Ukraine Mounts Security Push as Russia Warns on Civil War 

Ukrainian authorities sent security forces to Kharkiv to clear the country’s second-biggest city of separatists as U.S. Secretary of State John Kerry accused Russia of using “special forces and agents” to spark unrest.

An “anti-terrorist operation” was under way in Kharkiv, 40 kilometers (25 miles) from the Russian border, with the subway closed and the center sealed off, Interior Minister Arsen Avakov said today. The Russian government said its neighbor’s crackdown risks sparking civil war.

“Provocateurs have been sent there to create chaos,” Kerry told the Senate Foreign Relations Committee in Washington. “These efforts are as ham-handed as they are transparent,” Kerry said. He accused Russia of working to “create a contrived crisis with paid operatives across an international boundary.”

Russia and the U.S. are on a collision course after tensions flared anew in Ukraine over the weekend. With Russian forces deployed on the border with Ukraine, the U.S. and its allies are concerned that President Vladimir Putin may be planning further incursions into eastern Ukraine after annexing the Black Sea peninsula of Crimea. Russia cut its forecast for 2014 economic growth today, as did the International Monetary Fund.

In Luhansk, 330 kilometers southeast of Kharkiv, protesters took 60 hostages, planted mines and made threats with explosives and weapons, Ukraine’s security service said in a statement on its website.

Auction Canceled

The unrest has prompted investors to sell Russian and Ukrainian assets. Ukraine’s 2023 Eurobonds fell to the lowest level in two weeks, with the yield rising 19 basis points to 9.46 percent. The hryvnia weakened 1.1 percent to a record 11.825 per dollar at 3:35 p.m. in Kiev.

The Finance Ministry in Moscow canceled tomorrow’s ruble-bond auction after yields jumped the most in three weeks yesterday. The benchmark Micex share index rose 0.2 percent today, though it’s slid 6.4 percent since Putin’s intervention in Crimea on March 1. Gold climbed to the highest price in almost two weeks while crude oil also rose.

“We’ve already deported a number of Russians who’ve been in eastern Ukraine provoking the situation and violating Ukrainian laws,” Ukrainian Foreign Minister Andriy Deshchytsia said in a Bloomberg Television interview. “The Ukrainian government has enough power and authority to control the situation.”

Referendum Demand

The pro-Russian protesters demanded a referendum on seceding from Ukraine, state-run Rossiya 24 television reported. The regional government building in Kharkiv was cleared of separatists today, with 70 people detained, according to Avakov. None of them are Russian citizens, he said.

Russia’s Foreign Ministry said 150 specialists from a U.S. security company, Greystone, are involved in putting down protests. Ukraine denied U.S. advisers are involved, and the Wall Street Journal cited a company representative as saying Greystone has no one working in Ukraine.

“We call for the immediate halt of all military preparations, which risk sparking a civil war” in Ukraine, the ministry in Moscow said in a statement on its website.

Amid the tension, Russia cut its growth forecast for 2014 to between 0.5 percent and 1.1 percent, Deputy Economy Minister Andrei Klepach told reporters in Moscow, citing lower export demand for natural gas and increased capital outflows. That compares with a 2.5 percent target set in December.

IMF Prediction

The IMF said Russian gross domestic product will expand 1.3 percent, down from a 2 percent prediction made in January. Chief Economist Olivier Blanchard said in a Bloomberg Television interview the fund may lower its forecast further, perhaps to less than 1 percent.

Russian companies should consider delisting their shares from foreign stock exchanges and switching trading to Moscow amid the standoff, First Deputy Prime Minister Igor Shuvalov told reporters after a government meeting near Moscow. “This is a question of economic security,” he said.

Kerry said today that said additional sanctions targeting Russia’s energy, banking and mining industry are “all on the table” if Russia intervenes further in Ukraine.

Russian Speakers

The latest demonstrations have resembled the actions of pro-Russian protesters who seized Crimea’s assembly and paved the way for Russia to annex the peninsula last month. Putin says he has the right to defend Russian speakers in Ukraine from “fascists” after the ouster of President Viktor Yanukovych.

Russian speakers account for 44.3 percent in the Kharkiv region, 74.9 percent in the Donetsk region and 68.8 percent in the Luhansk region, 2001 census data show.

U.S. and European officials are increasingly concerned that yesterday’s disturbances, along with Russian economic and military pressure, signal the next phase of Putin’s effort to make Ukraine a loose federation allied with Russia.

Any further Russian move into Ukraine “would be an historic mistake” and “a serious escalation,” North Atlantic Treaty Organization Secretary General Anders Fogh Rasmussen said in Paris. “It’s obvious that the evolving security situation in Ukraine makes it necessary to review our defense plans.”

Russia has as many as 40,000 soldiers stationed along the frontier, according to the U.S. and NATO. Putin says they are conducting military exercises and will withdraw afterward.

Ukraine’s national guard and irregular forces of Pravyi Sektor, which unites nationalist groups, are gathering in southern and eastern Ukraine, the Russian Foreign Ministry said.

‘Needling Ukraine’

An outright invasion of eastern Ukraine is unlikely in the run-up to the May presidential election, said Chris Weafer, a partner at Moscow-based Macro Advisory.

“Recent events look like a Cold War-type set-up filled with agents provocateurs,” Weafer said by phone from London. “It seems like Russia’s just needling Ukraine to see what they can get away with.”

Kerry spoke to Russian Foreign Minister Sergei Lavrov yesterday to arrange talks among officials from Ukraine, the U.S., the EU and Russia within 10 days to head off any escalation. He said today a meeting will take place next week.

Russia is ready to examine a “multilateral format” for talks, Lavrov said in Moscow. The new Ukrainian government hasn’t yet sent “any positive signals” to the southeast, he told reporters.

“We urge the new government, which is working in difficult circumstances, to reach out and to be as inclusive as possible,” European Union President Herman Van Rompuy said at the Austrian parliament in Vienna today.

(By Kateryna Choursina, Jake Rudnitsky and Nicole Gaouette)

Source: bloomberg

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