By Alessandra Prentice and Richard Balmforth
SIMFEROPOL, Ukraine/KIEV (Reuters) – – President Vladimir Putin put Russian combat troops on high alert for a drill on Wednesday, the Kremlin’s most powerful gesture yet after days of sabre rattling since its ally Viktor Yanukovich was toppled as president of Ukraine.
Thousands of ethnic Russians, who form the majority in Ukraine’s Crimea region, demonstrated for independence for the peninsula that hosts part of Moscow’s Black Sea Fleet. They scuffled with rival demonstrators, mainly from the Tatar minority, who support the new authorities in Kiev.
With the political turmoil hammering Ukraine’s economy, the hryvnia currency tumbled 4 percent on Wednesday, with ripples spreading to Russia where the rouble fell to five-year lows and bank shares took a hit.
Ukraine’s central bank, which has been rapidly burning its hard currency reserves to protect the hryvnia, said it has abandoned a managed exchange rate policy in favor of a flexible currency, a senior official told CNBC TV.
Moscow also denounced what it described as the rise of “nationalist and neo-fascist sentiment” in the country’s mainly Ukrainian-speaking western areas, where it said Russian speakers were being deprived of rights. It has repeatedly expressed concern for the safety of Russian citizens in Ukraine.
“In accordance with an order from the president of the Russian Federation, forces of the Western Military District were put on alert at 1400 (0500 ET) today,” Interfax news agency quoted Russian Defence Minister Sergei Shoigu as saying.
Since Yanukovich’s downfall on Saturday, all eyes have been on Putin, who ordered an invasion of neighboring Georgia in 2008 to protect two self-declared independent regions with many ethnic Russians, which he then recognized as independent states.
Any military action in Ukraine, a country of 46 million people that has close ties with European powers and the United States, would be far more serious – arguably the closest the West and Russia have come to outright confrontation since the Cold War.
Ukraine’s new leadership plans to name its new cabinet on Wednesday, paving the way for urgent IMF talks to stave off financial meltdown now that Russia is all but certain to cut a $15 billion financial lifeline it offered Yanukovich as the prize for turning his back on ties with the EU in November.
The International Monetary Fund has said it is prepared to send a team of negotiators to Kiev, but a government must first be formed there and request the aid. U.S. Deputy Secretary of State William Burns, visiting Kiev, said American financial experts were already in the country looking for ways to help.
Yanukovich fled his luxurious palace on the outskirts of Kiev on Friday night after days of violence in which scores of his countrymen were killed, including demonstrators shot dead by police snipers from rooftops.
His downfall, three months after he abruptly turned his back on a free trade pact with the European Union to seek closer ties with Russia, has infuriated Moscow, which describes the new authorities as extremists who seized power through force with the aid of Western powers.
Ukraine has suffered an identity crisis throughout two decades of independence from the Soviet Union. With borders drawn by Bolshevik commissars, it is split between a largely Ukrainian-speaking west, including areas annexed by the Soviets from Austria and Poland, and eastern provinces where Russian is spoken, mainly Russian territory since the middle ages.
In the Crimean regional capital Simferopol, pro-Russian crowds, some of them cossacks in silk and lambswool hats, shouted “Crimea is Russian!”. Mainly ethnic Tatar demonstrators backing the new authorities rallied under a pale blue flag shouting “Ukraine! Ukraine!”
The regional parliament was due to debate the crisis later on Wednesday. Crimea was administered as part of Russia within the Soviet Union until 1954 when it was attached to Soviet Ukraine, and has seen separatist flareups during previous disagreements between Moscow and Kiev.
However, even in Yanukovich’s eastern home region of Donetsk, there was little sign of support for the fugitive leader. His portrait had been taken down at the Donetsk headquarters of Yanukovich’s Party of the Regions, where its leader in the provincial parliament Nikolay Zagoruyko said Yanukovich was to blame for the killings while he was president.
“Of course he is guilty,” he said without hesitation. “He was the president. The guilt for what happened lies with Yanukovich.”
The new authorities must salvage the economy of a country near bankruptcy and heavily dependent on Russian gas.
Traders in Kiev said the central bank was absent from the hryvnia market, allowing the national currency to fall to below 10 to the dollar, a fresh record low.
Sergiy Kruglyk, the central bank’s international relations director, said Kiev was adopting a new exchange rate policy – a major demand of the IMF. “We’ve transferred from a fixed, so-called managed exchange rate to the flexible exchange rate,” he said.
Year-to-date losses for the once tightly controlled unit are almost 20 percent against the dollar, more than any other major emerging currency in 2014. The further the hryvnia falls, the more difficult it is for Kiev to repay its dollar debt.
The cost of a contract to insure Ukraine’s debt for five years rose to more than 10 percent per year on Wednesday, a figure than means traders believe a default is likelier to take place in that timeframe than not.
Oleskander Turchinov, the parliament speaker who assumed the presidential duties after the assembly removed Yanukovich from power on Saturday, took the helm of the armed forces on Wednesday. He is expected to pick a cabinet that will be announced late on Wednesday to crowds in Independence Square, the crucible of the revolt.
Turchinov is an ally of opposition leader Yulia Tymoshenko, who was freed from jail moments before parliament voted to remove Yanukovich. Tymoshenko, herself a former prime minister, has said she is not interested in returning to the job, which could go to Arseny Yatsenyuk, an economist who ran her party while she was jailed.
Retired heavyweight boxing champion Vitaly Klitschko, who has said he will run for president, may also be given a post.
Ukrainians were shocked by the lavish palace that Yanukovich abandoned, which was stocked with a private zoo of rare animals and exotic birds, a floating restaurant built like a pirate ship and a private golf course on land half the size of Monaco.
Yanukovich’s precise whereabouts are not known, although the government says it believes he is hiding in Crimea.
Parliament has voted to request he be tried at the International Criminal Court in the Hague over the deaths on the square. On Wednesday the new authorities disbanded the Berkut “Golden Eagle” riot police units blamed by the public for posting sharpshooters on rooftops who killed protesters.
The U.S. Treasury warned banks to be on the look-out for potentially suspicious transfers of assets by Yanukovich or members of his circle.
Ukraine’s Soviet-era industry depends on cheap imports of Russian natural gas. It said on Wednesday it had reduced purchases in February, in part because of a mild winter.
(Additional reporting by Gabriela Baczynska in Donetsk and Steve Gutterman in Moscow; Writing by Peter Graff; editing by David Stamp)