EU considers targeting Russian banks in sanctions over Ukraine

The European Union would target state-owned Russian banks and their ability to finance Moscow's faltering economy in its most serious sanctions so far over the Ukraine crisis under proposals considered by EU governments today, diplomats said.

Ambassadors of the 28-nation bloc met in Brussels to discuss options drafted by the executive European Commission in response to the downing of a Malaysian airliner in an area of eastern Ukraine held by Russian-backed separatists.

In the key measure, European investors would be banned from buying new debt or shares of banks owned 50 per cent or more by the state. These banks raised almost half of their €15.8 billion capital needs in EU markets last year.

"If implemented such sanctions would be a serious blow to the Russian economy, exacerbating an already very likely recession this year and sustaining an economic depression for longer," said analyst Michal Dybula of BNP Paribas.

The proposals also included an arms embargo, although diplomats said it would apply to future deals and would not bar delivery of a French helicopter carrier built for Russia under a 2011 contract.

The EU is also considering restricting exports of technology for deep-sea drilling, shale gas and Arctic energy exploration under one of the options, diplomats said.

After months of hesitation, powerful EU states including Germany, Moscow's biggest trade partner, are now pushing for quick action as they believe Russia has consistently failed to meet international demands to end violence in Ukraine.

The crash of Malaysian Airlines flight MH17 last Thursday, which US intelligence officials believe was shot down in error by the rebels with a Russian-supplied missile, has stiffened Europe's resolve, officials said.

The proposals to restrict access to EU capital markets and defence and energy technology would mark the first time the Europeans have gone beyond asset freezes and visa bans to target sensitive sectors of the Russian economy.

The Commission did not propose a ban on buying Russian government bonds, a diplomat said. However, the cost of insuring Russian sovereign debt against default rose on the news.

The largest banks with state ownership of over 50 per cent are Sberbank, VTB, Russian Agriculture Bank (Rosselkhozbank) and VEB.

A spokesman for German chancellor Angela Merkel said yesterday she wanted to see rapid progress at the EU meeting.

"The chancellor believes quick decisions are needed," said deputy spokesman Georg Streiter, adding that EU leaders had expressed their readiness last week to hold a special summit if necessary to approve the measures.

Berlin believes the EU could move to impose sanctions on sectors of the Russian economy by the end of July unless Moscow acts quickly to defuse the crisis in eastern Ukraine, an EU source said.

Reuters