Ukraine Vows to Stanch Separatism as Militants Spread

Ukraine’s acting president vowed to create a special police force to staunch the spread of separatism in the country’s east, vowing to overcome unrest he says is stoked by Russia and hold an election slated for May 25.

Armed men seized government buildings in the city of Horlivka today, while news service Unian reported a member of the Donetsk electoral commission was kidnapped by “terrorists.” The U.S. and the European Union say President Vladimir Putin’s government is helping to destabilize the country in the run-up to next month’s presidential ballot in their worst standoff with Russia since the Cold War.

“The government doesn’t control the situation in Donetsk as well as part of the Donetsk region,” Ukraine’s acting President Oleksandr Turchynov said in Kiev today. “Because there is a real threat of Russia starting a continental war, our army is on full combat alert.”

Ukraine’s east is slipping out of the government’s grasp after a creeping campaign by pro-Russian militants. European officials today pressed their criticism of Russia’s commitment to an accord that sought to defuse tensions following an expansion of sanctions against people and companies linked to Putin’s inner circle this week. The Russian president warned that further economic penalties may trigger a response against foreign companies working in his country’s energy and other key industries.

Association Pact

The EU will sign the economic part of an association agreement after Ukraine’s presidential election next month, the bloc’s president, Herman Van Rompuy, said in Prague today.

The deal, which triggered the protests that eventually toppled former Ukrainian President Viktor Yanukovych when he refused to sign it last November, “will give the people of Ukraine the prospect of a European way of life and the prosperity that they deserve,” Van Rompuy said.

Russia hasn’t lived up to an accord signed April 17 in Geneva intended to defuse the confrontation, Van Rompuy said.

Russia batted back the accusation, with Putin telling U.K. Premier David Cameron that Ukraine’s compliance with the agreement is what’s needed to defuse tensions, according to a statement e-mailed by the Russian leader’s press service.

Bans, Freezes

The EU added Russian Deputy Premier Dmitry Kozak to a list of people slapped with travel bans and asset freezes along with others including pro-Russian separatist leaders, according to a statement yesterday in the EU’s Official Journal.

A day earlier, the U.S. targeted seven people, including Kozak and Igor Sechin, head of OAO Rosneft, and 17 companies linked to Putin allies, such as InvestCapitalBank.

German Chancellor Angela Merkel said she didn’t see “any problem at all” for the Group of Seven industrial countries to take more steps against Russia. If the current measures don’t work, “then we should not be afraid that further sanctions are necessary,” she told a news conference today in Berlin.

U.S. President Barack Obama added Ukraine’s neighbor, Poland, to his June trip to Brussels for a G-7 summit, according to White House spokesman Jay Carney. The event was moved to Belgium after Russia’s takeover of Crimea last month prompted G-7 leaders to cancel a meeting initially planned in Sochi.

In Pain

While further penalties may have greater consequences for Russia, which is “already feeling the pain” of sanctions, officials should make sure any future actions don’t harm the European economy, European Commission President Jose Manuel Barroso said today in Washington.

Russia is in a recession, the International Monetary Fund said today as it cut the country’s economic-growth forecast for the second time this month, citing geopolitical risks. The $2 trillion economy is facing two three-month periods of contraction, Antonio Spilimbergo, the IMF’s mission chief for Russia, told reporters today in Moscow.

The ruble lost 0.1 percent to 41.8478 against the central bank’s target basket of euros and dollars at 10:41 p.m. in Moscow. It’s down more than 8 percent against the dollar this year, the second-worst among 24 emerging-market currencies tracked by Bloomberg. Russia’s RTS Index has slumped 20 percent this year, the worst performance among 93 indexes tracked by Bloomberg worldwide. The gauge of dollar-denominated shares climbed 0.2 percent today.

Ukrainian Slump

Ukraine’s economy shrank 1.1 percent in the first quarter as industrial production and the hryvnia slumped amid deadly protests and Russia’s annexation of Crimea.

The central bank in Kiev today eased capital controls on companies, annulling a required waiting period to purchase foreign currency. It also extended limits on foreign-currency cash purchases or bank withdrawals for individuals, according to a decree published on its website.

“The package will stoke positive trends on the money market, which appeared in April, and will mitigate negative factors linked to current economic and political challenges,” the central bank said.

The yield on the Ukrainian government’s benchmark dollar-denominated notes due April 2023 rose 17 basis points to 10.404 percent. The hryvnia weakened 0.4 percent to 11.6 per dollar, according to data compiled by Bloomberg.

Troop Buildup

Russian forces, estimated by NATO to number about 40,000, continue to mass on Ukraine’s border, Turchynov said. The government has fired the heads of state security in areas where the unrest was taking place, he said, calling on “patriots to sign up to serve as police in those regions.”

Ukraine is ready to offer “additional guarantees” for Russian speakers, Premier Arseniy Yatsenyuk said at a weekly cabinet meeting in Kiev today.

Along with the U.S. and the EU, the government in Kiev says Putin has infiltrated the country’s eastern regions with agents and covert military forces to create unrest.

“May will clearly be one of the toughest months in the country’s history,” Viktoria Syumar, first deputy head of the National Security and Defense Council in Kiev, said on her Facebook page.

About 1,000 gunmen have seized buildings in more than 10 cities in eastern Ukraine, according to the country’s Interior Ministry. About 20 captured the Horlivka city council and regional police headquarters today, Interfax said. Yesterday, hundreds of activists wielding sticks and waving Russian flags stormed the Luhansk regional administration.

A member of the eastern Donetsk region’s electoral commission was abducted, Unian cited the deputy head of the commission, Andriy Mahera, as saying today.

Russian Countermeasures

While Putin’s government has prepared measures to retaliate for penalties imposed by the U.S. and its allies, the Russian leader told reporters in Minsk, Belarus, yesterday that he doesn’t consider them necessary for now, though that may change.

“If this kind of situation continues, of course we will have to start looking at who is doing what in Russia in different sectors of our economy, including the energy sector,” he said.

Putin’s remarks added uncertainty for companies that have stakes in Russia’s energy industry, including Royal Dutch Shell Plc and Exxon Mobil Corp., which is planning Arctic drilling in an alliance with Russian state-controlled Rosneft.

Both the U.S. and the EU have said they’ll extend sanctions to cover industries of the Russian economy, possibly including banks and energy, if Putin escalates the crisis.

The EU has been reluctant to impose broader sanctions because of the potential harm to its member states, which rely on Russia for energy imports. Germany, Europe’s largest economy, had $89 billion in trade with Russia in 2012.

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