Arseniy Yatsenyuk said at a government meeting that the equivalent of £1.6 billion in state support will be held back from rebel-held areas in the Donetsk and Luhansk regions. Ageing industrial operations in the economically depressed but coal-rich east have for many years relied heavily on state subsidies.
Mr Yatsenyuk also said that the payment of pensions and government benefits to residents in conflict-stricken parts of the east will resume when the rebels move out.
Ukraine’s government has blamed Russia for fomenting the last six months of fighting between government forces and separatist fighters. Moscow denies that it supplies rebel fighters with either manpower or military equipment.
Mr Yatsenyuk said suspending subsidies would cut a vital source of funding for rebel forces.
He said: “The money we pay into those territories today does not get to the people, but is stolen by Russian bandits, and this would be nothing but directly supporting Russian terrorism.”
The regions were already some of the most economically depressed in Ukraine, and living standards have slipped further since hostilities erupted.
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He said gas and electricity would continue to be supplied to rebel zones, saying: “Those are our citizens, and the government will not allow these people to freeze as this would lead to a humanitarian catastrophe.”
A ceasefire deal was agreed in early September by rebel leaders, and Ukrainian and Russian officials, but fighting has continued. More than 4,000 people have been killed in the region since the conflict began, according to United Nations estimates.
Interfax-Ukraine news agency yesterday quoted deputy defence minister Petro Mekhed as saying that military intelligence had noted an increase in the number of Russian troops in the Donetsk and Luhansk regions.
In an apparent response to a feared imminent escalation in hostilities, Ukrainian president Petro Poroshenko had said on Tuesday that additional troops are being deployed to the east.
The Ukrainian leadership and pro-Russian separatists blame each other for violations of the ceasefire agreed in the Belarussian capital, Minsk, on 5 September. The agreement appears now to be in tatters.
Meanwhile, German chancellor Angela Merkel said there was no way Europe would give Russia any relief from economic sanctions imposed over the Ukraine crisis and warned that separatist leaders appointed after Sunday’s election – which she described bluntly as “illegitimate” – could also be added to sanction lists.
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