G-7 Set to Unveil New Russia Sanctions as OSCE Monitors Held

Apr 26, 2014 9:37 am ET

(Updates with Ukraine’s SBU comment in 18th paragraph, Churkin in 27nd. For more on the Ukraine conflict, see EXT2.)

April 26 (Bloomberg) -- Group of Seven leaders agreed to impose additional sanctions on Russia, blaming it for stoking the conflict in Ukraine as the Ukrainian government said rebels had taken international military monitors hostage.

Penalties will be unveiled early next week by the U.S. and the European Union, according to a European diplomat and an American official. The sanctions may target individuals with influence in sectors of the Russian economy, such as energy and banking, White House Deputy National Security Adviser Ben Rhodes told reporters traveling with U.S. President Barack Obama.

The leaders of the world’s largest industrial democracies announced their decision today as turmoil intensified in Ukraine and Russia renewed military exercises on its neighbor’s border. The move followed a conference call yesterday between Obama and the leaders of Germany, France, the U.K. and Italy.

“We will move swiftly to impose additional sanctions on Russia,” the G-7 leaders said in a statement issued today by the White House as Obama visited South Korea. They said Russia “has continued to escalate tensions by increasingly concerning rhetoric and ongoing threatening military maneuvers.”

Geneva Accord

Russia has yet to fulfill its part of an April 17 accord signed in Geneva aimed at calming the crisis, the G-7 leaders said. The confrontation -- the biggest between Russia and its former Cold War enemies since the collapse of the Soviet Union - - escalated after Russian President Vladimir Putin warned Ukraine against continuing an anti-separatist offensive that killed five rebels.

New U.S. sanctions may be unveiled as soon as April 28, according to the U.S. official, who asked not to be identified discussing internal deliberations. The measures would be coordinated with allies, though penalties from each country wouldn’t necessarily be identical, the official said.

The EU would sanction 15 more Russians in positions of power, and the list of targets may be expanded after an emergency meeting of the group’s foreign affairs council on April 28, said the diplomat, who asked not to be identified because of the sensitivity of the matter.

Rhodes, speaking today aboard Air Force One, said the measures wouldn’t happen over the weekend and could come “early in the coming week.” Asked about a possible Russian response, he said “I don’t think they’ll like them.”

‘Significant Impact’

“We believe that these sanctions will have a significant impact,” Rhodes told reporters.

In the wake of capital flight and a Russian credit-rating downgrade yesterday by Standard & Poor’s, the country’s central bank unexpectedly raised its key interest rate to 7.5 percent, from 7 percent. All but one of 23 economists in a Bloomberg survey had forecast no change.

The ruble has lost almost 9 percent this year against the dollar, the second-worst performance among 24 emerging currencies tracked by Bloomberg, after Argentina’s peso.

With tensions high, Russia’s Micex Index of stocks fell for a fifth day after S&P lowered Russia’s sovereign rating to BBB-, the lowest investment grade, from BBB. The gauge fell 1.6 percent in Moscow, taking its decline to 15 percent this year.

The prospect of further sanctions has stirred concern in the business community in Europe. Rhodes said the U.S. and its allies were aware of the potential impact on the global economy.

Business ‘Unease’

“We understand that there’s unease about the economic consequences of increased sanctions on a large economy like Russia,” he said.

During the call between Obama, U.K. Prime Minister David Cameron, German Chancellor Angela Merkel, French President Francois Hollande and Italian Prime Minister Matteo Renzi, the leaders condemned “the absence of any efforts” by Russia to implement the Geneva agreement and agreed on the need for further penalties, Cameron’s office said in a statement.

Their call for added sanctions was also endorsed by G-7 members Canada and Japan, as well as the president of the European Commission. In the G-7 statement, the leaders welcomed steps taken by the Ukrainian government to abide by the accord and faulted Russia for failing to persuade armed militants to leave government buildings they’ve occupied in eastern Ukraine.

OSCE Hostages

In Ukraine, pro-Russian militants yesterday captured a bus carrying observers from the Organization for Security and Cooperation in Europe, a 57-nation group that includes Russia and the U.S. focusing on conflict prevention and preserving human rights, Ukraine’s Interior Ministry said in a statement on its website. They were holding 13 people hostage in the separatist-held eastern Ukrainian city of Slovyansk, it said.

“The OSCE’s representatives are being held in inhumane conditions in a basement of terrorists’ headquarters,” Ukraine’s State Security Service said in a statement on its website today, urging Russia to back demands for their immediate release. “One person needs immediate medical assistance, but the terrorists are refusing to help.”

