Obama Joins Merkel in Setting Ukraine Election as Trigger

President Barack Obama and German Chancellor Angela Merkel said the scheduled May 25 elections in Ukraine are the next trigger point determining whether the U.S. and its allies slap broader economic sanctions on Russia.

Obama and Merkel, at a joint news conference at the White House, said today Russia must pull back support for Ukrainian separatists so that the election can proceed unimpeded.

“If, in fact, we see the disruptions and the destabilization continuing so severely that it impedes elections on May 25th, we will not have a choice but to move forward with additional, more severe sanctions,” Obama said. Merkel called the vote on a new Ukrainian government “crucial” and said Germany is ready to support more penalties.

Sanctions imposed by the U.S. and European Union have so far targeted officials, individuals and companies tied to Russian President Vladimir Putin’s inner circle. The next step would be action against sectors of the Russian economy, including banking and energy. Those penalties would have consequences mostly for European countries, which have more extensive economic ties with Russia than the U.S. does.

“Some are more vulnerable than others to Russian retaliation,” Obama said of the EU nations. While there is “remarkable unity” between the U.S. and EU, Obama said, some nations in the 28-member bloc will need to make difficult choices on sanctions because of their vulnerability.

Russian Trade

Obama is seeking to coordinate a united U.S.-EU response to Russia’s actions in Ukraine. Merkel has a pivotal role. Germany, Europe’s largest economy, is Russia’s largest trade partner after China, with imports of $50.7 billion worth of Russian goods and services and exports to Russia worth $38.3 billion.

According to the Committee on Eastern European Economic Relations, a German business lobbying group, 6,000 German companies do business with Russia, with 350,000 workers depending on Russian trade. Russia also supplies about 30 percent of the EU’s gas imports.

Four of the 30 non-financial companies with the largest revenue exposure to Russia are German, including Metro AG and Adidas AG, according to Morgan Stanley.

Fighting between Ukrainian forces and pro-Russian separatists escalated today as the government began an offensive to retake the eastern city of Slovyansk and to free hostages. Rebels shot down two Ukrainian helicopters, killing two pilots, the Defense Ministry said.

Economic Warfare

Russian President Vladimir Putin’s spokesman said Ukraine’s actions kill any chance of implementing an agreement to defuse the crisis that was reached in Geneva last month between Ukraine, Russia, the U.S. and the EU.

Putin has threatened to escalate economic warfare if further sanctions are imposed.

“When we reach a particular tipping point is very hard to say in advance,” Merkel said. “But all I can say is that the elections on May 25 are a decisive juncture for me and if there is further destabilization, things will get more and more difficult.”

The confrontation is already squeezing Russia. The ruble’s 8.3 percent retreat this year is the second-worst after Argentina’s peso among 24 developing-country peers monitored by Bloomberg. The benchmark Micex Index has fallen 13 percent since the start of the year.

Russian GDP

The International Monetary Fund this month lowered its estimate of Russia’s GDP growth this year to 1.3 percent from 2 percent in January. Russian Finance Minister Anton Siluanov went even further on April 15, saying economic growth may halt this year as capital flight accelerates.

Obama and Merkel have been in regular contact leading up to their meetings today, exchanging assessments of Putin’s intentions.

The German chancellor also has been a critical intermediary with Putin. She grew up under Communism in former East Germany and speaks Russian, while Putin speaks German from his time as a KGB officer in Dresden.

The two leaders have phoned at least 10 times since Feb. 20, according to the German government, including yesterday when she called Putin to urge him to help secure the release of international observers in Ukraine.

U.S. Surveillance

While the situation in Ukraine has drawn the U.S. and Germany closer, it hasn’t completely eliminated friction over the U.S. surveillance revealed in documents leaked by former National Security Agency contractor Edward Snowden. That included the disclosure that Merkel’s mobile phone was monitored by U.S. signals intelligence.

The two nations haven’t been able to find agreement on surveillance. Both Obama and Merkel said they would continue discussions even if they can’t fully reconcile their approaches.

“There are differences of opinion on the intensity of surveillance and the issue of security on the one hand and the security of privacy and personal rights on the other,” Merkel said. “These will be further and more deeply discussed.”

Obama said the U.S. was taken steps to assure both the U.S. public and allies that they are not subject to continual surveillance, while defend intelligence collection as necessary to stopping terrorism.

“It has pained me to see the degree to which the Snowden disclosures have created strains in the relationship” with Germany, Obama said. “We are committed to a U.S.-German cyber-dialog to close further the gaps that may exist in terms of how we operate.”

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