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Russia Sees Progress on Ukraine as Putin Shifts to Diplomacy (1)

March 29 (Bloomberg) -- Russia said it’s making headway with the U.S. and the European Union in resolving the dispute in Ukraine after presidents Vladimir Putin and Barack Obama spoke and the two countries’ top diplomats readied for more talks.

U.S. Secretary of State John Kerry will travel to Paris for a meeting with Russian Foreign Minister Sergei Lavrov, State Department spokeswoman Jen Psaki said today. In an hour-long telephone conversation initiated by Putin, Obama asked for a written response from the Russian leader to a plan that Kerry presented to Lavrov in The Hague earlier this week, according to a statement from the White House.

Putin is changing tack a week after signing legislation to complete Crimea’s accession to Russia, with tensions over Ukraine’s breakaway Black Sea peninsula sparking the worst standoff with the U.S. and Europe since the Cold War. With the U.S. warning that Russia’s military, energy and financial industries may become possible targets if Putin pushes deeper into Ukraine, Moody’s Investors Service said Russia’s credit rating may be cut as fallout from the crisis weighs on its economy.

Stepping Back?

“Russia is trying to cement the status quo by providing assurances to the West that it won’t go further and invade Ukraine,” Fyodor Lukyanov, head of the Moscow-based Council on Foreign and Defense Policy, said by phone today. “I don’t think Putin was planning to but Western leaders clearly feel that he’s stepping back because of the threat of more sanctions.”

Diplomatic efforts are gaining traction, with Kerry planning talks with Lavrov after speaking with his Russian counterpart during a flight home from Saudi Arabia today. The meeting in Paris is planned for tomorrow, Interfax reported, citing the Russian Foreign Ministry.

Putin initiated a conversation with the U.S. leader for the first time in their last seven exchanges by phone, according to the Kremlin’s website. The talks yesterday marked their fifth conversation since the Ukrainian crisis intensified with the ouster of Moscow-backed President Viktor Yanukovych last month.

Russian Wishes

Russia, the U.S. and EU nations are moving toward a joint initiative that may be submitted to Ukraine, Lavrov said today in comments published on his ministry’s website. Russia wants Ukraine to grant greater powers to its regions, have a non- aligned status outside NATO and make Russian a second official language, he said. Ukrainian parties today nominate candidates for the May 25 presidential election.

Ukraine’s acting president Oleksandr Turchynov has vetoed a law that would have eliminated Russian as a second official language, with the government denying that the rights of Russian speakers are under threat.

“We have absolutely no intentions or interest in crossing the borders of Ukraine,” Lavrov said. “We only really insist on working collectively and on putting an end to the outrages that western countries are sweeping under the rug.”

Concern that Russia’s economy would suffer from an extended confrontation over Ukraine has helped push the benchmark Micex Index down 10.6 percent this year. The gauge lost 11 percent this quarter and entered a bear market in March.

Stocks Rally

Even so, with emerging-market stocks rallying amid confidence in the global economy, the index rose 0.9 percent to 1,344.12 by the close in Moscow yesterday, a 2.8 percent increase in the past five days.

Russia’s Baa1 government bond rating may be cut by Moody’s Investors Service, the ratings company said yesterday in a statement after the close of U.S. markets. The move was triggered by a weakening of Russia’s economy and uncertainty created by the Ukraine conflict, Moody’s said in a statement.

U.S. officials have warned that the presence of Russian forces on Ukraine’s eastern border suggests that Putin may seek to carve off more of Ukraine’s east and south. Obama urged Putin to pull Russia’s military back from Ukraine’s frontier.

The U.S. and EU have imposed two rounds of asset freezes and travel bans on Russian and Ukrainian officials and associates of Putin, with the threat of economic sanctions if the confrontation escalates.

Diplomatic Solution

Obama told Putin that a diplomatic solution “remains possible only if Russia pulls back its troops and does not take any steps to further violate Ukraine’s territorial integrity and sovereignty,” the White House said yesterday.

