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US, Europe escalate sanctions on Russia; Obama says Ukraine actions 'have consequences'

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WASHINGTON - Struggling to defuse the persistent crisis in Ukraine, both the U.S. and European Union imposed new economic sanctions on Russia Wednesday, with President Barack Obama declaring that Russian leaders must see that their actions supporting rebels "have consequences."

Though the American and European sanctions were co-ordinated, they nonetheless exposed fissures in what the West has tried to project as a united front in its monthslong effort to isolate Russian President Vladimir Putin.

Putin, sounding unperturbed, said the U.S. was only hurting itself.

The penalties announced by the White House were broad in scope, targeting two major Russian energy firms, a pair of powerful financial institutions, eight arms firms and four individuals. Leaders in Europe, which has a far deeper economic relationship with Russia than the U.S., were more restrained, ordering investment and development banks on the continent to suspend financing agreements with Moscow.

In a decision that could affect Russian oligarchs or members of the Kremlin inner circle, the EU leaders also asked their foreign ministers to consider targeting people or companies involved in the unrest in Ukraine.

Even the U.S. penalties stopped short of the most stringent actions the West has threatened, which would entail fully cutting off key sectors of Russia's economy. But officials said those steps were still on the table if Russia fails to abide by the West's demands to stop support for pro-Russian insurgents who have destabilized swaths of eastern Ukraine.

"What we are expecting is that the Russian leadership will see once again that its actions in Ukraine have consequences, including a weakening Russian economy and increasing diplomatic isolation," Obama said as he announced the U.S. penalties from the White House.

Publicly undismayed, Putin said the new sanctions run counter to U.S. national interests because they put American companies that want to operate in Russia at a competitive disadvantage.

At a news conference in Brazil, Putin said through a translator: "They are undermining the positions of their energy companies." He said, "They made one mistake, and now they insist on making another one."

Until now, the U.S. and Europe have limited their sanctions on Europe to travel bans and asset freezes aimed at individuals and entities, including some with close ties to Putin. But those measures have done little to change Putin's calculus, with the Pentagon announcing Wednesday that Russian troops were again building up along the border with Ukraine. In Ukraine itself, pro-Russian rebels in the east have lost much ground but now seem to be hunkering down for what could be extended urban warfare.

Ukraine and the West have accused Russia of fomenting the insurgency by sending troops and weapons across its border with the former Soviet republic, something Moscow denies. The insurgency was sparked by Russia's annexation of the Crimean Peninsula from Ukraine earlier this year.

While Obama has put a premium on responding to the provocations in co-ordination with Europe, the White House has grown increasingly frustrated with the continent's reluctance to impose sanctions on Russian economic sectors. EU leaders fear such penalties could have negative impacts on their own economies given their close financial relationships with Russia.

U.S. officials summoned European diplomats to the White House on Monday to discuss the matter and warn that Obama was prepared to take unilateral action if the EU did not take stronger measures during a meeting in Brussels Wednesday.

After meeting late into the night, the EU said it was asking the European Investment Bank to sign no new financing agreements with Moscow. The EU also agreed to suspend financing of new European Bank for Reconstruction and Development operations in Russia.

"There has been no progress in the attitude of Russia to solve this situation, the Ukraine crisis," said French President Francois Hollande in explaining the decision he and other EU leaders took.

European leaders also signalled for the first time their willingness to go after Russian companies "that are materially or financially supporting actions undermining or threatening Ukraine's sovereignty, territorial integrity and independence." They ordered their foreign ministers to draw up a list of such people or entities by the end of the month.

Lithuanian President Dalia Grybauskaite, whose nation borders Russia, said the EU had to get tougher with Moscow "because if Putin's aggressive policy isn't stopped, he will go further."

The targets of the U.S. sanctions include two major Russian energy firms: Novatek, the country's largest independent natural gas producer, and Rosneft, Russia's largest petroleum company and third largest gas producer. The penalties bar both from getting long-term loans from U.S. entities.

Also targeted were leading Russian financial institutions, the Russian development bank VEB and Gazprombank, banking arm of Russia's state energy behemoth Gazprom. The sanctions restrict their ability to access U.S. capital markets.

Steven Pifer, the former U.S. ambassador to Ukraine, said the American sanctions will add uncertainty to a Russian economy that has already been showing signs of weakness.

"These are serious sanctions. They target major Russian energy companies and financial institutions," said Pifer, who currently works as an analyst at the Brookings Institution in Washington.

The sanctions were welcomed with muted praise from some Republicans on Capitol Hill, who have contended that Obama's warnings of tougher action have been little more than empty threats.

"While the delay in imposing real costs on Russia has been damaging to U.S. credibility, today's announcement by the administration is definitely a step in the right direction," said Tennessee Sen. Bob Corker, the top Republican on the Senate Foreign Relations Committee.

Also included on Wednesday's sanctions list were four individuals: Putin adviser Igor Shchegolev, Russian State Duma Deputy Speaker Sergei Neverov, Ukrainian separatist leader Aleksandr Borodai and Sergey Beseda, an official with Russia's Federal Security Service, the intelligence agency that replaced the KGB after the collapse of the Soviet Union.

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Associated Press writers Nedra Pickler and Deb Riechmann in Washington and Laura Mills in Moscow contributed to this report.

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Follow Julie Pace at http://twitter.com/jpaceDC and John-Thor Dahlburg at http://twitter.com/JTDahlburg

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