DONETSK, Ukraine -- The pro-Russia militants who stormed City Hall here Wednesday suggest one serious challenge for the Ukrainian government -- a deepening insurrection by separatists. But the government is also confronting another major hurdle in the restive east.

A credibility problem.

"We don't trust them," Ilya Vladymynouvch, a 43-year-old resident said of the country's interim leaders in the capital, as he pushed his infant son in a stroller in the gardens behind City Hall.

Scenes of armed occupation unfolded Wednesday across eastern Ukraine. Besides the takeover of City Hall in this city of nearly 1 million, separatists farther north flew the Russian flag over six armored vehicles that had fallen into their hands after Ukranian forces either voluntarily surrendered them or were strong-armed. The defense ministry said the losses came after a crowd of pro-Moscow residents, mingling with covert Russian operatives instigating violence in the east, had blocked an advance by pro-Kiev forces.

Yet contrary to the image presented, Vladymynouvch, like many residents here, is not eager for the region to follow in the footsteps of Crimea, which was annexed by Russia last month.


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He considers himself solidly pro-Ukrainian. But the government in Kiev is managing to alienate citizens here, he said, with a little help from the West.

At a most dangerous and delicate time, just as it battles Moscow for hearts and minds across the east, the pro-Western government is set to unfurl economic measures to meet the demands of an emergency bailout with the International Monetary Fund. Both the government and IMF say they have no choice. Kiev is broke and desperate for cash, and Russia is no longer seen as a viable benefactor. And no matter how much they publicly offer their unequivocal support for Kiev, the IMF and Western governments that have pledged up to $27 billion in loans simply refuse to toss their money down the black hole of corruption and waste that is the Ukrainian economy.

But especially here in the east, the impact is hurting the government's popularity among an already skeptical audience.

Residents here are bracing for the worst. A rollback of long-generous subsidies on natural gas will jack up the rate consumers pay on their heating and cooking bills by roughly 63 percent next month. Approximately 24,000 state workers and 80,000 policemen nationwide are set to be laid off. Taxes on vodka, beer and cigarettes will soon go up. Changes in property tax calculations mean many Ukrainian homeowners will soon be paying more.

A demand for Ukraine to end its currency peg to the dollar, meanwhile, has allowed a sharp devaluation of the hryvnia that forced the Central Bank to raise interest rates this week. Among the effects of a weaker currency: Prescription drug prices have soared because high quality medicines here are imported from abroad.

IMF managing director Christine Lagarde said earlier this month that Ukrainians must learn to help themselves. "If there is that collective drive to eliminate corruption, to establish good governance, to have good procurements, to have true prices for energy and to own their economic destiny," change "will happen," she told euro news.

IMF demands are rarely popular, and countries around the globe from Argentina to South Korea to Greece have felt their sting. But Alexksey Kulek, a 32-year-old food industry manager in Donetsk and a pro-Ukrainian activist, said the political situation -- coupled with Russian aggression -- added a more dangerous element in Ukraine.

Pro-Russians "are using the IMF deal against us," he said. "The truth of whether it is going to hurt as bad as they say does not matter anymore. This is what people believe and these are people who trust only in the their wallets."

The IMF deal is not the only government move opponents in the east are latching on to. Following the protests in Kiev that forced Yanukovych to flee in February, the large ethnic Russian minority in the region was outraged by a new law that sought to lower the status of the Russian language in Ukraine. Although the law was quickly rescinded, it is still quoted by separatists who have occupied official buildings in several cities and towns.

At the same time, there is no doubt the government's first challenge is reclaiming control in the east. But on day two of a new campaign to reassert its authority in the region, there were few signs of a turning of the tide.

On Wednesday morning, a squad of separatists backed by seven masked gunmen in camouflage stormed the seat of Donetsk's mayor and local council. By afternoon, more than 40 pro-Russia militants were occupying the building while still allowing officials to go about their business inside.

City workers shuffled to and from meetings under the watchful gaze of camouflage-clad militants -- many of them clutching automatic weapons -- who loitered in the corridors.. A few local police officers casually strolled outside without attempting to intervene, evidence of the Kiev government's tenuous grip on the region.

The militants said they were separate from a similar group that occupied the regional headquarters in this city of nearly 1 million 10 days ago, but they issued at least one similar demand. They called for a referendum on May 11 with two questions: whether the populace agreed with the creation of a new "Donetsk People's Republic" and, if so, whether it should be part of Ukraine or Russia.

"Why should we consider Russia a hostile state?" asked Alexander Zakharchenko, a militant commander at city hall. "They are the closest people to us in the world." He commands the Donetsk branch of a group called Oplot, a pro-Russian movement that started as a fight club of young men in the Ukrainian city of Kharkiv, to the north.

But in this region of coal mines and steel plants and where a local saying goes "people work, not protest," residents often tend to vote with their stomachs.

And there is no doubt that bread and butter issues are influencing the debate here. There are mixed feelings in the east, for instance, over the new government's move to sign a trade deal with European Union that could lead Russia to slap higher duties on Ukrainian imports. Fear of lost jobs if the relationship permanently sours between Kiev and Moscow run deep. Kramatorsk, the eastern city where pro-Russian residents joined hands to halt and advance by Ukrainian troops on Wednesday, for instance, is home to the sprawling Novokramatorsky Machinery Plant, a manufacturer of mining equipment heavily reliant on exports to Russia.

"I don't know how this will end, but for eastern, it cannot end with bad relations with Russia," Vladymynouvch said.

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Alex Ryabchyn, Isabel Gorst in Moscow and Karla Adam in London contributed to this report.

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