US, EU to step up sanctions on Russia over Ukraine

SLAVYANSK, Monday

The United States and Europe is preparing to step up sanctions against Russia over the crisis in Ukraine, where pro-Kremlin rebels seized another town in the east and tensions simmered over the detention of international observers.

The fresh sanctions were likely to target the inner circle of Russian President Vladimir Putin, blamed for triggering the worst East-West confrontation since the end of the Cold War.

In eastern Ukraine, the situation remained jittery with pro-Russia militants holding seven monitors from the OSCE after presenting them in front of the world's media on Sunday as "prisoners of war".

AFP reporters said gunmen were increasingly aggressive at checkpoints and occupied buildings in the flashpoint eastern Ukraine town of Slavyansk, one of a handful under control of pro-Kremlin rebels.

SANCTIONS DRIVE

Meanwhile heavily armed gunmen on Monday seized control of the town hall in nearby Kostyantynivka, according to an AFP reporter on the scene, the latest in a string of about a dozen towns and cities in southeastern Ukraine to fall under the control of the pro-Russian insurgents over the past few weeks.

The threat of a full-scale invasion loomed large over the ex-Soviet country, with tens of thousands of Russian troops massed on the border and Ukraine's prime minister warning of efforts to start a "third world war".

As the West stepped up the rhetoric ahead of the sanctions announcement, French Foreign Minister Laurent Fabius warned the Ukraine crisis could yet have "incalculable consequences".

US President Barack Obama has led global efforts to punish Putin for what he called "provocation" in the Ukraine crisis and called for the West to pull together in the sanctions drive.

On Monday, EU officials were to meet to thrash out a new set of sanctions likely to include asset freezes and travel bans. Diplomats in Brussels have already agreed in principle to add 15 people to a blacklist of 55 Russians and Ukrainians.

DEBT CRISIS

In Washington, deputy national security adviser Tony Blinken said sanctions would target the people closest to Putin as well as "the companies they control (and) the defence industry".

The Group of Seven top economies have vowed to act "swiftly" to raise the pressure on Russia, where the economy is already contracting.

Speaking on his tour of Asia, Obama said it was vital to avoid "falling into the trap of interpreting this as the US is trying to pull Ukraine out of Russia's orbit, circa 1950. Because that's not what this is about".

The West has already imposed visa and travel restrictions on key members of Putin's inner circle and slapped sanctions on a top bank.

But some fear that undermining Russia's economy could tip the world back into recession, just as it begins to recover from the effects of the eurozone debt crisis.

Reflecting these jitters, stocks in Japan closed nearly one percent lower and the yen -- seen as a safe haven against uncertainty -- gained ground against the dollar.

However, former Russian tycoon Mikhail Khodorkovsky said the sanctions would have "no short-term effect" on the Russian economy and would take three or four years to really hurt Putin.

In Slavyansk, intense negotiations continued to secure the release of a team of seven monitors from the Organisation for Security and Cooperation in Europe captured by pro-Russian rebels.

FREE THE REST

On Sunday, the militants presented the team under armed guard in front of the world's media, a move Germany, in command of the mission, slammed as "repugnant".

Speaking in Slavyansk town hall under the watchful gaze of four armed guards and the self-styled mayor, Vyacheslav Ponomaryov, the group's leader, German officer Axel Schneider, told reporters they were in good health.

One of the group, a Swedish monitor, was released late Sunday on medical grounds as he suffers from diabetes and a team of OSCE negotiations was in talks to free the rest.

But the rebels have described them as "NATO spies" and "prisoners of war" and refused to release them except as part of an exchange for their own detained militants.

OSCE chairman and Swiss President Didier Burkhalter said his organisation was working "at all levels" to secure their release.

German Foreign Minister Frank-Walter Steinmeier said the presentation of the detained OSCE men in front of the press was "a violation of all negotiating rules and norms that prevail in tense situations like this one".

The monitors were in Ukraine to assess progress towards implementing a deal struck in Geneva on April 17 that was supposed to ease the crisis. Obama has said Russia has "not lifted a finger" to enact the deal, which calls for militias in Ukraine to lay down arms and free seized state property.

MASS DEMONSTRATIONS

The rebels are also holding three Ukrainian soldiers captured near Slavyansk. Russian television showed the men blindfolded and bloodied, stripped to their undergarments.

The fate of four Ukrainians travelling with the OSCE group is also unknown, as they did not appear at the news conference with the eight Europeans -- four Germans, a Dane, a Czech, a Pole and the Swede who was later released.

The crisis has escalated at breathtaking pace since November when pro-Western protesters in Kiev began mass demonstrations against former Kremlin-backed president Viktor Yanukovych after he rejected an agreement to bring Ukraine closer to the European Union.

After four months of protests, which turned deadly as authorities tried to break them up, Yanukovych was forced from power, sparking outrage in Moscow.

In response, Moscow launched a blitz annexation of the peninsula of Crimea and stepped up troop movements on the border.

Kiev and the West accuse Russia of being behind the unrest in southeastern Ukraine, allegations Moscow has denied. It has reserved the "right" to protect Russian speakers in the region, which has deep cultural and historical ties to Moscow.