Ukraine heaps on economic pressure as central bank confuses, truce takes hold

KIEV/MAKIYVKA, Ukraine Ukraine came under greater economic pressure after unexpectedly banning most currency trading and then abruptly reversing course, wreaking havoc on the hryvnia, just as a truce in the east took hold on Wednesday with no combat fatalities reported.With the long-awaited ceasefire coming into force, Russian President Vladimir Putin once again threatened gas supplies for the fourth time in a decade if Moscow did not receive advance payment.

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 in the midst of a major rebel offensive last week.

The separatist war in the east has complicated efforts to stabilize an economy on the verge of bankruptcy, and the hryvnia currency has lost more than half its value so far this year after halving during all of 2014.

With the hryvnia currency in free fall as investors fled, the central bank halted nearly all commercial currency trading until the end of the week.

Hours later, the bank reversed the decision, giving no explanation for the abrupt change in policy. But it came after a sharp rebuke from Prime Minister Arseny Yatseniuk, who said the move was bad for the economy.

The ban had put the currency's true value in limbo, with little or no trading taking place to set a price, before the bank jumped in to buy $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 booths 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."

Clearly concerned about the developments, the International Monetary Fund said on Wednesday it was ready to help Ukraine with its foreign currency issues.

"IMF staff are in close contact with the National Bank of Ukraine and stand ready to assist in designing measures that will address excessive and temporary imbalances in the supply and demand for foreign exchange," an IMF spokeswoman said in a statement released in Washington.

In a potential new blow, the Kremlin warned that Russia could halt gas supplies to Ukraine, which could disrupt flows to Europe, which receives around a third of its gas from Russia with 40 percent shipped via Ukraine.

Last year Russia cut off gas to Ukraine for six months without affecting Europe.

Criticizing Ukraine for cutting off gas to eastern regions controlled by 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 the most unambiguous signal yet that the French- and German-brokered truce was taking root.

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". For now, however, the fighters appear determined to be seen as implementing 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 night. No shooting was recorded 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.

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 sympathizers 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.

(Additional reporting by Pavel Polityuk and Peter Graff in Kiev; Writing by Peter Graff and Alan Crosby; Editing by Mark Trevelyan, Giles Elgood, Toni Reinhold)