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Published: Thursday July 17, 2014 MYT 2:55:13 AM
Updated: Thursday July 17, 2014 MYT 2:55:15 AM

EU set to block new loans to Russia through EIB, EBRD

BRUSSELS (Reuters) - European Union leaders want to block loans for new projects in Russia by two multilateral lenders and to broaden sanctions to target companies that help destabilise Ukraine, according to a draft statement seen by Reuters.

The EU leaders, meeting in Brussels on Wednesday, will step up sanctions because pro-Russian rebels in eastern Ukraine have not met their demands to end violence.

But the proposed new measures still fall short of the hard-hitting sanctions on sectors of the Russian economy that the United States and the Ukrainian government have called for.

German Chancellor Angela Merkel, arriving for the summit, said the EU leaders would talk about new sanctions "because we believe that the Russian contribution to peace in Ukraine is not yet sufficient".

British Prime Minister David Cameron said the situation in Ukraine was unacceptable. "The territorial integrity of that country is not being properly respected by Russia and we need to send a very clear message with clear actions," he said.

The leaders will ask the bloc's bank, the European Investment Bank (EIB), to suspend financing of new public sector projects in Russia, the draft statement said.

EU countries will work together within the European Bank for Reconstruction and Development (EBRD) to halt EBRD financing of new projects in Russia, it said.

The leaders will also ask the EU's executive Commission to look into suspending some cooperation programmes that are set to benefit Russia to the tune of around 450 million euros ($609 million) (355 million pounds) between now and 2020.

The EU will broaden the scope of asset freezes to allow the bloc to target companies and other organisations "that are supporting materially or financially actions undermining ... Ukraine's sovereignty", according to the draft statement, which could still be changed after the leaders' discussions.

BROADER SCOPE

The broadening of the criteria would allow the EU to impose sanctions on Russian or Ukrainian companies that help or finance separatist activities in eastern Ukraine.

Previously, only companies confiscated following Russia's annexation of Crimea in March or firms linked to a person targeted with sanctions could be put on the sanctions list.

The EU has so far imposed asset freezes on 72 people and two Crimean energy companies.

"I think that some additional steps will be taken, especially concerning the loans and financial assistance from the European Investment Bank and EBRD (and) against the separatists and supporters of separatists," Lithuanian President Dalia Grybauskaite said on arrival at the summit.

But she said the EU was "still far away" from a decision to impose sanctions on sectors of the Russian economy, or an arms or technology embargo.

Making clear that Europe was divided on the issue, Swedish Prime Minister Fredrik Reinfeldt said he favoured going further and putting sanctions on sectors of the Russian economy.

French Foreign Minister Laurent Fabius said the modest strengthening of sanctions was designed to show firmness while keeping dialogue open. He said there were no plans for an arms embargo - a sensitive question for Paris, which plans a 1.2 billion euro sale of helicopter carriers to Russia.

The 28-nation EU has been under strong pressure from the United States and Ukraine to take a harder line against Russia but some EU governments are wary of potential retaliation from Russia, the bloc's biggest energy supplier, if they did so.

LIMITED IMPACT

Blocking some loans to Russia through the EIB and EBRD marks a tightening of EU pressure but analysts said it would not have a severe economic impact on Russia.

"EBRD and EIB assistance is useful for Russia as it targets good projects that are aimed at modernising the economy and improving the investment climate," said Tatiana Orlova, a strategist at RBS in London.

"But the scope of those projects is relatively modest and Russia is not dependent on these banks' assistance," she said. "Unless we see names of important companies, markets won't really react too much."

Russia is one of 64 countries that are shareholders of the EBRD but, if it wins the support of other pro-Western countries, the EU should be able to block loans for new Russian projects.

Russia has traditionally been the biggest recipient of the London-based EBRD's funds - the bank lent 1.8 billion euros ($2.44 billion) there last year. The EIB typically lends around 300-500 million euros a year to public sector projects in Russia.

Both banks declined comment.

The United States has mounted a diplomatic campaign over the last few days to persuade the EU to sign up to tougher sanctions, according to a European diplomat.

EU leaders will also ask officials to draw up proposals for further measures to restrict investment in Crimea, whose annexation by Russia is not recognised by the EU.

The leaders will say they expect international financial institutions to refuse to finance any project that recognises the annexation of Crimea, according to the draft.

(Additional reporting by Justyna Pawlak, Jan Strupczewski, Martin Santa and Paul Taylor in Brussels. Marc Jones and Sujata Rao in London. Alexandra Hudson and Noah Barkin in Berlin. Editing by Mike Peacock)

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