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Ukraine Unrest Flares as Kiev’s Control Slips

By Volodymyr Verbyany, Balazs Penz and Stephen Bierman
May 04, 2014 2:18 PM EDT 299 Comments
Pro-Russian supporters storm the Luhansk Region administration building in eastern Ukraine on April 29, 2014. The activists oppose the pro-Europe government in Kiev that took power in February.
Photographer: Valery Matytsin/ITAR-TASS/Zuma Press
Pro-Russian supporters storm the Luhansk Region administration building in eastern Ukraine on April 29, 2014. The activists oppose the pro-Europe government in Kiev that took power in February.

Ukraine pursued an offensive to dislodge rebels from its eastern industrial heartland as violence that’s also spread to the Black Sea gateway of Odessa threatens to loosen Kiev’s control of the regions.

Troops in the Donetsk area, near the Russian border, took back a television tower overnight that had been seized by pro-Russian forces, Interior Minister Arsen Avakov said on his Facebook account. Fighting in Kramatorsk, in northern Donetsk, left seven people dead, the website Kramatorsk.info said. Clashes continued in Odessa today.

There is a “real war and this is the truth,” Prime Minister Arseniy Yatsenyuk said in an interview with BBC. The conflict is “due to Russian aggression and due to Russian-led protesters.”

The fighting in Odessa, where Interfax said two people were injured today, is taking place about 160 kilometers (100 miles) from the European Union’s southeastern frontier in Romania. It’s also Ukraine’s most important conduit to the Black Sea after Russia took control of Crimea last month.

Continuing Standoff

The continuing standoff with NATO countries over the fate of Ukraine caused the U.S. and European Union to impose sanctions against Russia. The dispute is threatening growth in the $2 trillion economy and tourism in a country that attracted 2.67 million visitors last year.

The turmoil drove the yield on Ukrainian government debt up 25 basis points on May 2 to a six-week high of 10.90 percent, data compiled by Bloomberg show. Russian bonds fell, with the yield on ruble-denominated government debt due February 2027 jumping to a seven-week high of 9.67 percent.

Russian President Vladimir Putin is “extremely concerned,” his spokesman Dmitry Peskov said yesterday. Peskov said Kremlin officials are getting “thousands of calls” from Ukraine seeking help.

“People are calling in despair,” Peskov told reporters. “The vast majority are asking for help from Russia.”

Russia wants an “objective assessment” by the Organization for Security and Cooperation in Europe and the Council of Europe into the actions of Ukrainian forces in the country’s eastern regions, the Foreign Ministry in Moscow said in a statement today.

Phone Call

Putin and German Chancellor Angela Merkel, in a phone call today, discussed the importance of OSCE in easing the conflict in Ukraine, according to a Russian government statement.

German Foreign Minister Frank-Walter Steinmeier called for a return to talks in Geneva to try to resolve the conflict. “We must now try again and with all our strength return to the Geneva agreements,” he said in an interview with Germany’s ARD television today. Talks were held in Geneva April 17 by Russia, Ukraine, the European Union and U.S.

Steinmeier said he’s been trying to win support for a second set of Geneva talks “so that finally clear agreements can be made on how to bring this conflict to a standstill and bit by bit find a political solution.” He called for the OSCE to have a “mediatory role” in setting up local round tables to ease conflicts in individual towns.

Biggest Operation

The assault in the Donetsk region marked the biggest operation yet by the Ukrainian government to retake ground from as many as 1,000 armed gunmen who’ve seized buildings in more than 10 towns and taken several dozen captives.

“We are not far from a civil war,” even if the government says it’s being driven by outside forces, Timothy Ash, an emerging-markets economist at Standard Bank Plc in London, said in an e-mail. There is “little evidence of any de-escalation in the conflict in Ukraine and little evidence of any back-room efforts to broker a solution.”