For his part, Putin highlighted a “rampage of extremists” intimidating officials and residents “in various regions,” according to a statement from his office. The Russian president’s statement indicated he’s willing to examine “steps the global community can take” to stabilize Ukraine.

The White House didn’t detail what plan Kerry and Lavrov discussed. In previous meetings, Kerry called for talks between Russia and Ukraine’s government with international participation, and sending monitors into Ukraine, including Crimea. Russia would be able to keep its bases on the Black Sea peninsula as long as Ukraine’s sovereignty was respected.

Russia has insisted on constitutional reform in Ukraine, demanded the rights of the Russian-speaking population be observed and called for the North Atlantic Treaty Organization to halt its eastward expansion.

Presidential Election

Ukraine’s UDAR party threw its support behind billionaire ex-Economy Minister Petro Poroshenko to represent democratic forces in the presidential election, said party leader Vitali Klitschko, a former world boxing champion, declaring his own intention to run for Kiev mayor instead.

Poroshenko has the highest rating among potential candidates, ahead of Batkivshchyna Party leader Yulia Tymoshenko, the former prime minister who was freed from prison last month, and independent candidate Serhiy Tigipko. Party of Regions, the ruling party under Yanukovych, nominated the former head of the Kharkiv region, Mykhaylo Dobkin.

Obama sharpened the U.S. response to Russia’s incursions into Ukraine while he traveled through Europe. He spoke with Putin while in Saudi Arabia, the final stop on the six-day trip. At a summit originally intended to discuss nuclear security and through an emergency meeting of the Group of Seven nations, the U.S. and its allies presented unified opposition to Russia’s actions.

Separatist Transnistria

The Kremlin’s account of Putin’s conversation with Obama said the Russian leader also brought up the situation in Transnistria, a self-proclaimed republic wedged between Moldova and Ukraine with a Russian military presence that followed Crimea’s annexation by asking to join Russia.

While U.S. intelligence officials continue to monitor what they say is a significant buildup of Russian troops near eastern Ukraine, some expressed concern that Putin’s sudden mention of Transnistria may be a prelude to a different move.

Speaking on the condition of anonymity to discuss intelligence assessments, two officials said that visible military movements in the east may be an effort to divert attention from preparations to move into Transnistria region through the Ukrainian Black Sea port of Odessa. Russian forces held what was called an anti-terrorism drill in the region this week.

Another possibility is a Russian move all the way from Ukraine’s eastern border past Crimea to Odessa and Transnistria -- a move that would leave Ukraine landlocked, U.S. Air Force General Philip Breedlove, NATO’s supreme commander in Europe, said March 23 in Brussels. The region may be “the next place where Russian-speaking people may need to be incorporated,” he said.

Next Flashpoint?

“The new authorities in Ukraine are pushing Transnistria into isolation and this may force Russia to act, though it’s not clear how,” Lukyanov said. “This is a very dangerous situation.”

European and Asian allies have rallied around the U.S. position, suspending Russia from the Group of Eight major industrial powers and jointly laying down a threat of “sectoral” sanctions should Russia invade other parts of Ukraine. Even so, the stance skirted tough questions on what those sanctions might be.

U.S.-based companies are the largest source of foreign investment in Russia, primarily in technology and financial services, according to a 2013 report by Ernst & Young. They include General Electric Co., Boeing Co., and Caterpillar Inc.

Exxon Mobil Corp. and OAO Rosneft had been set to start their first Arctic well this year, targeting a deposit that may hold more oil than Norway’s North Sea.

U.S. Assistance

As part of U.S. efforts, the Congress is poised to pass legislation that includes about $1 billion in loan guarantees and authorizes $150 million in direct assistance to Ukraine.

Ukraine’s government is grappling with dwindling reserves, a weakening currency, and an economy threatening to slide into a third recession in six years.

The U.S. Senate approved a plan this week, and the House of Representatives is scheduled to vote on it April 1. The aid was also linked to Ukraine reaching a deal with the International Monetary Fund. The IMF has unveiled a preliminary accord with Ukraine for a two-year loan of $14 billion to $18 billion designed to help the country avert default.

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