* G7 delivers Putin ultimatum: stabilise east Ukraine or
* Leading industrial powers meeting in Brussels without
* Two-day summit to discuss foreign policy, economics,
* Russia dropped from G8 talks after seizure of Crimea
(Releads with quotes from Merkel, G7 statement)
By Luke Baker and Mike Peacock
BRUSSELS, June 4 The world's leading
industrialised nations threatened on Wednesday to impose
harder-hitting sanctions on Russia if it does not help restore
stability to eastern Ukraine, where pro-Russian militias
continue to operate at will.
While Ukraine was able to hold a largely peaceful
presidential election last month, the situation in the east near
the Russian border remains volatile, with armed groups attacking
Ukrainian government forces and occupying state buildings.
"We stand ready to intensify targeted sanctions and to
consider significant additional restrictive measures to impose
further costs on Russia should events so require," the G7 said
in a statement after evening talks in Brussels.
German Chancellor Angela Merkel said Western powers would
check "again and again" to verify that Russia was doing what it
could to stabilise the situation, which erupted in March after
Russia seized Crimea from Ukraine and annexed it.
"We cannot afford a further destabilization in Ukraine,"
Merkel told reporters.
"If we do not have progress in the questions we have to
solve there is the possibility of sanctions, even heavy
sanctions of phase 3 on the table," she said, referring to
restrictions on trade, finance and energy.
So far, the United States and European Union have imposed
relatively minor travel bans and asset freezes on dozens of
Russian officials in reaction to the seizure of Crimea.
Further steps were threatened if the May 25 elections were
affected. However, they went smoothly and new President Petro
Poroshenko will be sworn in on Saturday.
Some saw that as an indication that Russia was being more
cooperative, reducing the threat of further sanctions. But
Wednesday's statement suggests the West is not yet satisfied
that President Vladimir Putin is doing enough to calm the
Russia denies it is behind the revolt in eastern Ukraine,
where militias allied to Moscow have seized buildings, attacked
Ukrainian troops and declared independence. Putin has also
defended his right to protect Russian-speaking people.
While Putin has been cut out of the G7 - this is the first
meeting without Russia since it joined the club in 1997 - he
will hold face-to-face meetings with Merkel, French President
Francois Hollande and Britain's David Cameron at a D-Day
anniversary gathering in France later this week.
Asked about those bilateral meetings and whether they raised
any concerns for President Barack Obama, who has pointedly
avoided any contact with Putin, a U.S. official said it wasn't
important who Putin met but "what people say in those meetings".
Ahead of the G7 summit, Obama met Poroshenko for talks in
Warsaw and declared him a "wise choice" to lead Ukraine, part of
efforts by the EU and the United States to provide moral and
financial support to the new leadership.
Poroshenko, a chocolate-industry billionaire, said he would
be willing to meet Putin for peace talks on the sidelines of the
D-Day commemorations in Normandy although no meeting has been
"As things stand now, a meeting between me and Putin is not
envisaged, but I do not rule out that it could take place in one
format or another," he told reporters, adding that he was
working on a peace plan for Ukraine that would involve the
decentralisation of power, local elections and an amnesty.
ECONOMICS AND TRADE
As well as foreign policy, the two-day G7 summit will cover
economics, trade, climate and energy policy.
One of the most sensitive discussions will be over energy
security, particularly in Europe, which relies on Russia for
around a third of its oil and gas - a fact that gives Moscow
leverage over the EU and its 500 million people.
European leaders have committed themselves to diversifying
away from Russia but doing so will take time and be costly, and
may in part depend on the willingness of the United States to
supply liquified natural gas to Europe.
A separate communique will be released by the G7 leaders
after talks on Thursday which will highlight the need to
prioritise security of energy supplies.
"The use of energy supplies as a means of political coercion
or as a threat to security is unacceptable," a draft of that
statement, seen be Reuters, said.
"The crisis in Ukraine makes plain that energy security must
be at the centre of our collective agenda and requires a
step-change to our approach to diversifying energy supplies."
The economic discussion is not expected to break new ground,
instead reiterating that all the G7 members - the United States,
Canada, Germany, France, Britain, Japan and Italy - must focus
on sustaining economic recovery and tightening regulations to
prevent future banking sector problems.
The leaders will reaffirm a commitment to completing
financial reforms this year including ending "too-big-to-fail"
(Additional reporting by Roberta Rampton, Jan Strupczewski,
Robin Emmott and Barbara Lewis in Brussels, Noah Barkin and
Stephen Brown in Berlin. Editing by Mike Peacock)