IMF approves $17 bn aid deal for `combat-alert` Ukraine

The International Monetary Fund has approved a $17 billion aid deal for the beleaguered Ukrainian economy as Kiev`s armed forces went on "full combat alert" against a possible Russian invasion.

Kiev: The International Monetary Fund has approved a $17 billion aid deal for the beleaguered Ukrainian economy as Kiev`s armed forces went on "full combat alert" against a possible Russian invasion.

Pro-Kremlin insurgents tightened their grip on the increasingly chaotic east of the country, storming the regional police building and town hall in the city of Gorlivka, local officials told AFP, adding to more than a dozen locations already under their control.

IMF chief Christine Lagarde, speaking in Washington on Wednesday after her executive board approved the huge aid plan, said "urgent action was necessary".

"Deep-seated vulnerabilities together with political shock have led to a major crisis in Ukraine," she warned.

"The economy is in recession, fiscal balances have deteriorated, and the financial sector is under significant stress."

Ukraine faces deep fiscal problems, and President Vladimir Putin has threatened to cut off vital gas supplies if a $3.5-billion (2.5-billion-euro) bill is not quickly paid.

The loan money will be released over two years, with a first tranche of $3.2 billion available immediately. 

The bailout had to be approved by the IMF`s 24-strong executive board, which includes a Russian representative.

Figures released Wednesday showed the crisis was taking its toll on an already weak economy, with gross domestic product shrinking 2.0 percent in the first quarter compared with the last three months of 2013.

The IMF had been wary about lending to Ukraine after two previous loan plans failed because of the government`s failure to implement reforms that the new interim administration has now promised to carry out.

The European Union said talks with Russia and Ukraine will take place in Warsaw on Friday to try to resolve the row over the money that Gazprom calculates Kiev owes.

The rebels lifted their siege of the HQ building in Gorlivka after the police chief promised to step down, while local media reported pro-Russian militants had seized the council building in the city of Alchevsk without encountering resistance.Ukraine`s interim president Oleksandr Turchynov told his cabinet the nation`s law enforcement bodies were "helpless" to prevent the insurgents storming official buildings in the restive east.

He said the nation`s armed forces have been put on "full combat alert" in the face of what he called a "real threat" of Russia starting a war against the former Soviet republic.

Kiev had arrested the Russian defence attache and asked him to leave, accusing him of spying, according to media reports.

Yulia Tymoshenko, a former prime minister who is a frontrunner for presidential elections on May 25, said Russia had already started an "undeclared war" against her country.

The West has accused Russia of fomenting the crisis and backing the rebels and has imposed sanctions to try to get Moscow to back down.

The United States and EU members see the insurgency as a bid to destabilise Ukraine ahead of the elections, but Moscow denies it has a hand in the rebellion.

Putin insisted late Tuesday that there were "neither Russian instructors, nor special units, nor troops" operating in Ukraine.

The separatists have vowed to hold a referendum on closer ties with Russia on May 11.

And Denis Pushilin, one of the leaders of the self-declared Donetsk Republic, told reporters on a trip to Moscow that the eastern Ukrainian region will not take part in the May 25 presidential polls.

The Kremlin said Putin had spoken to British Prime Minister David Cameron on Wednesday and both had agreed that an end to the crisis could only be achieved through peaceful means.

By contrast Ukrainian pop star Ruslana, who spent months singing for protestors in Kiev, made an impassioned plea to US President Barack Obama to take "resolute action" and show "courage" to end the escalating crisis in her homeland.

"Mr President Obama, words cannot stop tanks," Ruslana told the Atlantic Council think tank in Washington.Negotiations continued to secure the freedom of seven European monitors from the OSCE (Organization for Security and Cooperation in Europe) as the rebel leader holding them said they would be released "at the first opportunity".

"The dialogue is constructive. We understand each other," the self-styled mayor of the flashpoint town of Slavyansk, Vyacheslav Ponomaryov, told reporters.

Talks are dragging on for "technical reasons," he added, without elaborating.

Michael Bociurkiw, an OSCE spokesman, told reporters in nearby Donetsk that the held men were "in good health" but added: "As the days roll on, you become increasingly concerned about their well-being."

Putin said he hoped the team from the OSCE would soon be able to "freely leave the territory" of Ukraine, but laid the blame squarely at Kiev`s door.

Putin also warned the sanctions against his country could harm Western interests in Russia`s lucrative energy sector.

His comments threaten the operations of some of the world`s biggest energy companies in the resource-rich country, once viewed as a reliable alternative to unstable natural gas and oil-producing countries in the Middle East.

Russian officials have accused the US of wanting to reinstitute "Iron Curtain"-style policies and warned the sanctions would "boomerang" back to hurt it.

But the tensions are already having an impact on the Russian economy, which the IMF announced Wednesday was already "experiencing recession".

The IMF drastically slashed its 2014 growth forecast for Russia to 0.2 percent from 1.3 percent, amid massive capital outflows since the crisis began.

The EU, which Russia has accused of "doing Washington`s bidding", is considering beefing up sanctions by targeting Putin`s inner circle but some member states are "very reluctant", sources told AFP in Brussels.

The crisis in Ukraine has slipped rapidly into a global confrontation since February, when Moscow-backed president Viktor Yanukovych was forced out after months of increasingly bloody protests.

In response, Moscow launched a blitz annexation of the peninsula of Crimea, and stepped up troop deployments on the border.