Russia is “undertaking measures” to resolve the situation, the Foreign Ministry in Moscow said today in a statement. The Ukrainian government, which hosted the observers, bears full responsibility for their safety, the ministry said, adding that the authorities would have been expected to coordinate their visit to areas not under their control.

Russia calls for the immediate release of the detained observers and will do all it can to win their release, state-run RIA Novosti reported today, citing Andrei Kelin, Russia’s envoy to the OSCE.

‘People’s Mayor’

Vyacheslav Ponomaryov, the self-proclaimed pro-Russian “people’s mayor” of Slovyansk, said rebels had stopped the bus because the OSCE mission was accompanied by Ukrainian officers, and activists had found weapons and ammunition, news service Interfax cited him as saying.

Another separatist leader, Denis Pushilin, said they would not release the mission, accusing them of spying for NATO, Ukraine’s private channel TV5 reported. Pushilin said they may exchange Ukrainian officers for insurgents previously detained by Ukrainian authorities, according to TV5.

Ukrainian Prime Minister Arseniy Yatsenyuk accused Russia of seeking to disrupt a May 25 presidential election, remove the pro-European government in Kiev and seize territory.

World War

“Russian military aggression on Ukrainian territory will lead to a military conflict all across Europe,” he told a cabinet meeting in Kiev. “The world has not yet forgotten World War II, while Russia wants to start World War III.”

Yatsenyuk met with Italy’s Renzi today, with both sides reiterating their commitment to the Geneva agreement, according to a statement e-mailed by the Italian premier’s office. Renzi told his Ukrainian counterpart that the international community expects the presidential ballot to take place on May 25 as planned.

Ukraine’s premier is returning from Italy today “because of the situation in the country,” his spokeswoman, Olha Lappo, said via text message.

Russia first wants to see how the May 25 presidential ballot is conducted and won’t make any “categorical” conclusions before vote, Vitaly Churkin, Russia’s ambassador to the United Nations, said in an interview with Komsomolskaya Pravda published today.

Tanks Shooting

“If tanks will be shooting, then of course it’s absurd,” Churkin said.

Russia’s Foreign Ministry said it was adhering to the Geneva pact and called for a halt to military operations in Ukraine. Foreign Minister Sergei Lavrov said on state television yesterday that pro-Russian leaders in the east would be ready to abide by the deal if the Ukrainian government moved to clear Kiev’s Independence Square of supporters and disarmed nationalist group Pravyi Sektor.

EU foreign ministers agreed in principle to expand a “stage two” blacklist on April 14, possibly targeting Russian companies alongside government officials and military officers. So far, the bloc has slapped asset freezes and travel bans on 55 Russians and Ukrainians.

“Stage three” sanctions -- EU code for sweeping economic measures -- are more controversial within the 28-nation group and would need to be decided by its leaders. The European diplomat said EU members will make clear in a statement next week that they continue to prepare such sanctions that would apply to entire sectors of the Russian economy.

Crossing Border

In the past day, Russian aircraft entered Ukraine’s airspace several times, U.S. Army Colonel Steve Warren, a Pentagon spokesman, said in an e-mail. He said the U.S. urged Russia “to take immediate steps to de-escalate the situation.”

Ukraine contradicted the claim, with its defense minister, Mykhaylo Koval, saying that four Russian Ilyushin IL-76 transport planes only moved along the frontier, according to Interfax.

The Russian army, conducting exercises, came close to the frontier yesterday without crossing it and Ukraine’s military is “fully ready to fight any aggression,” Koval said told reporters in Kiev yesterday.

Koval described the offensive against separatists in Slovyansk, where the five rebels died April 24, as “a surgical operation,” saying the security forces are aiming to “liquidate separatists and protect the lives of peaceful citizens at the same time.”

One member of the government forces has died and nine have been wounded since the operation started last week, according to the official in charge of Ukraine’s anti-terrorist center, Vasyl Krutov. A helicopter pilot was injured when his aircraft came under fire yesterday, setting the fuel tank on fire, he said.

Police in the southern Ukrainian city of Odessa are also investigating an explosion that injured seven people this morning as a terrorist attack, Interfax reported, citing police chief Petro Lutsyk.

--With assistance from Daria Marchak and Volodymyr Verbyany in Kiev, Jason Corcoran, Irina Reznik, Henry Meyer and Yuliya Fedorinova in Moscow, Jones Hayden in Brussels, Peter Laca in Prague, Indira A.R. Lakshmanan and Kasia Klimasinska in Washington, Margaret Talev in Seoul, Patrick Donahue in Berlin and Chiara Vasarri in Rome.