Ukrainian U-Turn Imposes Full Cargo Block on Rebel-Held East

(Bloomberg) -- Ukraine vowed to halt all cargo into and out of its rebel-held eastern regions, cementing an economically damaging unofficial blockade that the government had only days earlier sought to end.

Police began closing off roads and railways Wednesday afternoon, widening the unsanctioned barricades put up in January by disgruntled veterans of the nation’s three-year conflict with Russian-backed insurgents. The measures will stay in place until there’s a cease-fire and separatists return businesses they partially took over this month to Ukrainian control.

Trade with the east has become a thorny issue. President Petro Poroshenko, whose approval rating has plunged to 12 percent, has expressed concern that the blockade poses risks to Ukraine’s economic recovery by curbing coal supplies for heating and electricity production. Protesters complained this week that police tried to remove them. While fighting in the conflict zone has died down following a spike earlier this year, shelling persists.

“The authorities have got the latest polls proving that most Ukrainians support the blockade,” said Oleksandr Parashchiy, head of research at the Concorde Capital investment company in the capital, Kiev.

The blockade could wipe 0.6 percentage point off this year’s economic growth, according to investment bank Dragon Capital, which sees gross domestic product advancing 2.5 percent. DTEK, an energy company owned by Ukraine’s richest man, Rinat Akhmetov, said Wednesday that it had lost control of 11 of its assets, including coal mines, on rebel-held areas.

Bank Penalties

The hryvnia was little changed against the dollar, leaving this year’s 1.5 percent gain intact. As tensions escalated, Russia said Wednesday’s decision contravened a stalled peace accord and Ukraine moved closer to imposing penalties on state-owned Russian banks that recognize identity documents issued by the rebel republics.

Ukraine’s move was based on “the sharp escalation of Russian aggression against Ukraine and the seizure of Ukrainian companies,” National Security and Defense Council chief Oleksandr Turchynov said in an emailed statement. He also cited the issue of passports handed out by the self-proclaimed republics.

The veterans who began the unsanctioned blockade two months ago to help stamp out smuggling said they’d remain in place for now.

“Of course we welcome Poroshenko’s desire to halt cargo supply to the occupied territories,” said Serhiy Akimovych, a senior member of the group. “But for the time being it’s a desire and not a fact. If the decision is really implemented and trade is stopped, we’re ready to help monitor.”

--With assistance from Volodymyr Verbyany

To contact the reporters on this story: Kateryna Choursina in Kiev at kchoursina@bloomberg.net, Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net.

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, James M. Gomez at jagomez@bloomberg.net, Andrew Langley, Tony Halpin