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Russia warns sanctions will backfire on West

A Ukrainian man videos a shell crater in Donetsk, on July 29, 2014
A man videos a shell crater in Donetsk, on July 29, 2014

A defiant Russia said Wednesday unprecedented Western sanctions over Ukraine would boomerang back on the United States and lead to energy price hikes in Europe after Brussels and Washington unveiled the toughest punitive measures against Moscow since the Cold War.

Russia's response came as the Ukrainian military pushed on with its offensive against pro-Russian rebels in the east, retaking the town of Avdiyivka, only a dozen kilometres (eight miles) from the main rebel city of Donetsk.

The Russian foreign ministry warned the United States it was shooting itself in the foot, saying the US was punishing the Kremlin for "independent policies that Washington finds inconvenient."

Moscow also attacked Brussels for its "inability to play an independent role in world affairs" and added that European consumers will bear the brunt of sanctions targeting Russia's vital energy, arms and energy sectors.

Local residents of Debaltceve walk past a damaged building on July 30, 2014, a day after after Ukrainian troops retook the eastern city from pro-Russian rebels
Local residents of Debaltceve walk past a damaged building on July 30, 2014, a day after after Ukrainian troops retook the eastern city from pro-Russian rebels

"This is a thoughtless, irresponsible step. It will inevitably lead to an increase in prices on the European energy market," the foreign ministry said.

Russia provided few details of possible retaliation but earlier Wednesday its agricultural watchdog banned the import of all fruit and vegetables from EU member Poland, one of the staunchest supporters of Kiev's pro-Western course.

Foreign Minister Sergei Lavrov said Russia was struggling to understand the West's logic, insisting Russia was doing everything to help mediate talks between Ukrainian authorities and Moscow-backed rebels.

"What exactly are our partners seeking?" Russia's top diplomat said on a visit to Tajikistan.

Graphic on the MH17 crash site in eastern Ukraine
Graphic on the MH17 crash site in eastern Ukraine

First Deputy Prime Minister Igor Shuvalov for his part made light of the restrictions, also designed to hit the oligarchs in Russian President Vladimir Putin's inner circle.

"In for a penny, in for a pound," he quipped to journalists.

The stepped-up sanctions came as Moscow dismissed claims it was responsible for supplying the missile that downed Malaysia Airlines flight MH17.

The restrictions will hinder access for Russian state-owned banks to European financial markets, forcing borrowing costs higher and hobbling an already struggling economy.

Debris from Malaysia Airlines flight MH17 lies at the crash site in rebel-held east Ukraine, on July 19, 2014
Debris from Malaysia Airlines flight MH17 lies at the crash site in rebel-held east Ukraine, on July 19, 2014

But Russian banks put on a brave face, saying their operations would not be affected and that they will seek funding outside the United States and Europe.

Russia's central bank said financial institutions were working normally and pledged to protect sanctions-hit lenders, which include the country's second-largest bank VTB.

Russian markets rallied Wednesday, with investors relieved Western sanctions weren't tougher. The main stock indices gained around two percent and the ruble firmed against the dollar and the euro.

- 'Driven into corner' -

A pro-Russian separatist stands guard as an international monitor with the Organization for Security and Cooperation in Europe (OSCE) talks on his mobile phone in Donetsk, on July 30, 2014
A pro-Russian separatist stands guard as an international monitor with the Organization for Security and Cooperation in Europe (OSCE) talks on his mobile phone in Donetsk, on July 30, 2014

Existing contracts including France's 1.2-billion-euro ($1.6-billion) deal to deliver two Mistral warships to Russia will be exempt from sanctions and Paris said it would go ahead with the sale of the first vessel.

Deputy Prime Minister Dmitry Rogozin said Russia would build the second Mistral-class vessel itself if Paris puts the contract on ice.

Some EU diplomats and Russia experts expressed concern that tighter sanctions may in fact embolden Putin, convincing him he no longer has anything to lose by further escalating the Ukraine conflict.

"The confrontation will increase abruptly. Putin has been practically driven into a corner and this man does not make concessions under pressure," Nikolai Petrov of the Higher School of Economics told AFP.

People come out from their houses after shelling in Donetsk, on July 29, 2014
People come out from their houses after shelling in Donetsk, on July 29, 2014

Economists acknowledged the new restrictions would be painful for Russia, and could stoke social tensions as its economy slides towards recession.

Obama denied the West was being drawn into a new Cold War with its former-Soviet foe, but warned the United States and Europe are running out of patience with Putin's government.

The US sanctions targeted banks and United Shipbuilding Corporation, which builds attack submarines and surface warships.

In addition to the financial markets, EU sanctions also banned future sales of weapons and dual-use technologies, especially in the key energy sector.

- New talks in Belarus? -

Russian President Vladimir Putin chairs a cabinet meeting at his Novo-Ogaryovo residence outside Moscow, on July 30, 2014
Russian President Vladimir Putin chairs a cabinet meeting at his Novo-Ogaryovo residence outside Moscow, on July 30, 2014

In Ukraine, fighting between Kiev forces and rebels prevented a Dutch and Australian police contingent from visiting the MH17 crash site for the fourth day running.

The remains of some of the 298 victims, who included nearly 200 Dutch nationals, still lie at the site nearly two weeks on.

Deputy Prime Minister Volodymyr Groysman said President Petro Poroshenko had given the go-ahead for Kiev's representatives to fly out to Belarus on Thursday for possible talks over access to the crash site.

Top separatist Andrei Purgin said he would likely take part in the talks if they happen, adding rebels want Ukrainian forces to withdraw entirely from their territory.

Kiev said it does not plan to take back the crash site by force but its troops pressed on with a broader offensive against the rebels, including a "mopping up" operation in a town some 40 kilometres from the downed jet.

One Ukrainian soldier was killed and 11 wounded over the past 24 hours, according to authorities.

Ukrainian security spokesman Andriy Lysenko blamed rebels for blocking observers from the crash site and alleged they were reinforcing their positions around the scene and even laying mines.

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