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Russia to await new Ukraine government before fully implementing rescue: Putin

Ukraine's First Deputy Prime Minister Serhiy Arbuzov waits for a meeting with European Enlargement Commissioner Stefan Fule (unseen) at the
Ukraine's First Deputy Prime Minister Serhiy Arbuzov waits for a meeting with European Enlargement Commissioner Stefan Fule (unseen) at the

By Steve Gutterman and Richard Balmforth

MOSCOW/KIEV (Reuters) - President Vladimir Putin raised the pressure on Ukraine on Wednesday, saying Russia would wait until it forms a new government before fully implementing a $15 billion bailout deal that Kiev urgently needs.

Putin repeated a promise to honor the lifeline agreement with Ukraine in full, but left open the timing of the next aid installment as Kiev struggles to calm more than two months of turmoil since President Victor Yanukovich walked away from a treaty with the European Union.

A day after Prime Minister Mykola Azarov resigned on Tuesday, hoping to appease the opposition and street protesters, Russia tightened border checks on imports from Ukraine in what looked like a reminder to Yanukovich not to install a government that tilts policy back towards the West.

Ukraine's new interim prime minister promised to try to limit the economic damage inflicted by the sometimes violent street protests, and said he expected Russia to disburse a further $2 billion aid installment "very soon".

Putin had less of a sense of urgency. "I would ask the (Russian) government to fulfill all our financial agreements in full," he said, repeating a promise made on Tuesday after the government resigned in Kiev.

However, he signaled that the latest installment was on hold in remarks he made during a meeting with senior government officials, extracts of which were broadcast later on Russian TV.

"Let's wait for the formation of a Ukrainian government," he said, before telling the meeting, "But I ask you, even in the current situation, not to lose contact with our (Ukrainian) colleagues," adding that discussions should continue before a new government is formed.

Putin agreed to the aid package with Ukraine in December, throwing the ex-Soviet state a lifeline in what the opposition and the West regard as a reward for scrapping plans to sign political and trade deals with the EU and promising to improve ties with Russia.

WESTERN ALARM

Alarm about Ukraine is growing in the West. German Chancellor Angela Merkel telephoned Putin and Yanukovich on Wednesday, urging a constructive dialogue between the government and opposition in Kiev. "The situation must not be allowed to spiral again into violence," a German government spokesman quoted her as saying.

NATO Secretary General Anders Fogh Rasmussen was more forthright, blaming Russia for Kiev's failure to sign the EU deals. "An association pact with Ukraine would have been a major boost to Euro-Atlantic security, I truly regret that it could not be done," he told the French newspaper le Figaro. "The reason is well-known: pressure that Russia exerts on Kiev.

U.S. congressional aides said on Wednesday that President Barack Obama's administration was preparing financial sanctions that could be imposed on Ukrainian officials and protest leaders if violence escalates in the political crisis gripping the country.

Obama referred to Ukraine in his State of the Union address on Tuesday, voicing support for the principle that all people have the right to free expression

Lawmakers loyal to Yanukovich offered an amnesty to people detained in anti-government protests - but only if activists first vacate occupied public buildings in Kiev and elsewhere, a condition they previously rejected.

Ukraine badly needs the Russian money. Figures compiled by UniCredit bank before the bailout put its gross external financing requirements at $3.8 billion in the first three months of this year alone, including $2.29 billion for gas that is covered by the deal with Moscow.

That rises to $5.5 billion in April-June, including repaying a $1 billion bond that matures then. Altogether, the government would need $17.44 billion this year to pay its foreign bills, including for Russian gas.

The EU's foreign policy chief, Catherine Ashton, called for sincere discussion during Ukraine's crisis. "The dialogue which has happened from time to time needs to become a real dialogue. We hope to see real progress in these coming days. Time is really of the essence," she said after meeting Yanukovich.

RUSSIAN CHECKS

In an apparent sign of further pressure from Moscow, the Ukrainian association of producers said Russia had started extra border checks, backed by demands for increased duties, on cargoes of food and machinery being shipped into the country by road and rail.

