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Ukraine under pressure from currency fall, gas supply threat

Ukraine came under increasing economic pressure from a collapsing currency and a threat to its gas supplies from the Kremlin on Wednesday, just as a long-awaited ceasefire took hold in the east.

As the truce appeared to be coming into force, the Ukrainian army reported no combat fatalities in the past 24 hours, but the news did nothing to halt a currency slump that forced the central bank to ban most trading before intervening to prop up the hryvnia.

In rebel-held eastern Ukraine, pro-Russian separatists were withdrawing heavy guns from the front. Kiev said it was too early to do likewise, but its acknowledgement that most of the front was quiet suggested it too could implement a truce that had appeared stillborn when the rebels launched a major offensive last week.

The cautious good news from the front has come amid dire economic consequences for a country teetering on bankruptcy.

With the hryvnia currency in free fall as investors flee, the central bank called a halt by banning nearly all commercial currency trading until the end of the week.

It later jumped into the market to buy dollars, reversing a free-fall in the hryvnia that it called "irrational".

Prime Minister Arseny Yatseniuk said the ban was bad for the economy. He had learned about it on the Internet and would demand an explanation from central bank chief Valeria Gontareva.

Gontareva said there was no fundamental reason for the panic in the currency market.

At the day's end the central bank announced it had bought $80 million at an official rate of 28.046 to the dollar, close to the rate at the start of the week and 12.8 percent higher than the close after a plunge on Tuesday.

Exchange kiosks in Kiev were selling limited amounts of dollars for 39 hryvnias, around 20 percent worse than rates advertised in the windows of commercial banks where dollars were not available.

A construction worker exchanging dollars at a kiosk in a grocery shop in return for a bag filled with thousands of hryvnia, laughed and told shoppers: "Soon we will have to walk around with suitcases for cash, like in the 1990s."

The hryvnia has lost at least half its value so far this year after halving over the course of 2014.

In a potential new blow, President Vladimir Putin warned that Russia would halt gas supplies to Ukraine, for the fourth time in a decade, if Moscow did not receive advance payment.

That could disrupt flows to Europe, which receives around a third of its gas from Russia, with 40 percent shipped via Ukraine. However, Russia cut off gas to Ukraine for six months last year without affecting Europe.

Criticising Ukraine for cutting off gas to eastern regions under the control of the pro-Russian separatists, Putin said: "Imagine these people will be left without gas in winter. Not only that there is famine ... It smells of genocide."

"We hope ... that gas supplies will not be interrupted. But this does not depend only on us, it depends on the financial discipline of our Ukrainian partners," Putin said.

Rebel Advance

News that no Ukrainian troops had died at the front was by far the most unambiguous signal yet that the French- and German-brokered truce is now holding.

The rebels had initially spurned the ceasefire, insisting it did not apply to their main target, the town of Debaltseve, which they stormed last week.

Kiev has since accused the separatists of reinforcing for a possible further assault deeper into territory the Kremlin calls "New Russia". But for now, the fighters appear determined to be seen to implement the agreement.

Reuters journalists, operating independently in rebel-held territory, saw columns of howitzers driven away from the front in several locations on Wednesday after initial moves on Tuesday.

A column of 24 self-propelled howitzers headed away from the front through the city of Makiyvka adjacent to the main rebel stronghold, Donetsk. Another five were spotted driving away from the front near Yenakiyve, further north.

The rebels have promised that the Organisation for Security and Cooperation in Europe will soon be able to verify that they have removed all heavy guns.

The OSCE says it cannot yet verify the withdrawal because the sides have not provided data on how many guns were in place before the truce. The European security body reported some shelling and shooting at various locations, including near Shyrokyne, a coastal town where Kiev has also reported fighting.

The Kiev military nevertheless said the number of ceasefire violations had "significantly decreased" for a second straight night. No shooting was recorded at all in the Donetsk, Luhansk and Mariupol areas, it said. Overall, rebels had fired shells and mortars 15 times and opened fire four times with light weapons during the 24-hour period.

Ukrainian military spokesman Andriy Lysenko said: "For now there is still no order on the withdrawal of weapons, as the fighters have not yet fulfilled the first point of the Minsk agreement, to cease fire."

Kiev fears the rebels, backed by Russian troops, may now be planning to capture Mariupol, a port of 500,000 people. Moscow denies aiding its sympathisers in east Ukraine.

U.S. Secretary of State John Kerry said additional sanctions against Russia were "teed up" should events in eastern Ukraine require a significant response.

Britain ruled out deploying combat troops to Ukraine, a day after it said it was sending 75 military trainers to help the Ukrainian army. Poland said it intended to send military instructors to train Ukrainian soldiers.

[Source: By Natalia Zinets and Anton Zverev, Reuters, Kiev and Makiyvka, Ukr, 25Feb15]

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