”

‘Needling Ukraine’

Russia has as many as 40,000 soldiers stationed along the frontier, according to the U.S. and NATO. Putin says they are conducting military exercises and will withdraw afterward.

An outright invasion of eastern Ukraine is unlikely in the run-up to the May presidential election, said Chris Weafer, a partner at Moscow-based Macro Advisory.

“Recent events look like a Cold War-type set-up filled with agents provocateurs,” Weafer said by phone from London. “It seems like Russia’s just needling Ukraine to see what they can get away with.”

Kerry said yesterday that he’s spoken with Russian Foreign Minister Sergei Lavrov to arrange talks among officials from Ukraine, the U.S., the EU and Russia to head off any escalation. He told the Senate committee that a meeting will take place next week and that Russia’s willingness to take part represents progress.

Russia is ready to examine a “multilateral format” for talks, Lavrov said in Moscow. The new Ukrainian government hasn’t yet sent “any positive signals” to the southeast, he told reporters.

“We urge the new government, which is working in difficult circumstances, to reach out and to be as inclusive as possible,” European Union President Herman Van Rompuy said at the Austrian parliament in Vienna yesterday.

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