Ukraine Vows To Staunch [Russian] Separatism As Militant Opposition Spreads

April 30 (Bloomberg) — Ukraine’s acting president vowed to create a special police force to staunch the spread of separatism in the country’s east, vowing to overcome unrest he says is stoked by Russia and hold an election slated for May 25.

Following an expansion of sanctions against people and companies linked to Vladimir Putin’s inner circle this week, the Russian president warned that further economic penalties over the crisis may lead the government to reconsider participation by foreign companies in his country’s energy and other key industries. European officials pressed their criticism of Russia’s commitment to an accord seeking to defuse tensions.

As part of a creeping campaign by pro-Russian militants across Ukraine’s east, armed men seized government buildings in the city of Horlivka today, while news service Unian reported a member of the Donetsk electoral commission was kidnapped by “terrorists.” The U.S. and EU say Putin’s government is helping the separatists to destabilize the country of 45 million people in the run-up to next month’s presidential ballot in their worst standoff with Russia since the Cold War.

“Our first and main task is to prevent the spread of the terrorist threat to other regions,” Ukraine’s acting President Oleksandr Turchynov said in Kiev today. “Because there is a real threat of Russia starting a continental war, our army is on full combat alert.”

Expanded Sanctions

The EU will sign the economic part of an association agreement after Ukraine’s presidential election next month, the bloc’s president, Herman Van Rompuy, said in Prague today.

The deal, which triggered the protests that eventually toppled former Ukrainian President Viktor Yanukovych when he refused to sign it last November, “will give the people of Ukraine the prospect of a European way of life and the prosperity that they deserve,” Van Rompuy said.

Russia hasn’t lived up to an accord signed April 17 in Geneva intended to defuse the confrontation, Van Rompuy said, echoing a later statement by Italian Premier Matteo Renzi.

Speaking with Putin in his first conversation since becoming Italy’s premier in February, Renzi asked the Russian leader “for a sustained commitment to produce concrete results in line with the Geneva accord.”

EU Sanctions

The EU added Russian Deputy Premier Dmitry Kozak to a list of people slapped with travel bans and asset freezes along with others including pro-Russian separatist leaders, according to a statement yesterday in the EU’s Official Journal.

A day earlier, the U.S. targeted seven people, including Kozak and Igor Sechin, head of OAO Rosneft, and 17 companies linked to Putin allies, such as InvestCapitalBank.

German Chancellor Angela Merkel said she didn’t see “any problem at all” for the Group of Seven industrial countries to take more steps against Russia. If the current sanctions don’t work “then we should not be afraid that further sanctions are necessary,” she told a news conference today in Berlin.

While further penalties may have greater consequences for Russia, which is “already feeling the pain” of sanctions, officials should make sure any future actions don’t harm the European economy, European Commission President Jose Manuel Barroso said today in Washington.

In Recession

Russia is in a recession, the International Monetary Fund said today as it cut the country’s economic-growth forecast for the second time this month, citing geopolitical risks. The $2 trillion economy is facing two three-month periods of contraction, Antonio Spilimbergo, the IMF’s mission chief for Russia, told reporters today in Moscow.

The ruble lost 0.1 percent to 41.8566 against the central bank’s target basket of euros and dollars at 7:34 p.m. in Moscow. It’s down more than 8 percent against the dollar this year, the second-worst among 24 emerging-market currencies tracked by Bloomberg. Russia’s RTS Index has slumped 20 percent this year, the worst performance among 93 indexes tracked by Bloomberg worldwide. The gauge of dollar-denominated shares climbed 0.2 percent today.

Ukraine’s economy shrank 1.1 percent in the first quarter as industrial production and the hryvnia slumped amid deadly protests and Russia’s annexation of Crimea last month.

The yield on the Ukrainian government’s benchmark dollar-denominated notes due April 2023 rose 18 basis points to 10.413 percent by 1:52 p.m. in Kiev. The hryvnia weakened 0.4 percent to 11.6 per dollar, according to data compiled by Bloomberg.

Status Quo

“Russia will want to keep the status quo in eastern Ukraine,” Charles Seville, director of Fitch’s sovereign group, told investors and reporters today at a briefing in London. “It’s not going to de-escalate meaningfully. It’s going to make it difficult for presidential elections to be held and that will de-legitimize the result. So I don’t see much scope for deescalation over the next month.”

Russian forces, estimated by NATO to number about 40,000, continue to concentrate on Ukraine’s border, Turchynov said. The government has fired the heads of state security in areas where the unrest was taking place, he said, calling on “patriots to sign up to serve as police in those regions.”

Along with the U.S. and EU, the government in Kiev says Putin has infiltrated the country’s eastern regions with agents and covert military forces to create unrest in what may be a precursor to an invasion, a tactic it used in its 2008 war with Georgia, Ukraine’s envoy to the United Nations said yesterday.

Toughest Month

“May will clearly be one of the toughest months in the country’s history,” Viktoria Syumar, first deputy head of the National Security and Defense Council in Kiev, said on her Facebook page.

About 1,000 gunmen have seized buildings in more than 10 cities in eastern Ukraine, according to the country’s Interior Ministry. About 20 seized the Horlivka city council and regional police headquarters today, Interfax said. Yesterday, hundreds of activists wielding sticks and waving Russian flags stormed the Luhansk regional administration.

A member of the eastern Donetsk region’s electoral commission was abducted, Unian cited the deputy head of the commission Andriy Mahera as saying today.

While Putin’s government has prepared measures to retaliate for penalties imposed by the U.S. and its allies, Putin told reporters in Minsk, Belarus, yesterday that he doesn’t consider them necessary for now, though that may change.

Russian Countermeasures

“If this kind of situation continues, of course we will have to start looking at who is doing what in Russia in different sectors of our economy, including the energy sector,” he said. “We really have no desire to resort to these kinds of measures, take our own steps in response, and I hope that things do not reach this point.”

Putin’s remarks added uncertainty for companies that have stakes in Russia’s energy industry, including Royal Dutch Shell Plc and Exxon Mobil Corp., which is planning Arctic drilling in an alliance with Russian state-controlled Rosneft.

The latest names on the EU sanctions list include Valery Gerasimov, chief of the general staff of Russia’s armed forces and Igor Sergun, head of the main intelligence directorate, and bring the number of people blacklisted to 70.

Both the U.S. and EU have said they’ll extend sanctions to cover industries in the Russian economy, possibly including banks and energy, if Putin escalates the crisis.

Most companies on the latest U.S. list are tied to Gennady Timchenko or brothers Arkady and Boris Rotenberg, who were placed on a sanctions list on March 20. They include the Volga Group, controlled by Timchenko, and InvestCapitalBank and SMP Bank, which are controlled by the Rotenbergs.

Sechin, 53, was a Putin colleague at the St. Petersburg mayor’s office before rising to become head of state-run Rosneft. The company, in which British oil company BP Plc owns 20 percent, isn’t being sanctioned.

The EU has been reluctant to impose broader sanctions because of the potential harm to its member states, which rely on Russia for energy imports. Germany, Europe’s largest economy, had $89 billion in trade with Russia in 2012.

To contact the reporters on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net ; Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net ; Peter Laca in Prague at placa@bloomberg.net

To contact the editors responsible for this story: James M. Gomez at jagomez@bloomberg.net ; John Walcott at jwalcott9@bloomberg.net ; Balazs Penz at bpenz@bloomberg.net Paul Abelsky, Andrew Langley

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