BRUSSELS/SIMFEROPOL, Ukraine
1 of 8. Armed men, believed to be Russian servicemen, march outside an Ukrainian military base in the village of Perevalnoye, near the Crimean city of Simferopol, March 12, 2014.
Credit: Reuters/Thomas Peter
BRUSSELS/SIMFEROPOL, Ukraine (Reuters) - The EU agreed a framework on Thursday for its first sanctions on Russia since the Cold War, a stronger response to the Ukraine crisis than many had expected and a mark of solidarity with Washington in the effort to make Moscow pay for seizing Crimea.
The EU sanctions, outlined in a document seen by Reuters, would slap travel bans and asset freezes on an as-yet-undecided list of people and firms accused by Brussels of violating the territorial integrity of Ukraine.
German Chancellor Angela Merkel said the measures would be imposed on Monday unless diplomatic progress was made.
Shares in Moscow dropped 2.6 percent and the central bank was forced to spend $1.5 billion to prop up the ruble as investors confronted the prospect that Russia could face unexpectedly serious consequences for its plans to annex Crimea.
Russian troops have seized control of the Black Sea peninsula, where separatists have taken over the provincial government and are preparing for a referendum on Sunday to make the region part of Russia, which the West calls illegal.
The measures outlined by the EU are similar to steps already announced by Washington, but would have far greater impact because Europe buys most of Russia's oil and gas exports, while the United States is only a minor trade partner. The EU's 335 billion euros of trade with Russia in 2012 was worth around 10 times that of the United States.
The travel bans and asset freezes could cut members of Russia's elite off from the European cities that provide their second homes and the European banks that hold their cash.
The fast pace of Russian moves to annex Crimea appears to have galvanized the leaders of a 28-member bloc whose consensus rules often slow down its decisions.
Merkel herself had initially expressed reservations about sanctions but has been frustrated by Moscow's refusal to form a "contact group" to seek a diplomatic solution over Crimea.
"Almost a week ago, we said that if that wasn't successful within a few days, we'd have to consider a second stage of sanctions," Merkel said. "Six days have gone by since then and we have to recognize, even though we will continue our efforts to form a contact group, that we haven't made any progress."
PREPARATIONS
In Crimea, the regional government is led by a Russian separatist businessman whose party received just 4 percent of the vote in the last provincial election in 2010 but who took power on February 27 after gunmen seized the assembly building.
Two days later, President Vladimir Putin announced Russia had the right to invade Ukraine to protect Russian citizens.
Preparations for Sunday's referendum are in full swing. Banners hang in the centre of Crimea's capital, reading "Spring - Crimea - Russia!" and "Referendum - Crimea with Russia!"
Crimea has a narrow ethnic Russian majority, and many in the province of 2 million people clearly favor rule from Moscow. Opinion has been whipped up by state-run media that broadcast exaggerated reports of a threat from "fascist thugs" in Kiev.
"Enough with Ukraine, that unnatural creation of the Soviet Union, we have to go back to our motherland," said Anatoly, 38, from Simferopol, dressed in camouflage uniform and a Cossack traditional fur cap.
But a substantial, if quieter, part of the population still favors being part of Ukraine. They include many ethnic Russians as well as Ukrainians and members of the peninsula's indigenous Tatar community, who were brutally repressed under Soviet rule.
"Crimea has been with Ukraine since the 1950s and I want to know how they will cut it off from what was our mainland," said Musa, a Tatar. "If the referendum is free and fair, at least a little bit, I will vote against Crimean independence."
The referendum seems to leave no such choice: voters will have to pick between joining Russia or adopting an earlier constitution that described Crimea as sovereign. The regional assembly says that if Crimea becomes sovereign, it will sever ties with Ukraine and join Russia anyway.
Still, with the streets firmly in control of pro-Russian militiamen and Russian troops, there is little doubt that the separatist authorities will get the pro-Russian result they seek. Many opponents, including Tatar leaders, plan to boycott.
