Russian markets plunge as Putin tightens Crimea grip

MOSCOW/PEREVALNOYE, Ukraine Tue Mar 4, 2014 3:19am IST

1 of 6. Activists hold a rally to support the possible military incursions of the Russian army onto the territory of Crimea to defend Russian citizens and speakers living in Ukraine, near the consulate of Ukraine in St. Petersburg, March 3, 2014. The banner reads 'Sevastopol is a Russian city'.

Credit: Reuters/Maxim Zmeyev

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MOSCOW/PEREVALNOYE, Ukraine (Reuters) - Russia paid a heavy financial price on Monday for its military intervention in neighbouring Ukraine, with stocks, bonds and the rouble plunging as President Vladimir Putin's forces tightened their grip on the Russian-speaking Crimea region.

The Moscow stock market fell 10.8 percent, wiping nearly $60 billion off the value of Russian companies - more than the $51 billion Russia spent on the Winter Olympics in Sochi last month.

The central bank spent as much as $12 billion of its reserves to prop up the rouble as investors took fright at tensions with the West over the former Soviet republic.

Putin declared at the weekend he had the right to invade Ukraine to protect Russian interests and citizens.

U.S. President Barack Obama called Russia's actions a violation of international law and of Ukraine's sovereignty, saying Washington would look at sanctions to isolate Moscow.

"Over time this will be a costly proposition for Russia. And now is the time for them to consider whether they can serve their interests in a way that resorts to diplomacy as opposed to force," he told reporters, saying Putin should let international monitors mediate a deal acceptable to all Ukrainians.

The European Union threatened unspecified "targeted measures" unless Russia returns its forces to their bases and opens talks with Ukraine's new government.

In his first public appearance for nearly a week, Putin flew to watch military manoeuvres in western Russia in what appeared designed as a show of strength.

Russia's Black Sea fleet denied reports it had given Ukrainian forces in Crimea an ultimatum to surrender by early on Tuesday or face attack, Interfax news agency said. The United States said any such threat would be a dangerous escalation.

Ukraine's acting president said Russia's military presence in Crimea was growing. Ukrainian officials said Russia was building up armour on its side of the 4.5 km (2.7 mile) wide Kerch strait between the Crimean peninsula and southern Russia.

Russian forces later began shipping truckloads of troops by ferry into the Crimea region after seizing the border post on the Ukrainian side, Ukraine's border guards spokesman said.

He said Russian troops seized the checkpoint after the guards tried to stop two buses carrying seven armed men. The next ferry brought three truckloads of soldiers across.

Both sides have so far avoided bloodshed, but the market turmoil highlighted damage the crisis could wreak on Russia's vulnerable economy, making it harder to balance the budget and potentially undermining business and public support for Putin.

Russian Deputy Economy Minister Andrei Klepach said market "hysteria" would subside but strains with Brussels and Washington - which has threatened visa bans, asset freezes and trade curbs - would continue to weigh on the economy.

On the ground in Perevalnoye, half-way between the Crimean capital of Simferopol and the Black Sea, hundreds of Russian troops in trucks and armoured vehicles - without national insignia on their uniforms - were surrounding two military compounds, confining Ukrainian soldiers, who have refused to surrender, as virtual prisoners.

Ukraine called up reservists on Sunday after Putin's action provoked what British Foreign Secretary William Hague called "the biggest crisis in Europe in the twenty-first century".

NATO allies will hold emergency talks on the crisis in Ukraine on Tuesday, for the second time in three days, following a request from Poland, a neighbour of Ukraine.

European Union foreign ministers held out the threat of sanctions against Russia on Monday if Moscow fails to withdraw its troops from Ukraine, while offering to mediate between the two, alongside other international bodies.

They agreed no details of any punitive measures against Russia. EU leaders will hold an emergency summit on Thursday.

OBSERVER MISSION

The Organisation for Security and Cooperation in Europe (OSCE) said it was trying to convene an international contact group to help defuse the crisis after Germany said Chancellor Angela Merkel had convinced Putin to accept such an initiative.

Switzerland, which chairs the pan-European security body, said the group could discuss sending observers to Ukraine to monitor the rights of national minorities.

"There will be very, very broad consensus for that monitoring mission. We call on Russia to join that consensus, make the right choice and pull back its forces," U.S. Assistant Secretary of State Victoria Nuland told OSCE envoys in Vienna.

Graphic on Crimea crisis link.reuters.com/suh37v

Ukraine's ethnic divide link.reuters.com/dag37v

The Russian central bank raised its key lending rate by 1.5 percentage points after the rouble fell to all-time lows.

