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U.S., EU to work together on tougher Russia sanctions

People pass by a mural of Crimea in Russian colors on a street in Moscow. REUTERS Arthur Bainozarov
People pass by a mural of Crimea in Russian colors on a street in Moscow. REUTERS Arthur Bainozarov

By Jeff Mason and Lidia Kelly

BRUSSELS/MOSCOW (Reuters) - The United States and the European Union agreed on Wednesday to work together to prepare possible tougher economic sanctions in response to Russia's behavior in Ukraine, including on the energy sector, and to make Europe less dependent on Russian gas.

U.S. President Barack Obama said after a summit with top EU officials that Russian President Vladimir Putin had miscalculated if he thought he could divide the West or count on its indifference over his annexation of Crimea.

Leaders of the Group of Seven major industrial powers decided this week to hold off on sanctions targeting Moscow's economy unless Putin took further action to destabilize Ukraine or other former Soviet republics.

"If Russia continues on its current course, however, the isolation will deepen, sanctions will increase and there will be more consequences for the Russian economy," Obama told a joint news conference with European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso.

In the keynote address of his European trip, Obama later told an audience of 2,000 young people that the West would prevail if it remained united, not by military action but by the power of its values to attract ordinary Ukrainians.

Russia would not be "dislodged from Crimea or deterred from further escalation by military force. But with time, so long as we remain united, the Russian people will recognize that they cannot achieve security, prosperity, and the status they seek through brute force," he said.

In the speech in a Brussels concert hall, which resembled a point-by-point rebuttal of Putin's March 18 Kremlin speech announcing the annexation of Crimea, Obama voiced respect for a strong Russia but said "that does not mean that Russia can run roughshod over its neighbors".

He also said NATO would step up its presence in new east European member states bordering on Russia and Ukraine to provide reassurance that the alliance's mutual defense guarantee would protect them.

Russian forces in Crimea captured the last Ukrainian navy ship after firing warning shots and stun grenades, completing Moscow's takeover of military installations in the Black Sea peninsula. Kiev has ordered its forces to withdraw.

Western concern has focused on an estimated 30,000 Russian troops massed on Ukraine's eastern border amid Kremlin allegations of attacks on Russian speakers in that industrial region of the country.

But Polish Prime Minister Donald Tusk said it seemed likely that the firm Western response so far would stop Russia undertaking what he called "other acts of aggression and interference on the territory of Ukraine".

The new Ukrainian authorities announced a radical 50 percent increase in the price of domestic gas from May 1, meeting an unpopular condition for International Monetary Fund aid which Russian-backed President Viktor Yanukovich had refused before he was ousted last month. Russia has said it will increase the price it charges Ukraine for gas from April.

The IMF concluded talks with Ukrainian officials on Wednesday, and was likely to announce an aid deal on Thursday for Kiev to help plug the government's budget gap and put its economy on a growth track. Ukraine has been seeking a bailout package of between $15 and $20 billion.

DEVELOP YOUR OWN

In response to EU pleas to expand U.S. gas exports to Europe to reduce reliance on Russian supplies, Obama said a new transatlantic trade deal under negotiation would make it easier to license such sales.

However, he said Europe should also look to develop its own energy resources - a veiled reference to environmental resistance to shale gas extraction and nuclear power - and not just count on America.

Russia provides around one third of the EU's oil and gas and some 40 percent of the gas is exported through Ukraine.

"You cannot just rely on other people's energy, even if it has some costs, some downside," the EU ambassador to Washington quoted Obama as telling his EU hosts over a working lunch.

The World Bank warned that the economic impact of annexing Crimea from Ukraine could drive Russia into a sharp recession this year even if the West stops short of trade sanctions.

A World Bank report on the Russian economy, compiled before the most recent evidence of the scale of capital flight, made clear Moscow was already set to pay a significant price in lost growth due to the most serious East-West confrontation since the end of the Cold War.

Gross domestic product could contract by as much as 1.8 percent in 2014 if the crisis persists, it said. That high-risk forecast assumes that the international community would still refrain from trade sanctions.

Under a low-risk scenario, assuming only a short-lived impact from the crisis, GDP could grow by 1.1 percent, just half the bank's 2.2-percent growth forecast published in December.

RUSSIAN STOCKS REBOUND

Russia is refusing to recognize the Kiev government chosen by parliament after the overthrow of Yanukovich on February 22 following months of street protests against his refusal to sign a pact on closer ties with the EU.

So far, the United States and the EU have imposed personal sanctions against Russian and Crimean officials involved in the seizure of the peninsula and Washington has slapped visa bans and asset freezes on senior business figures close to Putin.

Russian markets and the ruble have been shaken, resulting in massive capital outflows, now estimated by the Economy Ministry at up to $70 billion in the first quarter alone compared with $63 billion in the whole of last year.

However, Russian stocks clawed back more ground on Wednesday and the ruble strengthened as a relief rally continued due to signs of an easing of tensions over Crimea. Russian assets have rallied as investors calculate that the annexation will not trigger more serious Western sanctions.

(Additional reporting by Steve Holland and Robin Emmott in Brussels, Marcin Goclowski in Warsaw, Jeff Mason in Waregem, Belgium, William James in The Hague and Jason Bush in Moscow; Writing by Paul Taylor; Editing by Alastair Macdonald and Giles Elgood)

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