Eastern Ukraine Violence Brings ‘Crunch Time’ for U.S.,EU

The U.S. and European Union have reached “crunch time” to halt further destabilization in Ukraine and curb any further Russian expansion in the region.

Prospects for a negotiated end to the crisis were set back after camouflaged gunmen fired on government forces near Slovyansk, about 240 kilometers (150 miles) from the Russian frontier in eastern Ukraine. One serviceman was killed and five were wounded, with an unknown number of casualties on the separatist side, Interior Minister Arsen Avakov said on Facebook.

“Henchmen” of the Kiev government with the backing of Western nations are organizing terror attacks, Russia’s Ambassador to the United Nations Vitaly Churkin said at an emergency session of the UN Security Council in New York.

Russia “is spreading fiction -- we must stop this tonight,” U.S. Ambassador to the United Nations Samantha Power said at the meeting. “Insecurity in Ukraine is written and choreographed by Russia,” she said.

The U.S. backed Ukraine’s accusation that Russia was behind the violence. Yet the repeated threat of additional sanctions directly targeting Russia’s economy hasn’t prevented such clashes and there’s little likelihood of a military response, according to analysts.

Asserting Influence

“This is crunch time for the West’s response to Russia’s attempts to assert its influence over eastern Ukraine,” said Nicholas Spiro, founder of Spiro Sovereign Strategy in London. “This is supposed to be the trigger for more meaningful economic and trade sanctions against Russia. We’re now going to see the extent to which the West is unified in its willingness to face down Russia.”

Oil prices rose amid the increased tension, with Brent crude advancing for the first time in three days and West Texas Intermediate extending gains. Brent for May settlement gained as much as 71 cents to $108.04 a barrel on the London-based ICE Futures Europe exchange.

A new, broader set of economic sanctions would have an impact on European businesses and that’s prompted intense discussion among EU governments about the mechanics and timing, said a German government official last week, who asked for anonymity to discuss the talks. Such sanctions may be modeled after those imposed on Iran, which included energy, ports, insurance, shipping and banking, the official said.

The question facing the U.S. and EU is how high can they make the price for Russia to prevail in Ukraine and can the allies unity be maintained given trade and energy ties between the U.S. and Europe, a U.S. official said.

Economic Stress

The Russian economy already is under stress. Russia’s benchmark Micex Index has fallen 8.5 percent since late February, when pro-Russian forces began seizing control of parts of the Crimean peninsula, which has an ethnic Russian majority.

Envoys from Ukraine, Russia, the U.S. and EU are scheduled to hold talks in Geneva April 17 on resolving the crisis.

The German government doesn’t expect a direct military intervention of eastern Ukraine, the German official said. Putin is most likely to pursue further destabilization of the country and sabotage of the elections scheduled next month, according to the official.

Intelligence reports suggest the Russian plan is to split Ukraine into federated regions, some of which may then vote to rejoin Russia, according to two U.S. officials speaking on condition of anonymity.

“The West can’t do very much about this situation,” said Theodore Karasik, director of research at the Institute for Near East and Gulf Military Analysis in Dubai.“In an era of declining defense budgets there is no way there is going to be be any real military response that will stop such action. Sanctions won’t really bite.”

Russia ‘Complicit’

European foreign ministers will meet today in Luxembourg to discuss the situation in Ukraine. One challenge they face is establishing Russia’s involvement in events inside Ukraine. The U.K. today issued a statement saying that “assumptions Russia is complicit are inevitable as long as Moscow does not publicly distance itself.”

The latest escalation in eastern Ukraine echoes the events leading up to Russia’s annexation of Ukraine, Power, the U.S. ambassador to the UN said.

“It’s professional, it’s coordinated, there’s nothing grassroots-seeming about it,” she said yesterday on ABC’s “This Week” program. “So certainly it bears the telltale signs of Moscow’s involvement.”

Investors in Russia

Volkswagen AG, Siemens AG, and HeidelbergCement AG are among the largest investors in Russia, and German business leaders have criticized their government’s handling of the crisis and questioned the effectiveness of sanctions. Bernd Scheifele, chief executive officer of HeidelbergCement, warned last month that leaders shouldn’t “play power games.”

“The only measure that would find a consensual support at this moment is a potential expansion of the targeted sanctions lists to motivate the Kremlin’s return to the negotiations table,” said Otilia Dhand, an analyst at Teneo Intelligence in London. “Iran-style wide-ranging economic sanctions would likely only become a possibility in case of obvious Russian intervention in mainland Ukraine.”

According to Zvi Magen, former Israeli ambassador to Ukraine and Russia, the U.S. must accept it’s unlikely to win in Ukraine and look for a dignified exit.

“It’s impossible at this point to bring Ukraine further into the Western orbit,” Magen said. “The U.S. needs to find a diplomatic means of limiting the damage, exercising leverage and reaching a new status quo. There will be opportunities later for Ukraine to move closer to the West, but not now while Russia is creating tension.”

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