Tension over Ukraine also knocked 2-3 percent off European stock markets and one percent off Wall Street, and sent safe haven gold to a four-month high.

Chicago wheat futures rose more than 5 percent and corn about 4 percent amid fears of disruption to shipments from the Black Sea, a major grain-exporting zone.

Russian gas monopoly Gazprom (GAZP.MM), which supplies Europe through Ukraine, was down nearly 14 percent.

Gazprom's finance chief warned Ukraine that it may raise gas prices from next month, accusing Kiev of a patchy payments record, but said gas transit to Europe was normal. Ukraine has been stocking up on gas imports in the last few days to beat a feared rise, a spokesman for its gas transit monopoly said.

Ukraine's pro-Western Prime Minister Arseny Yatseniuk, whose government took power when ex-President Viktor Yanukovich, a Russian ally, fled on February 21 after three months of street protests, said Putin had effectively declared war on his nation.

Yatseniuk said the government planned to cut spending by 14 to 16 percent as Ukraine prepared for talks on Tuesday with the International Monetary Fund to avert the danger of default.

Western leaders have sent a barrage of warnings to Putin against armed action, threatening economic and diplomatic consequences, but are not considering a military response.

A Ukrainian border guard spokesman said Russian ships had been moving around the Crimean port city of Sevastopol, where the Russian Black Sea Fleet has a base, and Russian forces had blocked mobile telephone services in some parts of Crimea.

Russian Prime Minister Dmitry Medvedev issued an order on Monday to push ahead with a plan agreed with the previous Kiev government to build a bridge over the Kerch strait, which would be Russia's first direct land link to Crimea bypassing Ukraine.

RUSSIAN FLAGS FLYING

Russian forces seized Crimea, an isolated Black Sea peninsula with an ethnic Russian majority, without firing a shot. All eyes are now on whether Russia makes a military move in predominantly Russian-speaking eastern Ukraine, where pro-Moscow demonstrators have marched and raised Russian flags over public buildings in several cities in the last three days.

Pro-Russian protesters besieged lawmakers inside the regional government building in the eastern city of Donetsk, Yanukovich's hometown, on Monday in the latest such action.

Russia has staged war games with 150,000 troops along the land border, but so far they have not crossed. Kiev says Moscow is orchestrating the protests to justify a wider invasion.

Ukraine's ousted leader Yanukovich has written to Putin requesting that he use the Russian military to restore law and order in Ukraine, Moscow's U.N. envoy said on Monday.

"Under the influence of Western countries, there are open acts of terror and violence," Russian Ambassador Vitaly Churkin, quoted Yanukovich's letter as saying, brandishing a copy of it at an emergency meeting of the U.N. Security Council. "People are being persecuted for language and political reasons."

U.S. envoy Samantha Power said there was no evidence ethnic Russians or Russian speakers in Ukraine were under threat.

Ukraine's security council has ordered all armed forces to be put on highest alert. However, Kiev's small, under-equipped military is seen as no match for Russia's superpower might.

While the EU and NATO stepped up verbal pressure on Moscow, a German spokesman said Merkel believed it was not too late to resolve the Ukrainian crisis by political means despite differences of opinion between Putin and the West.

The German leader, who speaks fluent Russian, has had several long telephone calls with the German-speaking Putin since the crisis erupted with mass protests in Kiev, creating a major policy dilemma for Berlin, which is heavily dependent on Russian gas and has close economic ties.

Russian Foreign Minister Sergei Lavrov met his German counterpart Frank-Walter Steinmeier in Geneva on Monday, a Russian diplomat said. Lavrov will meet EU foreign policy chief Catherine Ashton in Madrid on Tuesday, RIA Novosti agency said.

So far, the Western response has been largely symbolic. Obama and others have suspended preparations for a G8 summit in Sochi. Some countries have recalled ambassadors.

On Kiev's Independence Square, or Maidan, where anti-Yanukovich protesters manned barricades for three months, crowds were smaller than in recent days as people returned to work.

"Crimea, we are with you!" read one placard. "Putin - Hitler of the 21st century," read another.

(Additional reporting by Peter Graff, Sabina Zawadzki, Pavel Polityuk, Natalia Zinets, Timothy Heritage and Stephen Grey in Kiev, Lina Kushch in Donetsk, Peter Apps in London, Steve Holland and Phil Stewart in Washington and Lou Charbonneau at the United Nations; Writing by Paul Taylor and Alistair Lyon; Editing by Janet Lawrence)

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