Separatism Spreads; Kiev Admits Losing Grip in Eastern Ukraine; Putin Threatens to Retaliate Against Sanctions

Pro-Russia forces seized administration buildings in Horlivka today forcing Kiev to admit reality. Please consider Kiev Admits Losing Grip in Eastern Ukraine.

Ukraine’s acting president on Wednesday admitted that government authorities had lost control of the eastern Donetsk and Lugansk provinces to separatists, and said the challenge now was to “prevent terrorism from spreading to other regions”.

Oleksandr Turchynov also warned that pro-Russian groups were planning “subversive acts” in six other eastern and southern Ukrainian regions during Thursday’s May Day holiday, formerly one of the biggest events in the Soviet calendar for mass marches.

In Lugansk, capital of Ukraine’s easternmost province, gunmen were on Wednesday in control of several government buildings after easily overpowering them late on Tuesday, using weapons and explosives from the state security headquarters, which they seized control of earlier this month.

Lugansk’s regional administration building was also in separatist hands after a crowd easily seized control on Tuesday from police, who remained in the building and surrendered control. Residents of the depressed mining city, population 450,000, approached men guarding the building with gifts of cigarettes.

“We saw policemen in anti-riot gear guarding the building, but they didn’t put up any resistance to the occupiers,” Andrea Cellino, leader of an Organisation for Security and Co-operation in Europe monitoring team in Lugansk who witnessed Tuesday’s government building takeover. “The population is mostly either sympathetic or openly supports the occupiers and their motives.”

Ukraine Vows to Stanch Separatism

Bloomberg reports Ukraine Vows to Stanch Separatism as Militants Spread

Ukraine’s acting president vowed to create a special police force to staunch the spread of separatism in the country’s east, vowing to overcome unrest he says is stoked by Russia and hold an election slated for May 25.

As part of a creeping campaign by pro-Russian militants across Ukraine’s east, armed men seized government buildings in the city of Horlivka today, while news service Unian reported a member of the Donetsk electoral commission was kidnapped by “terrorists.” The U.S. and EU say Putin’s government is helping the separatists to destabilize the country of 45 million people in the run-up to next month’s presidential ballot in their worst standoff with Russia since the Cold War.

“Our first and main task is to prevent the spread of the terrorist threat to other regions,” Ukraine’s acting President Oleksandr Turchynov said in Kiev today. “Because there is a real threat of Russia starting a continental war, our army is on full combat alert.”

About 1,000 gunmen have seized buildings in more than 10 cities in eastern Ukraine, according to the country’s Interior Ministry. About 20 seized the Horlivka city council and regional police headquarters today, Interfax said. Yesterday, hundreds of activists wielding sticks and waving Russian flags stormed the Luhansk regional administration.

Putin Threatens to Retaliate Against Sanctions

Europe wants to "do something" as long as it does not cost anything, an impossible challenge. For example, European Commission President Jose Manuel Barroso said today that officials should make sure any future actions don’t harm the European economy.

Meanwhile, Putin Threatens to Retaliate for Sanctions.

President Vladimir Putin’s threats to retaliate for further sanctions on Russia set the stage for escalating economic warfare that may have painful effects for U.S. and European companies.

“I would expect Putin to make life somewhat difficult for foreign companies in Russia whose governments are doing the sanctioning,” said Gary Hufbauer, a sanctions specialist at the Peterson Institute for International Economics in Washington. 

Putin’s warning yesterday of consequences for U.S. and European companies came hours after the EU announced new measures over the crisis in Ukraine. His comments took aim at the interests of companies such as Exxon Mobil Corp. (XOM), which has drilling rights to 11.4 million net acres (46,134 square kilometers) in Russia, the company’s biggest single cache of drilling rights outside the U.S. Exxon also is planning Arctic drilling in an alliance with state-owned OAO Rosneft.

“The Russian government has already proposed some retaliatory steps,” Putin said at a Supreme Eurasian Economic Council summit in Minsk. “I consider these not necessary. But if something like this continues, then of course we will have to consider who’s working and how in the Russian Federation, in the key sectors of the Russian economy, including energy.”

Hufbauer said in an interview that Putin’s response is likely to be limited, because any pain he inflicts on Russia’s trade partners and investors can boomerang on him. “I don’t think he’ll over-escalate, but he’ll show he can play the sanctions game, as well.”

Economic retaliation by Putin -- whether punishing foreign investors or cutting off gas exports to Europe -- would rebound back to Russia, harming its $2 trillion economy more than the $16.8 trillion U.S. economy or the EU’s $17.4 trillion gross domestic product, according to Michael Corgan, a professor of international relations at Boston University.

Negative Sum Game

I don't think it is at all clear that Russia would lose more than Europe if it shuts off gas, but it is clear that both Europe and Russia would suffer.

If the US turns the screws hard enough, Russia will respond in some fashion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com