WRAPUP 2-EU weighs Russia sanctions as Ukraine diplomacy falters

Thu Mar 6, 2014 4:42am EST

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(adds Medvedev on easing Russian passports, details of EU meeting)

* Divided EU to warn, not sanction Russia at summit

* Moscow says OSCE, NATO efforts not helpful

* Kerry, Lavrov to meet again in Rome

* U.N. envoy surrounded, forced to leave Crimea

* Rouble weakens despite central bank intervention

By Luke Baker and Elizabeth Piper

BRUSSELS/MOSCOW, March 6 (Reuters) - European Union leaders were set to warn but not sanction Russia on Thursday over its military intervention in Ukraine after Moscow rebuffed Western diplomatic efforts to persuade it to pull forces in Crimea back to their bases.

Russian Foreign Minister Sergei Lavrov refused to meet his new Ukrainian counterpart or to launch a "contact group" to seek a solution to the crisis at talks in Paris on Wednesday despite arm-twisting by U.S. Secretary of State John Kerry and European colleagues. The two men will meet again in Rome on Thursday.

Tension remained high in Ukraine's southern Crimea region, where a senior United Nations envoy was surrounded by a pro-Russian crowd, threatened and forced to get back on his plane and leave the country.

An emergency EU summit in Brussels is unlikely to adopt more than symbolic measures against Russia, Europe's biggest gas supplier, because neither industrial powerhouse Germany nor financial centre Britain is keen to start down that road.

The United States has said it is ready to impose sanctions such as visa bans, asset freezes on individual Russian officials and restrictions on business ties within days rather than weeks.

Russia's rouble currency weakened further on Thursday despite central bank intervention due to what analysts at VTB Capital called the political risk premium.

The short, informal EU summit will mostly be dedicated to displaying support for Ukraine's new pro-Western government, represented at the Brussels talks by Prime Minister Arseny Yatseniuk, who will attend the lunch although Kiev is neither an EU member nor a recognised candidate for membership.

After meeting European Parliament President Martin Schulz, Yatseniuk appealed to Russia to respond to mediation efforts to end the crisis.

The European Commission announced an aid package of up to 11 billion euros ($15 billion) for Ukraine over the next couple of years provided it reaches a deal with the International Monetary Fund, entailing painful reforms like ending gas subsidies.

Diplomats said that at most, the 28-nation EU would condemn Russia's so far bloodless seizure of Ukraine's Black Sea province and suspend talks with Moscow on visa liberalisation and economic cooperation, while threatening further measures if President Vladimir Putin does not accept mediation efforts soon.

But they will hold back from further reaching steps both in hopes of a diplomatic breakthrough to ease tensions in Ukraine and out of fear of a tit-for-tat trade war with Russia, a major economic partner of Europe.

France has a deal to sell warships to Russia that it is so far not prepared to cancel, London's banks have profited from facilitating Russian investment, and German companies have $22 billion invested in Russia.

Before the summit, European members of the Group of Eight major economies will meet separately, diplomats said, in an apparent effort to coordinate positions towards Russia, due to host the next G8 summit in Olympic venue Sochi in June. They have so far stopped participating in preparatory meetings and Canada has said G7 countries may meet soon without Russia.

ILLEGITIMATE

The crisis began in November when Ukrainian President Viktor Yanukovich, under strong Russian pressure, turned his back on a far reaching trade deal with the EU and accepted a $15 billion bailout from Moscow. That prompted three months of street protests leading to the overthrow of Yanukovich on Feb. 22.

Moscow denounced the events as an illegitimate coup and refused to recognise the new Ukrainian authorities.

Russia kept the door ajar for more diplomacy on its own terms, announcing on Thursday a meeting of former Soviet states in the Commonwealth of Independent States (CIS), including Ukraine, for April 4 and saying it would be preceded by contacts between Russian and Ukrainian diplomats.

Lavrov said attempts by Western countries to take action over the Ukraine crisis via democracy watchdog OSCE and the NATO military alliance were not helpful.

"I want to very briefly say that we had a meeting with U.S. Secretary of State John Kerry on the situation in Ukraine in relation to the actions that our partners are trying to take via the OSCE, the NATO-Russia council and other international organisations - action that does not help create an atmosphere for dialogue and constructive cooperation," he said in a statement issued by the ministry on Thursday.

In a move that may alarm some of Russia's neighbours and the West, Russian Prime Minister Dmitry Medvedev announced steps to ease handing out passports to native Russian speakers who have lived in Russia or the former Soviet Union.

Putin has cited the threat to Russian citizens to justify military action in both Georgia in 2008 and Ukraine now.

After a day of high-stakes diplomacy in Paris on Wednesday, Lavrov refused to talk to Ukrainian Foreign Minister Andriy Deshchitsya, whose new government is not recognised by Moscow.

As he left the French Foreign Ministry, Lavrov was asked if he had met his Ukrainian counterpart. "Who is that?" the Russian minister asked.

He stuck to Putin's line - ridiculed by the West - that Moscow does not command the troops without national insignia which have taken control of Crimea, besieging Ukrainian forces, and hence cannot order them back to bases.

Kerry said afterwards he had never expected to get Lavrov and Deshchitsya into the same room right away, but diplomats said France and Germany had tried to achieve that.

Western diplomats said there was still hope that once Lavrov had reported back to Putin, Russia would accept the idea of a "contact group" involving both Moscow and Kiev as well as the United States and European powers to seek a solution.

The European Union formally announced it had frozen the assets of ousted Ukrainian president Yanukovich and 17 other officials, including former prime minister Mykola Azarov, suspected of human rights violations and misuse of state funds.

"RUSSIA! RUSSIA!"

In an awkward coincidence, just as EU leaders were gathering in Brussels, German Economy Minister and Vice-Chancellor Sigmar Gabriel travelled to Moscow for talks with his Russian counterpart and Putin.

Reflecting concern about how the long-planned trip might be seen in the midst of the Ukraine crisis, Gabriel dropped at the last minute plans to take along German industrialists with him. Germany has been accused in some quarters of soft-pedaling on sanctions in the light of its close economic ties to Russia.

Officials close to Gabriel said he was hoping to keep a low public profile on the trip, but if he meets Putin, as scheduled, he may have to appear in front of TV cameras.

U.N. special envoy Robert Serry had to abandon a mission to Crimea after being stopped by armed men and besieged inside a cafe by a hostile crowd shouting "Russia! Russia!" The Dutch diplomat flew to Istanbul after the incident.

In eastern Ukraine, a pro-Russian crowd in Donetsk, Yanukovich's home town, recaptured the regional administration building they had occupied before being ejected by police. But police loyal to the new authorities in Kiev raised the Ukrainian flag over the building again on Thursday.

Putin has said Russia reserves the right to intervene militarily in other areas of Ukraine if Russian interests or the lives of Russians are in danger.

Dropping diplomatic niceties on Wednesday, the U.S. State Department published a "fact sheet" entitled "President Putin's Fiction: 10 False Claims about Ukraine."

"As Russia spins a false narrative to justify its illegal actions in Ukraine, the world has not seen such startling Russian fiction since Dostoyevsky wrote, 'The formula "two plus two equals five" is not without its attractions,'" the State Department said in the document. (Additional reporting by Lidia Kelly in Moscow, Tim Heritage in Kiev, John Irish and Lesley Wroughton in Paris; Writing by Paul Taylor; editing by Anna Willard)

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