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U.S. Says Russia Shelling Ukraine as Kiev Coalition Falls

July 25 (Bloomberg) -- The U.S. accused Russia of shelling Ukrainian military positions across its border, raising tensions after the ruling coalition in Kiev broke apart while voting over the costs of funding its army and keeping a bailout deal afloat.

Fighting on the ground continued in Ukraine as the city of Donetsk faced a possible showdown battle between Ukrainian forces and pro-Russian rebels. Last week’s downing of Malaysia Airlines Flight 17 over Ukraine prompted the Australian government to send police to Europe to help in the investigation and recovery of the bodies of the 28 of its nationals who perished.

“Others can engage in the politics of eastern Europe,” Australian Prime Minister Tony Abbott told reporters in Canberra today. “All we want to do is to claim our dead and to bring them home.”

The July 17 crash that killed 298 passengers and crew dashed at least temporarily any chances of a de-escalation in the struggle between pro-Russian rebels and the government in Kiev. President Vladimir Putin is facing intense pressure to expedite the investigation into the crash, which the U.S. says was probably caused by a Russian-supplied missile.

The Obama administration’s accusation that Russia is firing artillery over its border into Ukraine marked the first time American officials have publicly alleged direct Russian participation in fighting on behalf of separatists.

‘Intelligence Friends’

“Russia is firing artillery from within Russia to attack Ukrainian military positions,” State Department spokeswoman Marie Harf told reporters yesterday in Washington, offering no evidence for what she described only as information “from our intelligence friends.”

The government in Kiev supported the U.S. allegations.

“Yesterday at 6 p.m. and 11 p.m., Ukraine’s border checkpoint at Marynivka in the Donetsk region was attacked from Russian territory by mortars, Grad missile systems and artillery,” Defense Ministry spokesman Andriy Lysenko said in Kiev today. “Infrastructure and equipment on the international border point have been rendered inoperable.”

Ukraine’s dollar bond due in July 2017 slumped for a second day, lifting the yield 22 basis points to 8.85 percent, the highest in three weeks. The hryvnia weakened 1.5 percent to 11.91 per dollar by 3:19 p.m. in Kiev, according to data compiled by Bloomberg.

Yatsenyuk Resignation

In Kiev, parliament went into recess without voting on the resignation of Prime Minister Arseniy Yatsenyuk, who said he’d step down yesterday. Parliament has 10 days to vote on the resignation, which will also mean the cabinet’s demise, with the government in place until a new administration is named.

“The government’s status hasn’t changed,” Yuriy Yakymenko, head of the political department at the Kiev-based Razumkov Centre, said by phone. “Its resignation hasn’t been formally recognized. It’s only Yatsenyuk who left.”

The cabinet named Deputy Premier Volodymyr Hroisman as acting premier last night, according to a government decree.

Two parties pulled out of the ruling coalition yesterday to open the way for early parliamentary elections. Lawmakers subsequently failed to pass two government proposed bills, including a law on funding the military and cutting social spending required under Ukraine’s $17 billion International Monetary Fund aid deal, prompting Yatsenyuk to announce he would step down.

Extraordinary Session

The government called for an extraordinary session to vote on the budget laws, according to a statement on its website. The ruling coalition’s parties are still political allies and will have to find a way out of the situation, while the government should still be able to negotiate with the IMF, Yakymenko said.

Ukraine was also pushing forward with its ground offensive to regain territory lost to pro-Russian rebels in the east of the country.

Rebel leader Alexander Borodai said he’s preparing for block-to-block fighting to defend Donetsk as Ukraine seeks to retake the stronghold.

‘Will Stand’

“We will stand till the end,” Borodai, the prime minister of the self-proclaimed Donetsk People’s Republic, said in an interview yesterday. “If the Ukrainians start an offensive, it will become a second Stalingrad,” Borodai said, referring to the World War II battle that claimed almost 2 million Soviet and German lives.

The U.S. allegations are at odds with Russian denials that the country is aiding the rebels fighting the government in eastern Ukraine.

The U.S. has said that a surface-to-air missile fired from territory held by the rebels in eastern Ukraine shot down the plane, while stopping short of alleging direct involvement by Russia.

Australia has already sent 90 federal police to Europe who are working on efforts to identify the victims. Another 100 are being sent from Australia to take part in a possible international mission to secure the crash site. The government is also close to an agreement with Ukraine to deploy those police, who may be armed, to assist with the recovery of remains of the crash victims, Abbott said.

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