The fighting in Ukraine’s eastern regions threatens to undermine the presidential election scheduled for May 25, Chris Weafer, a partner at Moscow-based Macro Advisory, said in an e-mail today.

Unless the government “can regain control over all cities in east Ukraine by May 25, the separatists will not accept the election,” Weafer said. “That may lead to an intensification of the violence as the newly elected president would have to quickly choose between heavier military intervention or negotiations.”

In Odessa, 42 people were killed and 125 injured May 2 after Russian sympathizers took refuge in a building that was later engulfed by fire. They were seeking to escape fighting between soccer fans and supporters of the Kiev government on one side and Russia backers on the other.

Investigation Urged

Catherine Ashton, the European Union’s foreign policy chief, urged an investigation of the incident and urged “everyone to exercise utmost restraint and not to exploit this tragedy to fuel more hatred, division and senseless violence,” according to a statement on her website.

The authorities in Kiev have their hands “stained with blood,” Peskov said in a conference call with reporters yesterday.

“Nationalists and radicals with the complicity of local authorities and those who consider themselves to be in power in Kiev, burned unarmed people alive,” he said. “This is the crime.”

Ukrainian prosecutors have started a probe into the incident and will “investigate everyone,” Yatsenyuk told BBC. He said local police and security officials are responsible for “doing nothing” to stop the violence. The Interior Ministry has replaced the city’s law-enforcement leadership, according to the Interfax news service.

Releasing Activists

Pro-Russia protesters attacked the Odessa police headquarters today and negotiated the release of 67 detained activists, the Interior Ministry in Kiev said in a statement on its website. The release was ordered by the city prosecutors’ office, it said.

U.S. Secretary of State John Kerry said yesterday that he spoke to Russian Foreign Minister Sergei Lavrov by phone to tell him Russia must stop supporting separatists. In a website statement following the conversation, Lavrov said he told Kerry of a “fratricidal conflict” brewing and urged the U.S. to pressure Ukraine to stop its offensive.

U.S. intelligence officials have warned for at least a month of a possible Russian-orchestrated campaign in Odessa similar to those in Crimea and in Ukraine’s easternmost, largely Russian-speaking regions.

Destabilizing Region

Not only does the port city have economic and military significance, it sits between Crimea and pro-Russian areas in eastern Ukraine and the breakaway Transnistria region of neighboring Moldova.

Russian citizens took part in provocations before the bloodshed in Odessa, the Ukrainian Foreign Ministry said in a statement on its website. Their aim was to destabilize the region, the ministry said, citing what it said was information from detained Russian citizens.

Economic sanctions imposed on Russia by the U.S. and EU have so far targeted officials, individuals and companies tied to Putin’s inner circle. The next step would be action against Russian industries, including banking and energy.

“What we’re trying to achieve here is to change the calculus of the Russian government,” David Cohen, undersecretary for terrorism and financial intelligence, said on CNN’s “Fareed Zakaria GPS” program.

Obama, Merkel

At a joint news conference on May 2 in Washington, U.S. President Barack Obama andMerkel said Russia must pull back support for the separatists so Ukraine’s May 25 election can proceed.

Obama is seeking to coordinate a united U.S.-EU response. Merkel has a pivotal role. Germany is Europe’s largest economy and had 91.7 billion euros ($127 billion) in trade with Russia in 2013, according to the International Monetary Fund, making Germany Russia’s second-biggest trading partner.

Sanctions now in place fueled a record $60 billion capital outflow in the first quarter, as well as losses in Russia’s stock market and currency, according to the U.S. The benchmark Micex Index (INDEXCF) has dropped more than 13 percent this year.

“I don’t think any leader can just ignore those sorts of very significant economic weaknesses,” Cohen said.

To contact the reporters on this story: Volodymyr Verbyany in Kiev at vverbyany1@bloomberg.net; Balazs Penz in Budapest at bpenz@bloomberg.net; Stephen Bierman in Moscow at sbierman1@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Justin Blum, Gail DeGeorge

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