Bloomberg News

Ukraine in ‘Undeclared War’ With Russia as Rebels Unite

May 13, 2014

A separatist celebrates in Luhansk

A separatist celebrates victory in a disputed independence referendum in the eastern Ukrainian city of Luhansk on May 12, 2014. Events of the past two days in eastern Ukraine bore similarities to those that preceded Putin’s annexation of the Crimean peninsula in March, although Russia stopped short yesterday of suggesting an intention to absorb eastern Ukraine. Photographer: Dimitar Dilkoff/AFP/Getty Images

Insurgents killed seven Ukrainian soldiers and wounded eight others in an ambush near an eastern rebel-held stronghold as the defense minister said the country was fighting an “undeclared war” with Russia.

More than 30 attackers struck a convoy near the Donetsk region city of Kramatorsk at about 1 p.m., according to a statement by the Defense Ministry, which said that six paratroopers were killed. Another died later during transport to the hospital, according to Interfax.

“Russia is already engaged” in Ukraine “in supporting Russian-led protesters and terrorists,” Ukrainian Prime Minister Arseniy Yatsenyuk told reporters in Brussels today after talks with European Commission President Jose Barroso. “We urge Russia to condemn them, to urge all these so-called protesters -- or really, terrorists -- to leave and vacate the buildings, and to do everything they can to stabilize the situation in Ukraine. Russia will fail to make Ukraine a failed state.”

A Snapshot of Ukraine's Past and Future

As fighting flared, Europe tried to rev up diplomatic efforts, with Germany’s Foreign Minister Frank-Walter Steinmeier visiting Kiev and Odessa in a bid to broker talks between the central government and pro-Russian separatists. Russia would face new sanctions if the scheduled presidential election on May 25 is disrupted, French President Francois Hollande said in Tbilisi, the capital of the former Soviet republic of Georgia, which fought a war with Russia over a breakaway region in 2008.

Separatists Unite

The self-styled Donetsk People’s Republic and neighboring Luhansk agreed to unite today, a day after declaring themselves sovereign states. Donetsk said 90 percent of voters backed splitting from Ukraine in a May 11 referendum that was rejected by the U.S. and European Union as illegitimate and marred by irregularities. Luhansk reported a similar ballot result.

The events echo Russia’s annexation of Crimea in March, Ukraine’s government and its U.S. and European allies say President Vladimir Putin is stoking unrest that’s threatening to rip apart the former Soviet republic ahead of the presidential vote.

“In our eastern regions we have an undeclared war,” acting Defense Minister Mykhaylo Koval told reporters in Kiev today. “Our neighboring country unleashed the war, sending special forces and saboteurs into our territory.”

EU Sanctions

EU foreign ministers froze the assets of companies for the first time, including oil and natural-gas producer Chernomorneftegaz, after they were expropriated during Russia’s Crimea’s annexation. They added 13 people to a list of individuals facing asset freezes and travel bans for destabilizing Ukraine and threatened more measures, along with the U.S., to target entire Russian industries.

The EU will soon disburse the first package of 600 million euros ($823 million) of a total amount of 1.6 billion euros of macro-financial assistance to Ukraine, Barroso said today.

Russian stocks advanced on bets the latest penalties won’t hurt the economy. The Micex Index (INDEXCF) jumped 0.7 percent to 1,385.29, advancing for a fifth day and paring its drop since the start of Russia’s intervention in Crimea on March 1 to 4.1 percent. The ruble strengthened 0.6 percent to 34.8335 per dollar, according to data compiled by Bloomberg, extending its gain since Feb. 28 to 3 percent.

Ukraine’s hryvnia was 0.5 percent weaker to the dollar, bringing its loss to 30 percent since the start of the year.

Compromise Deal?

“It is still hard to see the shape of any compromise deal at this point in time, as the federal structure which is being pushed by Russia and the separatists in south-east Ukraine is simply unacceptable to the administration in Kiev, and those in the west of the country,” Timothy Ash, an emerging-markets economist at Standard Bank Plc in London, said in an e-mail.

If Donetsk and Luhansk secede, Ukraine would lose about a fifth of its economic output, Bank of America (BAC:US) analyst Vadim Khramov said in an e-mailed report today. As for Russia, the tension may cost it $115 billion, or about 3 percent of annual output, and exacerbate recessionary pressure, said Nariman Behravesh, chief economist at consultancy IHS Inc. (IHS:US), said in an e-mail today.

“While Russia could end up paying a very heavy economic price for its annexation of Crimea and its ongoing conflict with Ukraine, the negative impacts on other parts of the world, notably Europe, will also be hard to avoid,” Behravesh said.

Troop Buildup

The U.S. says Russia has massed about 40,000 troops on Ukraine’s border and is helping insurgents who have seized buildings and television towers in at least 10 cities.

With the separatists lacking infrastructure and voter registries and without control over the entire regions, the referendums were held in a salient extending from Russia’s border to about 200 kilometers (120 miles) into Ukraine in northern Donetsk and southern Luhansk, according to an analysis by news website espresso.tv.

The balloting was “illegal under Ukrainian law” and a “transparent attempt” to create further division, White House spokesman Jay Carney told reporters in Washington. He said there were cases of pre-marked ballots and children voting and that the U.S. was disappointed Russia didn’t use its influence to prevent the referendums from taking place.

German Chancellor Angela Merkel said today she was “not interested” in the referendum results.

‘Deep Crisis’

Russia said a “reluctance of the Kiev authorities to engage in real dialogue with the representatives of the regions” was an obstacle to de-escalation.

“The recently held referendums in the Donetsk and Luhansk regions of Ukraine should be seen as a clear signal of a deep crisis,” its Foreign Ministry said in a statement on its website today.

A majority of Ukrainians, or 56 percent, believe their country is at war with Russia, according to a poll by the Kiev-based Razumkov Center published today.

About 53 percent want to join the EU -- ousted President Viktor Yanukovych’s refusal to sign an EU association agreement triggered the crisis -- whereas two thirds see Russia as “brotherly” and “friendly” according to the April 25-29 poll of 2,012 people. It had a margin of error of three percentage points.

Luhansk’s the self-proclaimed “peoples governor,” Valery Bolotov, was shot and wounded, probably by a sniper, news website www.0642.ua reported. His life was not in danger.

Gas Deadline

The rebels will start an “anti-terrorist operation” against the Ukrainian military if they refuse to leave Donetsk within 48 hours, the head of the separatist group, Denis Pushilin, said by phone yesterday.

Russian gas-export monopoly OAO Gazprom informed Ukraine it must pay in advance for gas by June 2 and will receive only those supplies it pays for, risking a cutoff, company spokesman Sergei Kupriyanov said in an e-mailed statement today. Ukraine owes $3.5 billion for fuel delivered in 2013 and through April this year, Gazprom Chief Executive Officer Alexey Miller said.

Ukraine, which depends on Russia for half of its gas consumption, has an opportunity to pay, as it received the first $3.2 billion of an international aid package last week, Medvedev said. Stopping shipments to Ukraine may have an effect on the rest of Europe because about 15 percent of the region’s gas supply travels through the country’s Soviet-era pipelines.

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Kateryna Choursina in Kiev at kchoursina@bloomberg.net; Daria Marchak in Kiev at dmarchak@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Paul Abelsky, Caroline Alexander


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