Ukraine in ‘undeclared war’ with Russia as rebels unite

Bloomberg

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A separatist celebrates victory in a disputed independence referendum in the eastern Ukrainian city of Luhansk on May 12, 2014. Events of the past two days in eastern Ukraine bore similarities to those that preceded Putin’s annexation of the Crimean peninsula in March, although Russia stopped short yesterday of suggesting an intention to absorb eastern Ukraine.

Ukraine is fighting an “undeclared war” with Russia, its defense minister said, as rebels in its eastern region sought to secede and Russian gas export monopoly OAO Gazprom (GAZP) gave Kiev a deadline to pay or risk being cut off.
Facing a military assault by Ukrainian government troops, the self-styled Donetsk People’s Republic and neighboring Luhansk agreed to unite today, a day after declaring themselves sovereign states. Donetsk said 90 percent of voters backed splitting from Ukraine in a May 11 referendum that was rejected by the U.S. and European Union as illegitimate and marred by irregularities. Luhansk reported a similar ballot result.
The events echo Russia’s annexation of Crimea in March, Ukraine’s government and its U.S. and European allies say President Vladimir Putin is stoking unrest that’s threatening to rip apart the former Soviet republic ahead of a May 25 presidential election. At least 40 people have died in two months of fighting between government forces and rebels in Donetsk, the Unian news service reported yesterday.
“In our eastern regions we have an undeclared war,” acting Defense Minister Mykhaylo Koval told reporters in Kiev today. “Our neighboring country unleashed the war, sending special forces and saboteurs into our territory.”
Company sanctions
EU foreign ministers froze the assets of companies for the first time, including oil and natural-gas producer Chernomorneftegaz, after they were expropriated during Russia’s Crimea’s annexation. They added 13 people to a list of individuals facing asset freezes and travel bans for destabilizing Ukraine and threatened more measures, along with the U.S., to target entire Russian industries.
Even so, Russian stocks advanced on bets the latest penalties won’t hurt the economy. The Micex Index (INDEXCF) gained 1.2 percent to 1,391.47 at 4:08 p.m. in Moscow, while the ruble strengthened 0.6 percent to 34.8783 per dollar. Ukraine’s hryvnia was 0.5 percent weaker to the dollar, for a loss of 30 percent since the start of the year.
If Donetsk and Luhansk secede, Ukraine would lose about a fifth of its economic output, Bank of America analyst Vadim Khramov wrote in an e-mailed report today. As for Russia, the tension may cost it $115 billion, or about 3 percent of annual output, and exacerbate recessionary pressure, said Nariman Behravesh, chief economist at consultancy IHS Inc. (IHS), said in an e-mail today.
Heavy price
“While Russia could end up paying a very heavy economic price for its annexation of Crimea and its ongoing conflict with Ukraine, the negative impacts on other parts of the world, notably Europe, will also be hard to avoid,” Behravesh said.
The U.S. says Russia has massed about 40,000 troops on Ukraine’s border and is helping insurgents who have seized buildings and television towers in at least 10 cities.
With the separatists lacking infrastructure and voter registries and without control over the entire regions, the referendums were held in a salient extending from Russia’s border to about 200 kilometers (120 miles) into Ukraine in northern Donetsk and southern Luhansk, according to an analysis by news website espresso.tv.
The balloting was “illegal under Ukrainian law” and a “transparent attempt” to create further division, White House spokesman Jay Carney told reporters in Washington. He said there were cases of pre-marked ballots and children voting and that the U.S. was disappointed Russia didn’t use its influence to prevent the referendums from taking place.
‘Deep crisis’
Russia said a “reluctance of the Kiev authorities to engage in real dialogue with the representatives of the regions” was an obstacle to de-escalation.,
“The recently held referendums in the Donetsk and Luhansk regions of Ukraine should be seen as a clear signal of a deep crisis,” its Foreign Ministry said in a statement on its website today.
A majority of Ukrainians, or 56 percent, believe their country is at war with Russia, according to a poll by the Kiev-based Razumkov Center published today.
About 53 percent want to join the EU -- ousted President Viktor Yanukovych’s refusal to sign an EU association agreement triggered the crisis -- whereas two thirds see Russia as “brotherly” and “friendly” according to the April 25-29 poll of 2,012 people. It had a margin of error of three percentage points.
Luhansk’s the self-proclaimed “peoples governor,” Valery Bolotov, was shot and wounded, probably by a sniper, news website www.0642.ua reported. His life was not in danger.
Gas deadline
The rebels will start an “anti-terrorist operation” against the Ukrainian military if they refuse to leave Donetsk within 48 hours, the head of the separatist group, Denis Pushilin, said by phone yesterday.
Russian gas-export monopoly Gazprom informed Ukraine it must pay in advance for gas by June 2 and will receive only those supplies it pays for, risking a cutoff, company spokesman Sergei Kupriyanov said in an e-mailed statement today. Ukraine owes $3.5 billion for fuel delivered in 2013 and through April this year, Gazprom Chief Executive Officer Alexey Miller said.
Ukraine, which depends on Russia for half of its gas consumption, has an opportunity to pay, as it received the first $3.2 billion of an international aid package last week, Medvedev said. Stopping shipments to Ukraine may have an effect on the rest of Europe because about 15 percent of the region’s gas supply travels through the country’s Soviet-era pipelines.

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