US readies more sanctions as Ukraine costs rise for Moscow

Credit: Reuters/Baz Ratner

1 of 4. Ukrainian soldiers stand guard near the Kramatorsk airport in eastern Ukraine April 25, 2014.

Obama said he would seek to make sure key European leaders shared his view that Russia had failed to live up to the terms of a Ukraine peace accord in Geneva earlier this month, under which Russia, the United States, Ukraine and the European Union agreed to work to disarm illegal groups.

The Ukraine government launched further military operations against some of the pro-Russian separatists who have seized government buildings across eastern Ukraine, having killed up to five rebels on Thursday.

Russia's foreign minister, Sergei Lavrov, accused authorities in Kiev of waging 'war on their own people'.

'This is a bloody crime, and those who pushed the army to do that will pay, I am sure, and will face justice,' Lavrov said.

Russia is also paying for the dispute, with heavy capital flight prompting credit rating agency Standard & Poor's to cut the country's ratings on Friday. That in turn forced Russia's central bank to raise its key interest rate to reverse a drop in the ruble.

Lavrov said Moscow was committed to implementing the Geneva agreement but accused Washington of distorting it with 'one-sided demands'. However, Russia's Defence Ministry said it was ready for 'unbiased and constructive' talks with the United States to stabilize the situation.

Obama, who accuses Moscow of sending agents to coordinate the unrest in the east, as it did before seizing Ukraine's Crimea region in February, is planning to call allies in Europe later in the day.

'The window to change course is closing,' U.S. Secretary of State John Kerry warned Russia late on Thursday, citing Obama's earlier comments that Washington was ready to impose new sanctions, on top of those imposed after Crimea was annexed.

Kerry said Russia was using propaganda to hide what it was trying to do in eastern Ukraine - destabilize the region and undermine next month's Ukrainian presidential elections - and decried its 'threatening movement' of troops up to Ukraine's border.

'If Russia continues in this direction, it will not just be a grave mistake, it will be an expensive mistake,' Kerry said.

Russian President Vladimir Putin has scoffed at the sanctions so far imposed, which have been limited to travel bans and overseas assets freezes on individuals.

'WORLD WAR THREE'

Ukraine's Prime Minister Arseny Yatseniuk said Russia wanted to start World War Three by occupying the country 'militarily and politically' and creating a conflict that would spread to the rest of Europe.

Ukraine said Russian troops conducting exercises had approached to within 1 kilometer (1,100 yards) of its border and would treat any incursion as an invasion.

Ukrainian special forces launched a second phase of their operation in the east of the country on Friday by mounting a full blockade of the rebel-held city of Slaviansk, an official on the presidential staff said.

One of its military helicopters was hit by rocket fire and exploded while on the ground at an airport near the city, the Defence Ministry said.

Interior minister Arsen Avakov insisted every care was being taken to avoid non-combatant casualties, after Moscow warned it may act if Kiev used the army against civilians.

German Foreign Minister Frank-Walter Steinmeier meanwhile suggested that the United States, the EU and Russia should make a joint high-level trip to hotspots in Ukraine with local officials to signal political backing for the Geneva agreement.

A German government spokesman told reporters on Friday that Russia had done nothing to implement the agreement, and Chancellor Angela Merkel had called Putin to urge action.

During that call, Putin called for urgent talks between Russia, the EU and Ukraine on Russian gas supplies to Europe, which are now under threat over the crisis in Ukraine, through which much of the gas is piped.

ODESSA CLASH

Seven people were injured overnight at a pro-Ukrainian checkpoint near the Black Sea port of Odessa when an explosive device blew up, police said on Friday.

Residents have built several such checkpoints near the town aimed at stopping pro-Russian separatists entering from Moldova's breakaway territory of Transdniestria.

NATO warned last month of a possible Russian military grab for Transdniestria following its annexation of Crimea.

Ukrainian forces killed up to five pro-Moscow rebels on Thursday as they closed in on the separatists' military stronghold in the east, and Russia launched army exercises near the border in response, raising fears its troops would invade.

The Ukrainian offensive amounts to the first time Kiev's troops have used lethal force to recapture territory from rebels who have seized swathes of eastern Ukraine since April 6 and proclaimed an independent 'People's Republic of Donetsk'.

The Kremlin, which says it has the right to invade its neighbor to protect Russian speakers, has built up forces - estimated by NATO at up to 40,000 troops - on Ukraine's border.

ECONOMIC DAMAGE

Though the direct financial impact of sanctions has been limited, Russia's economy is being damaged by the crisis.

Central bank data released earlier this month showed an estimated $63.7 billion in net capital outflows in the first three months of 2014, the same as for the whole of 2013. The World Bank has said this year's total could reach $150 billion.

S&P cut Russia's foreign currency sovereign ratings to reflect the risk of further outflows, hitting Moscow stocks and weakening the ruble.

Russia's central bank then raised its key interest rate by 50 basis points to 7.5 percent to address the currency weakness, which it said was raising inflation expectations.

Ukraine, a former Soviet republic, slid into unrest late last year when Moscow-backed President Viktor Yanukovich rejected a pact to build closer ties with Europe. Protesters took over central Kiev and he fled in February. Days later, Russian troops seized control of Crimea.

(Additional reporting by Alexei Anishchuk, Lidia Kelly and Oksana Kobzeva in Moscow, Alastair Macdonald and Pavel Polityuk in Kiev, Arshad Mohammed in Washington, and Erik Kirschbaum in Berlin; writing by Will Waterman; editing by Giles Elgood)