Ukraine Pushes On With Offensive as Russia Warns on Vote

(Bloomberg – bloomberg.com – Kateryna Choursina, Daria Marchak, Ryan Chilcote – May 15, 2014)

Ukraine pushed on with an operation to dislodge separatists less than a day after Russia warned the violence could make it impossible to hold legitimate elections.

Troops eliminated two rebel bases in the towns of Slovyansk and nearby Kramatorsk in the former Soviet republic’s east, acting President Oleksandr Turchynov said today in parliament in Kiev. Russian Foreign Minister Sergei Lavrov said yesterday that Ukraine is sliding into a civil war.

“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.”

The Kiev government and its U.S. and European Union allies blame Russia for the unrest in Ukraine’s easternmost regions. Pro-Russian separatists there were excluded from national unity talks that began yesterday in the capital to ease tensions as a May 25 presidential vote looms. U.S. and EU leaders say they’ll tighten sanctions on Russia if the ballot is disrupted. Lavrov said it’s “ridiculous” to hold Russia responsible.

Markets in Moscow have rallied since President Vladimir Putin last week called Ukraine’s elections a step in the right direction. The Micex (INDEXCF) Index rose for a seventh session, adding 0.3 percent, while the ruble strengthened 0.1 percent against the dollar. Ukraine’s hryvnia, which has lost 30 percent against the U.S. currency in 2014, rose for the first time in six days, gaining 0.9 percent, data compiled by Bloomberg show.

‘Real War’

Tens 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.

“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.”

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.

Talks Begin

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 U.S. should attend. He said the election of a president this month will help stabilize the situation.

Some of Ukraine’s richest people have weighed in with suggestions. At the unity talks, Vadym Novinsky, a lawmaker and owner of LLC Smart Holding, said all of Ukraine’s parties and presidential candidates should commit to the country’s neutrality, “to calm down our eastern neighbor.”

Billionaire Rinat Akhmetov said on his website that constitutional change to decentralize Ukraine is the “only proper way” out of the crisis. Secession for eastern regions would bring sanctions and economic damage, he said.

Another billionaire, Petro Poroshenko, is the frontrunner for Ukraine’s presidential vote. Lavrov said Poroshenko isn’t a “fascist,” a term Russia applies for some forces in Ukraine’s interim government. He said the emergence of a Ukrainian leader with broad support may help diplomacy because “it’s easier to have such an interlocutor than self-appointed people.”

Troop Movements

Lavrov also said Russia has no intention of sending troo ps into eastern Ukraine. While Putin promised last week to move soldiers back from the border with Ukraine, the U.S. says he hasn’t fulfilled the pledge. Ukraine said today that it’s concerned after Russian informed it of plans to hold military drills on the day of the election, Interfax reported.

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 yesterday.

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 EU, may push Russia into recession and cause growth across the region to “grind to a halt,” it said.

The U.S. and EU a re backing Ukraine’s election plan. Preparations for the vote are “on track” and Russia “ought to support that process instead of taking steps to undermine it,” White House spokesman Jay Carney said yesterday. He described Lavrov’s warnings about the risk of civil war as “a convenient position to take when you’ve actively exacerbated and stoked tensions and instability.”

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