US offical curses EU in leaked phone call

A top U.S. diplomat has tried to play down the damage to Washington's diplomacy in Ukraine from a leaked telephone call, but German Chancellor Angela Merkel called an obscene remark about the EU "absolutely unacceptable."

U.S. officials blamed Moscow for the Internet leak of recordings of a senior State Department official and the U.S. ambassador discussing a possible future government for Ukraine, where Washington and Brussels back anti-Kremlin demonstrators.

Western officials described the leaks as a throwback to the cloak-and-dagger tactics of the Cold War, apparently aimed as much at sowing discord among Western allies as at discrediting the opposition in Ukraine, a country of 46 million people on the verge of bankruptcy, torn between East and West.

Senior State Department official Victoria Nuland is heard using an expletive to tell the U.S. ambassador to Ukraine, Geoffrey Pyatt, it would be better if a new Ukrainian government is backed by the United Nations than the EU.

"F*** the EU," she says.

U.S. officials have not denied the authenticity of the recording and said Nuland apologised to EU colleagues for the comment.

Angela Merkel - already furious with Washington for several months over reports that U.S. officials bugged her own phone - found Nuland's remarks "totally unacceptable", a spokeswoman for the German chancellor said.

Merkel also expressed support for EU foreign policy chief Catherine Ashton, who heads the bloc's Ukraine policy.

In a separate leaked recording, an Ashton aide is overheard complaining about the United States for telling Ukrainian opposition members that Brussels was "soft" in its reluctance to impose measures such as sanctions to hurt the pro-Russian government.

Nuland, who met President Viktor Yanukovich in Kiev on Thursday before the Ukrainian leader flew off to meet President Vladimir Putin at the Olympics in Russia, described the bugging and leaks as "pretty impressive tradecraft" but said it would not hurt her ties with the Ukrainian opposition.

Other U.S. officials directly blamed Moscow, noting that the leaked recording, posted anonymously, was first highlighted in a tweet from a Russian official.

"Tapping phone calls and releasing carefully selected bits to support propaganda efforts is an age-old method by some type of regimes," Swedish Foreign Minister Carl Bildt tweeted.

In Washington, U.S. officials said Nuland and Pyatt apparently used unencrypted cellphones, which are relatively easy to monitor. The officials said smart phones issued to State Department officials had data encryption but not voice encryption.

In Nuland's bugged call, apparently recorded about 12 days ago when Ukrainian opposition leaders were considering an offer from Yanukovich to join his cabinet, she suggested that one of three leading figures might accept a post but two others should stay out. In the end, all three rejected the offer.

CAPITAL CONTROLS

The diplomatic furore with the EU draws attention to a gulf between Washington and Brussels, who agree on the goal to draw Ukraine closer to the West but disagree over how to achieve it. Some U.S. officials want to threaten Yanukovich's government with sanctions, including travel bans on individuals. Many Europeans worry that such tactics could be counterproductive by driving Ukraine's elite closer to Moscow.

Relations between Washington and Moscow, frosty for years, have been bitter recently, with disputes over Syria, human rights and other issues leaving little to show for what President Barack Obama's administration once billed as a diplomatic "reset".

Within Ukraine, economic and political events have been coming to a head three months into the political crisis that began with Yanukovich's decision to walk away from a free trade pact with the EU under Russian pressure.

The central bank imposed new capital controls overnight in a bid to shore up the sliding hryvnia currency. Officials said the measures - which include a six-day waiting period for hard currency purchases, a maximum of around $5,700 for private transfers abroad and a ban on buying hard currency to pay back foreign loans early or invest abroad - were only temporary.

"The result will be a flourishing black market" in dollars, said Tatiana Orlova, an emerging markets strategist at RBS in London.

Central bank governor Ihor Sorkin said: "When the situation improves, these temporary measures will be removed."

On the political front, Yanukovich must name a new prime minister after sacking a pro-Russian loyalist in a concession to demonstrators only to fail to persuade opposition leaders to take his place.

Russia, which bailed out Ukraine with an offer of $15 billion in cheap gas and loans after Yanukovich snubbed the EU trade pact, has cut off the funds until it learns who the new prime minister will be. Yanukovich may discuss it with Putin.

Modern Ukraine is divided between eastern provinces that were districts of Russia for centuries and where most people speak Russian, and western sections that were annexed by the Soviets from Poland and the former Austrian empire, where most people speak Ukrainian and many resent Russian domination.

Although many Ukrainians say they dream of integration with the West, the Soviet economic legacy gives Moscow extraordinary leverage: Ukraine's heavy industry depends on imports of energy, above all Russian natural gas.

Moscow portrays the anti-Yanukovich demonstrators as paid Western agents and seems to be pushing for Yanukovich to order a crackdown to clear the streets.

In some of the sharpest language yet, the Kremlin's point man on Ukraine, Sergei Glazyev, urged the Ukrainian leader to stop negotiating with "putschists". He accused Washington of arming, funding and training the opposition to take power.

Nuland called the remarks "pure fantasy".

"He could be a science fiction writer," she said.

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