Ukraine Pushes On With Offensive as Russia Warns on Vote

Ukraine pushed on with an operation to flush separatists from their eastern holdouts as the top U.S. and U.K. diplomats raised the prospect of punishing Russia with industrywide sanctions if this month’s election is undermined.

“If Russia or its proxies disrupt the elections,” the U.S. and its allies “will impose sectoral economic sanctions as a result,” U.S. Secretary of State John Kerry said in London today after meeting his counterparts from the U.K., Italy, France and Germany. Separatists “are literally sowing mayhem,” seeking to “speak for everyone through the barrel of a gun.”

Discord over the election risks another round of escalation as the Kiev government and its U.S. and European Union allies blame Russia for the unrest in Ukraine’s easternmost regions. In rejection of Russian calls to include separatist leaders in national unity talks, they weren’t allowed to join meetings that began yesterday in the capital to ease tensions as the May 25 presidential vote looms. With U.S. and EU leaders threatening more sanctions over the ballot, Russian Foreign Minister Sergei Lavrov said it’s “ridiculous” to hold Russia responsible.

Government troops eliminated two rebel bases near the towns of Slovyansk and Kramatorsk, acting President Oleksandr Turchynov said today in parliament in Kiev. Militants vowed to expel the military from the region.

‘Adequate Answer’

“The anti-terrorist operation can stop after weapons are surrendered and hostages released,” Turchynov said. “We’re conducting dialogue with those who’re prepared for conversation and cooperation. We’re working on changes to the constitution to expand powers to local self-government. At the same time, those who conduct war will receive an adequate answer.”

While Lavrov said yesterday that Ukraine’s slide into a civil war is making legitimate voting impossible, Kerry appealed to separatists to take part in the presidential ballot and engage in national dialogue as “the best way to de-escalate the situation.”

Russia’s Micex Index ended a six-day rally as Ukraine stepped up efforts to dislodge separatists. The benchmark gauge fell 0.5 percent to 1,381.99, taking its drop since the start of President Vladimir Putin’s intervention in Crimea on March 1 to 4.3 percent. The ruble lost 0.1 percent to 34.76 versus the dollar, trimming its advance since Feb. 28 to 3.2 percent.

Ukraine’s hryvnia, which has lost 30 percent against the U.S. currency in 2014, strengthened for the first time in six days, gaining 0.9 percent, data compiled by Bloomberg show.

Death Toll

Dozens of people have been killed and more than 100 kidnapped in eastern Ukraine since separatist unrest flared up after Russia’s annexation of the Black Sea Crimea peninsula in March.

The situation in the Donetsk region is worsening, with the sounds of gunfire constant in Slovyansk and the surrounding district, television service knocked out and civil transport not functioning, the governor’s office said in a statement today. Tensions have engulfed 15 towns and cities in the region, according to the statement.

Armed rebels seized a truck carrying 1.5 million hryvnia ($127,000) near Yenakiyevo in the Donetsk region, according to Ukraine’s biggest lender, Privatbank. The central bank said it’s evacuating staff members and suspending operations in the region after attacks by separatists.

‘Civil War’

“When Ukrainians kill Ukrainians, I believe it’s as close to civil war as you can get,” Lavrov told Bloomberg Television yesterday in an interview in Moscow. “In the east and south of Ukraine, there is a war, a real war, with heavy weaponry used, and if this is something that is conducive to free and fair elections, then I don’t understand something about freedom.”

While events in Ukraine “bear the hallmarks of civil war,” Lavrov’s comments “are grating” given Russia’s role, Polish Defense Minister Tomasz Siemoniak said today on Polish Radio’s Channel One. What’s going on in eastern Ukraine amounts to “special operations run by trained personnel,” he said.

Separatists in Luhansk and Donetsk, where unofficial ballots on breaking away from Kiev were held last weekend, have agreed to join forces to confront the central government. Rebels fighting for the self-proclaimed Donetsk People’s Republic said today that they’ll “burn and wipe out” Ukrainian forces unless they withdraw from the region by this evening.

Kiev Talks

At the roundtable talks in Kiev, Prime Minister Arseniy Yatsenyuk said ending the crisis requires an international conference in Geneva, which Ukraine, Russia, the EU and the U.S. should attend. He said the election of a president this month will help stabilize the situation.

Lavrov said Russia “can do business” with any elected president in Ukraine after Putin last week for the first time signaled his endorsement of the ballot as a “step in the right direction.”

While Putin promised last week to move soldiers back from Ukraine’s border, NATO says this has’t happened. Russia has no intention to send troops to eastern Ukraine, Lavrov said.

Ukraine said it’s concerned about Russian military drills on election day. Russia said it’s holding an army competition, not exercises, in the Voronezh region close to Ukraine. It will run May 21-26 and involve planes, helicopters and tanks, said Andrei Bobrun, head of the Western Military District’s press service.

Economies Pressured

As the crisis squeezes Ukraine’s finances, the government sold $1 billion of U.S.-backed bonds yesterday. It’s also seeking international arbitration in a natural gas dispute with Russia, asking a Stockholm court to help ensure its neighbor doesn’t cut off supplies as a payment deadline looms next month, Finance Minister Oleksandr Shlapak said.

Ukraine’s economy may shrink 7 percent this year, the European Bank for Reconstruction and Development said yesterday. The impact of the conflict, including sanctions imposed by the U.S. and the EU, may push Russia into recession and cause growth across the region to “grind to a halt,” it said.

Russia’s first-quarter economic growth slowed to the weakest in a year as investment dried up. Gross domestic product advanced 0.9 percent in January-March from a year earlier after a 2 percent gain in the previous quarter, the Moscow-based Federal Statistics Service said today.

More Sanctions?

The U.S. and the EU have already penalized 98 people and 20 companies over Russia’s actions in Ukraine. Should it interfere in the planned election, Russia will face punitive measures targeting entire industries, which may include energy, banking, defense and mining, according to a U.S. official who asked not to be identified following diplomatic protocol.

The U.S. and its European allies agreed that industrywide sanctions would come next, the official said.

“Russia’s attitude and behavior toward those elections will be the determining factor in whether we need to apply widening sanctions,” U.K. Foreign Secretary William Hague said at a news conference in London today. “We can’t give and wouldn’t want to give an exact definition” of what Russia would do to destabilize and have sanctions applied, he said. “If we set a red line, Russia knows it can go up to that red line.”

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