(Updates with rebels' airport claim)
* Sanctions to hit Russian companies
* U.N. says fighting has made one million homeless
* Strong response needed, says incoming EU foreign policy
By Robin Emmott and Gabriela Baczynska
BRUSSELS/DONETSK, Ukraine, Sept 2 EU officials
proposed sanctions on Tuesday to starve Russian firms of cash as
punishment for Moscow's role in Ukraine, where rebels said they
were storming Donetsk airport, potentially their biggest prize
since turning the war's tide last week.
Western countries accuse Moscow of sending armoured columns
of troops into Ukraine, where the momentum in a five-month war
shifted last week decisively in favour of pro-Russian rebels,
who are now advancing on a new front towards a major port.
Russia denies its troops are involved in fighting on the
ground, in the face of what Western countries and Ukraine say is
According to the United Nations, the war, in which
pro-Russian separatists are fighting to throw off rule from
Kiev, has killed more than 2,600 people and driven nearly a
million from their homes in east Ukraine.
Rebels in Donetsk, the biggest city under their control,
said they were close to recapturing its airport from Ukrainian
troops who had defended it since capturing it two months ago.
"The airport is 95 percent under our control. Practically,
we are holding it by now. Some remaining Ukrainian troops need
to be cleared," said Aleksandar Timofeyev, a leader of one of
the main rebel units in Donetsk. "The Ukrainian army is
retreating. It's more of a flight by now. Reasonable ones give
up their weapons and go. Others stay in the ground for good."
A rebel source said an attempt to storm the airport was
under way: "It will soon be over".
Losing control of the airport in Donetsk would be a
humiliating reversal for government forces that recaptured it
after going on the offensive in June. Ukrainian forces abandoned
the airport at the other rebel stronghold, Luhansk, on Monday.
European leaders asked the EU on Saturday to draw up new
sanctions to punish Moscow, which are expected to be unveiled on
Wednesday and adopted by Friday. The United States is also
planning new sanctions but is keen to maintain Western unity by
not getting in front of its European allies.
Outlining the new proposals on Tuesday, European diplomats
described a number of mainly technical measures that would have
the combined effect of making it harder for companies in
Russia's state-dominated economy to obtain overseas financing.
U.S. and EU sanctions steadily tightened since March have
already made it hard for many Russian firms to borrow, scaring
investors and contributing to billions of dollars in capital
flight that has wounded the Russian economy. Moscow has
responded by banning most imports of Western food.
"We need to respond in the strongest possible way," said
the EU's newly named incoming foreign policy chief, Italian
foreign minister, Federica Mogherini. "Things on the ground are
getting more and more dramatic. We speak of an aggression, and I
think sanctions are part of a political strategy."
A summit of European leaders, which will be followed later
this week by a NATO summit in Wales, has been dominated by
events in Ukraine, against a backdrop of increasingly defiant
statements by Russian President Vladimir Putin.
According to Italy's La Repubblica newspaper, outgoing
European Commission president Jose Manuel Barroso said Putin had
told him he could take Ukraine's capital within two weeks if he
wanted to. The Kremlin said any such remarks would have been
taken out of context and criticised Barroso for the leak.
Last week Putin compared the Kiev government to Nazis and
said foreigners needed to understand that Russia was a nuclear
power and "it's best not to mess with us". On Sunday he said
Kiev needed to negotiate "statehood" for its south and east.
Still, it is by no means clear that the sanctions will pass
in their proposed form: the 28 EU member states must all agree
on any measures, and several have openly expressed scepticism.
Czech Prime Minister Bohuslav Sobotka said he would study
ways to reduce the harm to his country from sanctions, and
seemed unconvinced by the entire strategy.
"The problem is that if sanctions are escalated now, there
will be a reaction from Russia and we are not able to estimate
at this point what impact the next wave of sanctions by Russia
against EU countries will have," he said.
Slovak Prime Minister Robert Fico has also expressed
concern, calling sanctions "meaningless and counterproductive".
The measures described by EU diplomats all build on earlier
sanctions imposed in July, which hit Russian business broadly
for the first time.
The new proposals on the table would widen a ban on Russian
state banks raising capital in EU markets to cover all Russian
state-owned firms. The capital markets borrowing ban would be
extended to include syndicated loans from EU banks, and a ban on
sales in Europe of Russian debt instruments for periods of less
than 90 days would be reduced to 30 days.
Bans on sales of energy technology and technology with dual
military and civilian uses would be tightened. And the 28-member
bloc could also consider more symbolic measures, like adding
Russia's defence minister to an EU travel ban list and possibly
even limiting future sport and culture exchanges.
The European Union also opened a pipeline that could supply
Ukraine with 20 percent of its natural gas needs, important aid
for a country that depends on Russian energy. Kiev has been
burning gas reserves since Moscow cut it off two months ago.
The International Monetary Fund, which is supporting Kiev
with loans, said it would need a bigger bailout if war goes on.
In an interview with Reuters, Kiev's governor for the
Donetsk region, now operating out of the province's
second-biggest city Mariupol while the regional capital Donetsk
is in rebel hands, described the Russian presence as an
Western leaders including U.S. President Barack Obama and
German Chancellor Angela Merkel, mindful that the Russian forces
they say have crossed into Ukraine still represent just a
fraction of Moscow's potential might in the area, have so far
avoided that word, instead calling it an "incursion".
"A huge amount of weapons are unfortunately crossing the
Russian border. They (the Russians) bring them to Ukraine to
bring death and destruction and they try to annex part of
Ukrainian territory," the governor, wealthy industrialist Serhiy
Taruta, told Reuters. "So it is very difficult to qualify it any
way other than as an invasion."
Russia annexed Ukraine's Crimea peninsula, where most of the
population is ethnic Russian, in March. Since then, rebels in
the east, where most people identify themselves as ethnic
Ukrainians who speak Russian, have declared independence.
At talks this week, the rebels have offered to consider some
kind of special status within Ukraine. Kiev refuses to discuss
political issues with fighters it calls Moscow's proxies.
The rebels have been steadily advancing in recent days after
weeks in which they had appeared to be on the verge of collapse
while government forces besieged them in two provincial
capitals, Donetsk and Luhansk.
Military spokesman Andriy Lysenko said government forces
destroyed the runway at Luhansk airport before retreating on
Monday. He also said the government was reinforcing Mariupol, a
port of around half a million people, and the next big city in
the path of a rebel advance that began last week with the sudden
capture of the small town of Novoazovsk.
"Soon we will build a second line of defence at a distance
further out of 15-20 km from the town," Lysenko said.
Lysenko said Russian trucks, painted white, were now being
used to deliver arms to the rebels.
"Last night four white trucks came ... and after an hour
went back again. It's not the first time that white trucks have
unlawfully crossed the border accompanied by off-road vehicles
and guards," he told journalists.
Months ago Mariupol rallied behind Kiev after the region's
main employer Metinvest, the industrial firm of Ukraine's
richest man Akhmet Rinatov, sent steelworkers into the streets
to push out rebels.
At a Metinvest smelter, Alexander Ilarionov, a manager, said
the employees were keeping production going despite being cut
off from raw materials. If the rebels arrive, the workers will
defend the city, he said.
"We resisted, we organised and we will do it again."
(Additional reporting by Aleksandar Vasovic in Mariupol,
Gabriela Baczynska in Donetsk, Adrian Croft and Jan Strupczewski
in Brussels, Jan Lopatka and Jason Hovet it Prague, Pavel
Polityuk and Kiryl Sukhotski in Kiev and Mark Trevelyan in
Moscow; Writing by Peter Graff; Editing by Giles Elgood)