There will be no Western observers. Election officials have openly said they proudly support union with Russia. Journalists seeking accreditation for the vote are required to promise not to report "negative news".
While tightening his grip on Crimea, Putin seems to have rowed back from his March 1 threat to invade other parts of eastern and southern Ukraine, where most of the population, though ethnically Ukrainian, speak Russian as a first language.
That threat exposed the limits of Ukraine's military, which would be little match for the superpower next door and has seen its detachments in Crimea surrounded. The authorities in Kiev announced the formation of a new national guard on Wednesday.
But if Putin had expected to be able to seize Crimea without facing any consequences - as he did when he captured parts of tiny Georgia after a war in 2008 - the push towards sanctions suggests he may have miscalculated.
In a statement, the leaders of the G7 - the United States, Britain, France, Germany, Italy, Japan and Canada - called on Russia to stop the referendum from taking place.
"In addition to its impact on the unity, sovereignty and territorial integrity of Ukraine, the annexation of Crimea could have grave implications for the legal order that protects the unity and sovereignty of all states," they said. "Should the Russian Federation take such a step, we will take further action, individually and collectively."
TALK BUT NO BREAKTHROUGH
There has been a lot of diplomatic contact between Russia and the West - on Thursday Putin spoke to French President Francois Hollande, while U.S. Secretary of State John Kerry is due to meet Foreign Minister Sergei Lavrov on Friday in London - but so far no sign of any breakthrough.
Russia has pledged to retaliate for any sanctions, but EU leaders seem to be betting that Moscow has more to lose than they do. Merkel's finance minister, Wolfgang Schaeuble, said any potential impact on Germany's economy was likely to be limited.
Storage tanks for natural gas across much of Europe are full after a mild season, and the peak of winter demand is over.
Europe's trade volume with Russia accounts for just 1 percent of EU gross domestic product but 15 percent of Russia's, said the German trade lobby group BGA. "A trade conflict would be painful for the German economy, but for the Russian economy it would be life-threatening," said its president, Anton Boerner.
Many investors still believe sanctions are unlikely to be severe enough to damage 'business as usual' for Moscow, but say the risk of serious disruption has grown.
"Talk of very tough sanctions is probably a negotiating tool and at this stage the impact will be limited. But it's the anticipation of stronger action that could potentially be more harmful," said Neal Shearing, head of emerging markets research at Capital Economics.
While the EU has agreed wording for its sanctions, it is still working on a target list. Talks took place in London this week between officials from Britain, the United States, Italy, France, Germany, Poland, Switzerland, Turkey and Japan.
"My understanding is that there was detailed discussion of names at the meeting," an EU official said. "No definitive list has been drawn up, but it will be ready by Monday."
European officials have indicated that Putin and Lavrov will not be on the list, in order to keep channels of communication open. The list is expected to focus on targets close to Putin in the security services and military, as well as lawmakers.
In the past, U.S. and EU sanctions against countries such as Syria, Libya and Iran have started with lists of only around 20 people and firms. But those lists quickly evolved into more powerful weapons as other people and firms were added.
The EU has said it is also prepared to take further steps, such as an arms embargo and other trade measures.
Thursday's losses on the Russian stock market brought the RTS index down 11 percent this month. The ruble's slide has been slower, at a cost of $15 billion in central bank reserves.
The $1.5 billion that traders estimate the bank spent to prop up the currency on Thursday was the most since March 3, the first trading day after Putin announced his right to invade.
The cost of insuring Russian debt against default rose 10 basis points to 247 bps on Thursday, its highest level in more than two years. Russian 5-year credit default swaps have risen almost 60 bps since the start of March.
(Additional reporting by Luke Baker in Brussels, Jason Bush in Moscow, Ron Popeski in Kiev and Stephen Brown in Berlin; Writing by Peter Graff; Editing by Kevin Liffey)
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