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Published: Saturday July 26, 2014 MYT 5:40:02 AM
Updated: Saturday July 26, 2014 MYT 5:41:01 AM

As Russian arms flow to Ukraine, more U.S. sanctions expected

WASHINGTON (Reuters) - Evidence that Russia is moving more weapons into Ukraine to arm rebels is likely to trigger more U.S. sanctions against Moscow once the European Union likely agrees its own sanctions next week, senior U.S. officials said on Friday.

“If the EU pulls together a package of sanctions in the coming week, the U.S. would want to complement that,” said a European diplomat in Washington, who requested anonymity to discuss diplomatic strategy.

The new willingness in Europe to impose sanctions on prominent Russians and sections of the economy, partly because of horror at the downing of a Malaysian airliner over Ukraine last week, has been welcomed by the United States.

After months of hesitation, the EU moved on Friday toward adopting measures that include closing EU capital markets to state-owned Russian banks, an embargo on arms sales to Moscow, and restrictions on supplying dual-use and energy technologies.

"The European Union leaders have tied these tough measures not just to the cooperation on (investigating the Malaysian plane crash) but to an end of the arms flow across the border," one senior U.S. official said.

"The fact is that those arms flows are continuing and the Europeans know it, and we're providing them with information about it," said the official, speaking on condition of anonymity.

The Pentagon said on Friday that Russia was again massing thousands of troops along the Ukraine border, was firing artillery into Ukraine, and was preparing to supply the rebels with advanced large-caliber multiple-launch rocket systems.

In its sixth round of sanctions, the United States last week imposed the toughest ones yet on Moscow, targeting Russia's largest oil producer Rosneft , its second-largest gas producer Novatek , and its third-largest bank Gazprombank .

MORE U.S. SANCTIONS EXPECTED

"We're not done," the official said, referring to additional sanctions. "Sanctions will make it progressively harder for Putin to carry out his aggressive designs."

Some critics, demanding more action from the administration of U.S. President Barack Obama, argue that the sanctions have failed to halt Russian President Vladimir Putin's aggression in Ukraine. But the U.S. official said, "We know from many sources that the sanctions have certainly changed the context in which Putin is making these decisions."

Moscow traditionally views Ukraine as within its sphere of influence and has been angered by the Kiev government's moves to build links with western Europe. But it denies supplying weapons to the separatist forces and on Friday accused the Ukrainian military of firing up to 40 mortar rounds across the border.

A senior U.S. congressional aide said senior officials at the State and Treasury departments were "champing at the bit" to impose additional sanctions, while the White House favoured a more measured pace of tightening the financial screws.

He said another round of U.S. sanctions was inevitable once the European Union's measures were in place, and predicted it would be "significantly more serious." The likely targets again are Russian banks, energy companies and defence firms.

U.S. State Department spokeswoman Marie Harf on Friday said sanctions had been "incredibly effective against the economy" of Russia so far and that Washington was "looking at a variety of options" to put increased financial pressure on Putin.

She conceded there had not yet been a significant change in Putin's approach and said: "We have not seen a de-escalation" of the hostilities. But she told a regular media briefing that "sanctions work best the longer they are implemented."

On Friday, U.S. credit rating agency Fitch affirmed its long-term foreign and local currency issuer default ratings (IDRs) of "BBB" on Russia, citing a "deteriorating" security situation in eastern Ukraine that has strained its relations with the European Union and United States.

The outlook of Russia's IDRs is negative, according to the ratings agency. ( http://bit.ly/1xd5xBc )

The ratings agency said the events of July 17, when a Malaysian airliner was shot down over eastern Ukraine, killing 298 people, are expected to result in more sanctions against the country by the U.S. and the EU.

"This will depress capital inflows to Russia and potentially lead to higher capital outflows, putting downward pressure on reserves and growth," Fitch said in a statement.

A European diplomat in Washington, speaking on condition of anonymity, said the downing of the plane over an area controlled by Russian-backed separatists was "a game changer" for the Europeans.

"The mood music is far more optimistic" for those favouring tougher measures against Russia, said the diplomat. "It does look increasingly likely we will have something that looks and feels like sectoral sanctions by the back end of next week," he said.

(Additional reporting by Matt Spetalnick, Steve Holland and David Alexander; Editing by David Storey and Clive McKeef)

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