Putin Urges Ukraine to Withdraw Troops as Turmoil Grips Far East

May 01, 2014 7:05 pm ET

(For more on the Ukraine conflict, see EXT2.)

May 2 (Bloomberg) -- Russian President Vladimir Putin urged Ukraine to withdraw forces from its easternmost regions as the International Monetary Fund warned that extra financing may be needed if control of the industrial heartland is lost.

In a telephone call yesterday with German Chancellor Angela Merkel, Putin also demanded an end to violence gripping cities in southeastern Ukraine, according to a Kremlin statement. The Ukrainian conflict will top the agenda when Merkel and U.S. President Barack Obama meet today in Washington, according to White House spokesman Jay Carney.

“We expect to continue a path that sees an international coalition escalating the costs that Russia will have to endure” if it “continues to destabilize the situation in eastern Ukraine and southern Ukraine, or even goes further and uses its forces to cross the border,” Carney told reporters yesterday.

Ukraine no longer controls the eastern city of Donetsk, Acting President Oleksandr Turchynov said on April 30. The U.S. and European Union accuse Russia of stoking the turmoil, which has worsened even after they ratcheted up sanctions on Russian interests. Russia says Ukraine’s rulers must listen to complaints in the east and cede powers to the regions.

The IMF, which approved a $17 billion bailout for Ukraine on April 30, said yesterday that “a significant recalibration of the program” might be required if the situation worsens. The lender predicts Ukraine’s economy will contract by 5 percent this year before rebounding in 2015 with 2 percent growth.

Throwing Stones

In Ukraine, armed men stormed the Donetsk regional prosecutors’ office yesterday, throwing stones and stun grenades. Russian forces, estimated by NATO to number about 40,000, continue to mass on Ukraine’s border, said Turchynov, who signed a decree to reinstate a military draft.

As many as 1,000 gunmen have seized buildings in more than 10 cities in eastern Ukraine, according to the Interior Ministry, while Gennady Kernes, mayor of Kharkiv, is in a hospital in Israel where he was transferred after being shot.

In the city of Slovyansk, pro-Russian rebels said they had begun talks to swap international monitors abducted last week, the Interfax news service reported. The militants freed two hostages, though they still have 50 more, including eight from the Organization for Security and Cooperation in Europe.

Vyacheslav Ponomarev, the city’s self-appointed mayor, said he’s in discussions with the government in Kiev to swap the OSCE monitors for his captured allies, according to Interfax. During their call yesterday, Merkel appealed to Putin for help in freeing the observers.

Moscow Parade

While Merkel urged Putin to intervene, according to a German government statement, the Kremlin cited the Russian president as telling the chancellor the “most important” thing now is for Ukraine to remove its troops from the east.

In Moscow, Putin celebrated May 1 with a return to Soviet- era traditions in the shape of a parade by unions and medals for “heroes of labor” awarded in the Kremlin.

In the first Labor Day march across Red Square since the Soviet Union collapsed, workers carried banners saying “I’m proud of my country,” “In Putin we trust,” and “We’re going to vacation in Crimea.”

The U.S. and Europe are threatening industries such banking and energy if Putin doesn’t calm the crisis. Putin has warned the U.S. and the EU that further sanctions may trigger a response against foreign companies in Russia’s energy and other industries.

Economic Strains

In Washington, the head of the U.S. Senate Armed Services Committee urged Obama’s administration to expedite aid promised to Ukraine and provide further support, including body army and fuel, for the country’s military.

Senator Carl Levin, a Michigan Democrat, also said the U.S. should pursue tougher sanctions on Russian interests, including the energy and banking industries. He also called for working with European allies to ease their dependency on natural gas from Russia to keep the government in Moscow from using energy “to coerce not only Ukraine, but also many of its neighbors.”

Russia is suffering from the crisis. Its economy is in a recession and may only expand 0.2 percent this year, according to Antonio Spilimbergo, the IMF’s mission chief for Russia. The ruble is down 7.6 percent against the dollar this year, the second-worst among 24 emerging-market currencies tracked by Bloomberg.

‘Long-Lasting Disruption’

With the crisis straining Ukraine’s shrinking economy, the government will get an immediate $3.2 billion disbursement under the IMF program to help it meet the $9 billion in debt payments it’s facing this year. The loan approval unlocks a total of $27 billion in international aid.

The Washington-based lender’s staff said in an e-mailed report that more financing would be needed if there was “a long-lasting disruption of relations with Russia that depresses exports, investment, and growth or loss of economic control over the east that reduces budget revenue.” Ukraine’s three eastern regions accounted for 30 percent of industrial output last year, according to the IMF.

Gross domestic product fell 1.1 percent from a year earlier in the first quarter as industrial production and the hryvnia slumped amid deadly protests and Russia’s annexation of the Crimean peninsula. With the currency down 29 percent this year, the government has pledged to stabilize the nation’s accounts.

“The authorities have developed a bold economic program to secure macroeconomic and financial stability and address long- standing imbalances and structural weaknesses to lay a firm foundation for high and sustainable growth,” IMF Managing Director Christine Lagarde said in an e-mailed statement.

Even so, the yield on Ukraine’s dollar-denominated bonds due 2023 rose 26 basis points to 10.65 percent, a six-week high, amid the continuing tensions on the ground.

--With assistance from Volodymyr Verbyany in Kiev, Sandrine Rastello in Washington, Dalia Fahmy in Berlin and Ilya Khrennikov in Moscow.