Ukraine Hostages Free in East as Kerry Blames Russian Agents (1)

Pro-Russian activists released most
of their hostages in Ukraine’s eastern city of Luhansk today
after U.S. Secretary of State John Kerry accused Russia of using
“special forces and agents” to fuel unrest.

Ukrainian security forces continued an “anti-terrorist”
operation in the eastern cities of Luhansk, Donetsk and Kharkiv,
the country’s second-largest, Interior Minister Arsen Avakov
said today. Pro-Russian protesters are still occupying buildings
in the latter two and want a referendum on joining Russia and a
boycott of Ukraine’s May 25 presidential election.

“I think the way to solve this crisis will be found within
48 hours,” Avakov said in a statement on his ministry’s
website. “The anti-terrorist alert in all three regions has not
been canceled and at any given moment we will be able to carry
out planned actions.”

Russian President Vladimir Putin, who is due to speak this
afternoon in Moscow, has ratcheted up pressure on Ukraine since
he annexed the Black Sea peninsula Crimea last month. His
government has shrugged off sanctions from the U.S. and European
Union, banning Ukrainian imports, raising gas prices and massing
troops along its smaller neighbor’s eastern border in the worst
standoff between Russia and its former Cold War adversaries
since the fall of the Iron Curtain.

Hostages Released

The unrest prompted Russia yesterday to cut its economic
growth forecast this year and has triggered the selling of
Russian and Ukrainian assets by investors.

The yield on Ukraine’s 2023 Eurobonds rose 14 basis points,
or 0.14 percentage point, to 9.6 percent by 12:38 p.m. in Kyiv,
according to data compiled by Bloomberg. The hryvnia has lost 31
percent this year against the dollar, the world’s worst
performing currency tracked by Bloomberg.

Russia’s benchmark Micex Index fell 0.6 percent by 1:38
p.m. in Moscow. It has lost 11 percent this year.

In Luhansk, protesters released unharmed 56 of the 60
hostages they took after seizing the region’s State Security
Service headquarters on April 6, the agency, known as the SBU,
said in a statement on its website today. It said protesters
planted land mines and threatened police with weapons yesterday.

In an echo of protests in Crimea that preceded Russia’s
absorption of the province, pro-Russian protesters demanded a
referendum on seceding from Ukraine. The regional government
building in Kharkiv, 40 kilometers (25 miles) from the Russian
border, was cleared of separatists yesterday with 70 people
detained, Avakov said.

‘Russian Provocateurs’

The U.S. and its allies say they’re concerned that Putin
may be planning further incursions into eastern Ukraine after
annexing Crimea. Putin has as many as 40,000 soldiers stationed
along the frontier, according to the U.S. and NATO. His
government is pushing Ukraine to grant more autonomy to its
regions, which might preface a push to get Ukraine’s eastern
regions to split from the rest of the country.

“Russian provocateurs and agents operating in eastern
Ukraine” have been “sent there determined to create chaos,”
Kerry told the Senate Foreign Relations Committee in Washington
yesterday. “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.”

War Risk

Ukraine’s SBU said it had detained a Russian citizen who
had met activists on behalf of Russian secret services and took
part in protests.

Russia isn’t conducting any unusual or unplanned activity
near its border with Ukraine, the Foreign Ministry in Moscow
said in a statement today. It accused Ukraine yesterday of
“military preparations, which risk sparking a civil war,”
saying its neighbor’s national guard and irregular forces of
Pravyi Sektor, which unites nationalist groups, were gathering
in southern and eastern Ukraine.

Putin says he has the right to defend Russian speakers in
Ukraine from “fascists” after the ouster of President Viktor Yanukovych. The risks of a Russian military intervention in east
Ukraine are “higher than ever,” according to Joerg Forbrig,
senior program officer for central and eastern Europe at the
Berlin bureau of the German Marshall Fund of the U.S.

“If Russian forces come in, it will be much less clear-cut
than in Crimea,” he said. “The next stage will probably be
deployment of Russian special operations forces and provocateurs
in east Ukraine, followed by incidents and then calls for the
Russian military to pacify the situation.”

German Tack

Kerry said yesterday that he’s spoken with Russian Foreign
Minister Sergei Lavrov to arrange talks among officials from
Ukraine, the U.S., the EU and Russia to head off any escalation.
European Union foreign policy chief Catherine Ashton said she’ll
meet Kerry and Lavrov, along with Ukraine’s foreign minister,
next week.

In Germany, which has moved more slowly on sanctions than
the U.S. as companies there raise concerns about losing
business, Chancellor Angela Merkel did not signal a significant
shift in tack.

“Unfortunately in many instances it’s not apparent that
Russia is contributing to de-escalating the situation,” she
said in a speech in parliament. “Therefore we will continue to
do what we’ve been doing — keeping the line open for talks, but
on the other hand to say in our view Ukraine has the right to
its own path of development.”

Ukraine won’t import Russian gas until it agrees on a price
with Russia, Energy Minister Yuri Prodan said today in Kyiv.
Slovakia will help Ukraine by reversing flow in its gas supply
line, he said.

Money Flood

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

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

Former U.S. Senator and Secretary of State Hillary Clinton
said the “flood of money out of Russia in the last several
months” had been “astonishing,” and said it was the best way
to get Putin to back down.

“That is the best way to undermine the oligarchs who
support him, undermine his own economic interests,” she said.

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.

To contact the reporters on this story:
Kateryna Choursina in Kyiv at
kchoursina@bloomberg.net;
Jake Rudnitsky in Moscow at
jrudnitsky@bloomberg.net;
Nicole Gaouette in Washington at
ngaouette@bloomberg.net

To contact the editors responsible for this story:
Balazs Penz at
bpenz@bloomberg.net;
James M. Gomez at
jagomez@bloomberg.net
Michael Winfrey, Paul Abelsky