Russia took similar action in August in what was seen as part of Moscow's campaign to dissuade its neighbor from signing the association and trade agreements with the EU.

Ukraine has been gripped by mass unrest since Yanukovich walked away from the EU deals last November.

Leonid Kravchuk, the first president of independent Ukraine, stressed the depth of the crisis on Wednesday.

"The state is on the brink of civil war. We must call what is happening by its proper name. What is happening is revolution because we are talking about an attempt to bring about a change of power," he told parliament.

With Yanukovich and loyalist deputies in parliament now making concessions to defuse the crisis and with Azarov, a Russian-born hardliner, gone there had been speculation that Moscow might slow or even halt the stream of aid.

But acting Prime Minister Serhiy Arbuzov appeared to have been cheered by Putin's promise on Tuesday to extend the $15 billion in credits and cheaper gas.

"We have already received the first tranche of $3 billion and expect to receive the second tranche of $2 billion very soon," he said, chairing his first Cabinet meeting. Russia is offering the funds by buying Ukrainian government bonds.

BACK-ROOM TALKS

In Kiev, opposition deputies and Yanukovich loyalists were in back-room talks on Wednesday over the wording of a draft law under which protesters detained by police would get amnesties.

In an unusual move, Yanukovich himself went to parliament to intervene in the debate. There was no immediate response from protesters to the late-night passing of a law that would amnesty detainees if occupied buildings were first cleared. The opposition in parliament had abstained on the vote.

Although the unrest began because of Yanukovich's U-turn on policy towards Europe, it has since turned into a mass demonstration, punctuated by violent clashes between radical protesters and police, against perceived misrule and corruption under Yanukovich's leadership.

Several hundred people camp round-the-clock on Kiev's Independence Square and along an adjoining thoroughfare, while more radical activists confront police lines at Dynamo football stadium a few hundred meters away.

Anti-Yanukovich activists have also stormed into municipal buildings in many other cities across the sprawling country of 46 million. Hundreds of protesters in Kiev have occupied City Hall and the main agriculture ministry building.

Opposition leaders, including world champion boxer-turned-politician Vitaly Klitschko, have resisted demands by Yanukovich's Regions Party for barricades to be removed from roads and for protesters to leave occupied buildings as a pre-condition for an amnesty for detained activists.

Klitschko, in a comment that also highlighted the tenuous control the opposition leaders have over sections of the protest movement, said, "For us to simply say to people 'You have done your job, now go home' is now not possible."

In a big concession to the opposition and the protest movement, pro-Yanukovich deputies voted on Tuesday to repeal a series of sweeping anti-protest laws they brought in hastily on January 16 in response to increasingly violent clashes.

But opposition leaders, who also include former Economy Minister Arseny Yatsenyuk and nationalist Oleh Tyahnibok, have won a mandate from protesters on the streets to continue to press for further gains from Yanukovich.

The opposition also wants a return to the previous constitution, which would represent another significant concession since it would reduce Yanukovich's powers.

Speculation that Russia might cut the financial lifeline it has offered prompted the Standard & Poor's agency to cut Ukraine's credit rating to CCC+ on Tuesday.

Arbuzov said the central bank was ensuring stability on the financial markets and he made no mention of any changes to his predecessor's policy of keeping the hryvnia currency pegged close to the dollar and maintaining subsidies for domestic gas - both criticized by the International Monetary Fund.

(This version of the story corrects typos in name of former prime minister Mykola Azarov in paragraph 3, and Anders Fogh Rasmussen in paragraph 10)

(Additional reporting by Natalia Zinets and Pavel Polityuk in Kiev, Thomas Grove in Moscow, Nicholas Vinocur in Paris, and Patricia Zengerle in Washington; Writing by Richard Balmforth and Jack Stubbs; Editing by David Stamp, Alastair Macdonald and Peter Cooney)

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