BRUSSELS The European Union reached outline agreement on Friday to impose the first economic sanctions on Russia over its behaviour in Ukraine but scaled back their scope to exclude technology for the crucial gas sector.
The sanctions on access to capital markets, arms and hi-tech goods are also likely to apply only to future contracts, leaving France free to go ahead with the controversial delivery of Mistral helicopter carriers being built for Russia.
European Council President Herman Van Rompuy wrote to EU leaders asking them to authorise their ambassadors to complete an agreement by Tuesday. That would avoid the need for leaders to hold a special summit to approve the sanctions.
Van Rompuy said the proposed sanctions package "strikes the right balance" in terms of costs and benefits to the EU and in its flexibility to ramp up sanctions or reverse them over time.
"It should have a strong impact on Russia's economy while keeping a moderate effect on EU economies," he wrote in the letter, seen by Reuters.
After months of hesitation, the 28-nation EU toughened its stance towards Moscow following last week's downing of a Malaysian airliner, killing 298 people, in an area of eastern Ukraine held by Russian-backed separatists.
But the narrowing of the proposed measures highlighted the difficulty of agreeing to tough sanctions among countries which have widely different economic interests and rely to varying degrees on Russian gas.
After a discussion that lasted all day Thursday and part of Friday, EU ambassadors reached a preliminary agreement and asked the executive European Commission to draw up a legal text setting out economic sanctions.
European Commission President Jose Manuel Barroso said in a statement late on Friday that the Commission had adopted a draft legal text for the Russia sanctions package.
"The final decision now lies with the EU's member states, but I believe that this is an effective, well-targeted and balanced package providing the flexibility to adjust our reaction to changes on the ground. I hope that member states will agree on this package of restrictive measures next week," he said.
The measures are not an end in themselves, "but a means to achieve a negotiated and political solution to the crisis ... I call on Russia to take decisive steps to stop the violence and genuinely engage in peace plan discussions," he said.
EU ambassadors will try to reach a final deal at a meeting on Tuesday.
Key measures include closing EU capital markets to state-owned Russian banks, an embargo on arms sales to Moscow and restrictions on the supply of dual-use and energy technologies. They would not affect current supplies of oil, gas and other commodities from Russia.
Van Rompuy said there was an "emerging consensus" among EU governments that "the measures in the field of sensitive technologies will only affect the oil sector in view of the need to preserve EU energy security."
The Commission had proposed restricting equipment for deep-sea drilling, shale oil and Arctic energy exploration.
If the sanctions had applied to gas technology, they could have affected Gazprom's huge South Stream pipeline project to Europe and Novatek's Arctic Yamal liquefied natural gas (LNG) facility.
That in turn would have hit large EU energy suppliers and manufacturers with an interest in the project, including in Germany, Austria and Italy. The prospect of EU sanctions sent shares in French energy services firm Technip plunging 8 percent on Thursday.
Gazprom's main partners in South Stream are Italy's Eni, France's EDF, Austria's OMV and Germany's Wintershall [WINT.UL], a subsidiary of German chemical giant BASF.
Van Rompuy said EU governments also agreed that the sanctions should not be applied retroactively, particularly in the area of arms trade and restrictions on access to capital markets.
France was determined to uphold existing contracts with Russia to preserve a 1.2 billion euro ($1.6 billion) 2011 deal to supply two Mistral helicopter carriers.
EU governments also agreed that a ban on exports of dual-use technology - that can be used in both military and civilian products - would be limited at this stage to military users, Van Rompuy said.
Separately, the EU was due to publish on Saturday the names of 15 individuals and 18 entities, including companies, subject to asset freezes for their role in supporting Russia's annexation of Crimea and destabilisation of eastern Ukraine.
That will bring the number of people under EU sanctions to 87 and the number of companies and other organisations to 20.
A further sanctions list could be agreed as early as Monday under new criteria targeting companies and people who support Russian decision-makers responsible for annexing Crimea or destabilising eastern Ukraine, Van Rompuy said. New restrictions on trade and investment in Crimea could also be agreed on Monday, he said.
HIDING BEHIND FRANCE
Dutch Prime Minister Mark Rutte, whose country is seen as having a key role in shaping the EU response because it lost 194 citizens in the plane crash, said he would back sanctions unless Moscow halts weapons supplies to the rebels.
"We want as a country that has acquired a certain moral obligation as a result of this tragedy to promote Europe taking a common line on this," he told parliament in The Hague.
German Foreign Minister Frank-Walter Steinmeier said any negative consequences must be borne by Europe as a whole.
France's warship sale was the most discussed example of European defence cooperation with Russia but more was going on behind the scenes, Steinmeier said in an interview with Deutschlandfunk radio made available on Friday.
"There are many working to ensure that this remains the only example. But I can assure you, there are some other European states which are continuing their defence cooperation with Russia in the same way and are keen to hide behind France. If we are serious, we cannot exclude the defence sector from future sanctions," he said.
Spreading the burden evenly among EU member states is a delicate balancing act. Britain is strong in financial services, Germany in technology and machinery, France in arms sales, while Italy is heavily dependent on Russia for energy.
"To a degree everyone is reverting to trying to protect their own national interests from harm," a senior European diplomat said. As things stood, Britain would probably face more pain than any other state from the proposed measures because of London's key position as a financial centre.
In a sign of the widening economic fallout, an Italian-Russian project to build a new-generation small submarine has been suspended because of the "political situation", Itar-Tass news agency said on Friday.
German business sentiment fell to its lowest level in nine months in July, suggesting that firms are worried about the crises in Ukraine, Iraq and Gaza.
(1 = 0.7436 Euros)
(Additional reporting by Thomas Escritt in Amsterdam, Alexandra Hudson in Berlin, Justyna Pawlak, Martin Santa, Paul Taylor and Julia Fioretti; Editing by Paul Taylor and Mohammad Zargham)