Ukraine Warns About Economic Fallout of Crisis as Fighting Rages On

Prime Minister Yatsenyuk Says Conflict Is Destroying Infrastructure, Delaying Overhauls

James Marson

It was a symbol of the thawing of the Cold War and attracted long lines when it opened in 1990. But on Wednesday evening, in what's likely a bout of diplomatic tit-for-tat, the McDonald's in Moscow's Pushkin Square stood empty. Meanwhile, Ukrainian troops continue to press attacks on rebel-held territory. (Photo: AP)

MOSCOW—Heavy fighting in Ukraine's east is causing long-term damage to the economy, the country's prime minister warned Wednesday, as Kiev pressed its attacks on several cities held by pro-Russian rebels.

Local officials in the eastern region of Donetsk said 34 civilians were killed and 29 wounded in the past day. Col. Andriy Lysenko, a government defense spokesman, said nine Ukrainian servicemen died and 22 others were wounded.

A man leaves a building after shelling in Donetsk on Wednesday. Local officials said 34 civilians were killed. Agence France-Presse/Getty Images

After days of fierce battle, the Ukrainian army retook control of the town of Ilovaisk, which had served as an important route for the rebels to reinforce their positions in the regional capital, said Col. Lysenko. He attributed the seizure of Ilovaisk to a new strategy called for by Ukrainian President Petro Poroshenko to trap the rebels and cut them off.

Rather than just shrinking the territory controlled by rebels, the military is trying to break it into isolated islands. Rebel leaders said their men were battling for control of the town, and Col. Lysenko said troops were still clearing out separatist gunmen.

Ukraine accused pro-Russian separatists of killing dozens of civilians by firing on a refugee convoy, the latest example of residents caught in the line of fire in Ukraine. WSJ's Anton Troianovski visits some of these camps where refugees who have been displaced now live. Photo: Anton Troianovski/WSJ

As the fighting raged on, Prime Minister Arseniy Yatsenyuk warned that restoring infrastructure in eastern Ukraine could cost billions of dollars, while the conflict was hamstringing much-needed economic overhauls.

Ukraine is "losing economic potential by the day," said Mr. Yatsenyuk, an economist who threatened to quit last month over the slow pace of reform.

Mr. Yatsenyuk accused the separatists of deliberately targeting infrastructure, such as mines, power plants and railways. "It is clear that this is an planned action to strangle us economically," he told a government meeting Wednesday.

Russia has denied Western allegations it is sending fighters and weapons to reinforce insurgents. Rebels blame Kiev for much of the shelling that has severely damaged scores of cities across Ukraine's industrial east.

Underscoring the country's need for funds, Finance Minister Oleksandr Shlapak called for the International Monetary Fund to advance the last of three credit installments totaling $3.6 billion that Kiev is expecting to receive this year. Mr. Yatsenyuk said he expects the IMF's board of directors to decide on a $1.4 billion tranche on Aug. 29.

The IMF has demanded that Kiev cut spending, increase the price of gas for households and refrain from intervening to support the value of its currency, the hryvnia. But the government has been diverting funds to the military operation in the east, and Mr. Yatsenyuk said the conflict is hampering planned overhauls. The economy is expected to contract 6.5% this year, according to the IMF. The hryvnia has hit record lows in recent weeks, with $1 now buying more than 13 hryvnia.

"Unless the security situation stabilizes, it seems likely that further hryvnia weakness lies ahead. And a weaker currency just adds to the government's problems, likely boosting inflation, deepening the recession, and causing more pressure on banks, and public finances," said Timothy Ash, an analyst at Standard Bank.

In a renewed diplomatic push to end the four-month conflict, Russian President Vladimir Putin will meet Mr. Poroshenko and senior European Union officials on Tuesday. Ukrainian and Western officials say they are hopeful of progress. Col. Lysenko said Ukraine was hoping to see progress on Mr. Poroshenko's "peace plan," which calls for the insurgents to put down their weapons in return for greater autonomy. "No one needs war," he said.

Ukrainian soldiers cover coffins containing the bodies of Ukrainian servicemen killed in action with national flags upon their arrival at the airport in Lviv on Tuesday. Reuters

The rebels have rejected calls to give up their arms and demand independence from Kiev. And Ukrainian politicians and voters have been skeptical of a truce now, arguing it could give the rebels a chance to consolidate control over some territory and give Russia long-term influence.

Meanwhile, a convoy of trucks bearing what Russia says is humanitarian aid remained parked in a field some 30 kilometers (20 miles) away from the Russia-Ukraine border near a Russian town that is also called Donetsk.

The trucks have been stuck there since last Thursday amid wrangling over the details of the delivery and inspections. A spokeswoman for the International Committee of the Red Cross, which is helping to coordinate the delivery, said it had sent a small group to check the road to Luhansk to see if the convoy trucks can make it there after security guarantees provided.

Sixteen convoy trucks that were moved to the border crossing point over the weekend drove into the customs check zone on the Russian side late on Wednesday.