US toughens stance on Ukraine as Kerry to visit Kiev

KIEV - The United States on Tuesday toughened its stand on Ukraine as Secretary of State John Kerry was to arrive in Kiev to support its new Western-backed leaders who are caught up in a Cold War-style struggle between Washington and Moscow.

Russia meanwhile ordered troops who had been holding a snap military drill near the border of ex-Soviet Ukraine back to their barracks, giving some relief to markets left skittish by events.

On Ukraine's Black Sea peninsula of Crimea, though, Kremlin-backed troops remained deployed and in de facto control.

There were no signs of them conducting a military offensive after a dawn deadline expired that Ukraine's military said it had received from the Russian forces.

Western powers have been wrestling with no clear solution as to how best deal with President Vladimir Putin's decision to threaten force against its neighbour. Kiev's new leaders, installed after three months of protests which culminated in a days of carnage that led to the downfall of Kremlin-backed leader Viktor Yanukovych, have been pleading for their help.

The Ukraine crisis threatens to blow up into the biggest test for global diplomacy - and relations between Moscow and the West - since the fall of the 1989 Berlin Wall.

It escalated still further on Monday when both Washington and European powers announced a raft of their toughest sanctions against Russia in decades.

"We have, in light of recent events in Ukraine, put on hold all military-to-military engagements between the United States and Russia," US Defence Department spokesman Rear Admiral John Kirby said.

Kerry was due to hold talks with Kiev's leaders later Tuesday in a display to bolster their legitimacy which is contested by Moscow.

There was immediate response to the steps by Moscow. But the Kremlin's official spokesman said on Tuesday that Putin had the night before ordered a halt to military exercises lanched last week in parts of western Russia bordering Ukraine that had involved 150,000 troops.

Putin had watched the exercises involving tanks, helicopters and around 1,800 troops in the Leningrad region on Monday.

 Wrong side of history

 US President Barack Obama on Monday accused Russia of being on the "wrong side of history" on Ukraine by violating its sovereignty and international law.

Obama said he had told Russia that, if it continued, "we are examining a whole series of steps - economic, diplomatic - that will isolate Russia".

US officials then announced a series of punitive measures designed to puncture Russia's geopolitical prestige as well as military and economic ambitions.

The Pentagon spokesman announced the suspension of both joint military exercises and port visits as well as bilateral meeting and planning conferences.

US media reports cited administration sources saying Washington would also consider cancelling visas for officials involved in the Crimea operation.

British Foreign Secretary William Hague also said on a visit to Kiev on Tuesday that Russia faced "significant diplomatic and economic costs" unless it immediately ordered its troops back to their bases in Crimea.

The European Union warned Russia that ties were at risk without a "de-escalation".

Hawkish ex-Soviet satellites in the 28-member bloc are pushing hard for sanctions but others - including heavyweights France and Germany - called for soft diplomacy.

EU foreign policy chief Catherine Ashton said ahead of talks with Russian Foreign Minister Sergei Lavrov on Tuesday in Madrid that the EU was considering "targeted measures".

 Russia defends itself at UN

Moscow offered a fervent defence of its decision at a tense UN Security Council meeting requested by the Kremlin.

Russia argued that its citizens were under attack from nationalist Ukrainians and that Kiev's new pro-EU leaders were fanning the flames of cultural tensions.

Moscow's UN representative, Vitaly Churkin, took out a piece of paper he said was a letter from Yanukovych to Putin urging him to order in troops to Ukraine to defend Russian citizens.

Churkin said Yanokovych asserted he remained "the legitimately elected president of Ukraine" and asked Putin "to use the armed forces of the Russian Federation to restore law and order, peace, stability, and protect the population of Ukraine".

Markets recover from Black Monday

Russia's stock market followed Asian trading higher after a Black Monday of trading on the Moscow Exchange saw shares lose more than 10 per cent of their value and the ruble hit historic lows against both the dollar and euro.

Moscow's two main exchanges were up about three per cent on Tuesday morning while the ruble regained some of its value a day after the central bank had spent billions of dollars on keeping the struggling currency from suffering even steeper losses.

Russia's central bank on Monday had taken the dramatic decision to hike the main interest rate to 7.0 from 5.5 per cent to stem the flow of investor cash out of the country.

Gazprom's shares were 3.60 per cent higher after tumbling about 13 per cent the day before on uncertainty about whether the state-controlled natural gas giant may be ordered to halt deliveries to Ukraine - and by consequence Western Europe - as a punitive step by the Kremlin against the new Kiev team.

Shares in Tokyo rose about half a per cent while Sydney and Hong Kong also both traded higher.

Oil prices were mixed in Asian trading after rising by nearly two per cent on Monday.

An IMF team meanwhile was due to begin a 10-day fact-finding mission in Kiev that will weigh the merits of the new Ukrainian government's request for $15 billion in assistance this year.

The new interim leaders are seeking $35 billion of assistance over the coming two years to cover Ukraine's foreign obligations and budget shortfall.