SLAVIANSK Ukraine/SEOUL The leaders of the Group of Seven major economies agreed on Saturday to swiftly impose further sanctions on Russia over the Ukraine crisis, and the United States could unveil its new punitive measures as early as Monday, officials said.
"We believe that these sanctions will have a significant impact," U.S. Deputy National Security Advisor for Strategic Communication Ben Rhodes said.
The new sanctions will likely target individuals or companies with influence in specific sectors of the Russian economy such as energy and banking, said Rhodes, with Washington expected to announce its sanctions list as early as Monday.
The European Union will announce sanctions separately.
The Ukraine crisis escalated on Friday with armed pro-Russia separatists seizing a bus carrying international mediators and Pentagon reports that Russian aircraft breached Ukraine's airspace several times over the past 24 hours.
The separatist, self-declared mayor of the east Ukraine city of Slaviansk told Reuters the mediators were being held because they were believed to have a spy amongst them from the pro-Western government in Kiev.
"People who come here as observers bring with them a real spy: it's not appropriate," Vyacheslav Ponomaryov said in front of a security service building occupied by separatists where the Ukrainian government said the observers were being detained.
The new sanctions are intended to punish Russia for failing to comply with an international agreement to help defuse the Ukraine crisis, according to a statement from G7 leaders released on Saturday by the White House, as U.S. President Barack Obama flew from South Korea to Malaysia on an Asian trip.
"Given the urgency of securing the opportunity for a successful and peaceful democratic vote next month in Ukraine's presidential elections, we have committed to act urgently to intensify targeted sanctions and measures to increase the costs of Russia's actions," the G7 statement said.
Sources familiar with the matter said the U.S. list of individuals targeted with sanctions is expected to include "cronies" of Russian President Vladimir Putin.
The EU is expected to name 15 previously unidentified individuals to be placed under sanctions and would focus on those it thinks are responsible for the unrest in Ukraine.
The sources said the one thing that might prevent the EU and the United States from moving ahead with the sanctions on Monday would be a sudden reversal of what they say is Russian-sponsored separatist movements in eastern Ukraine.
"You will find a European list much more connected to actions on the ground, and an American list more focused on cronies and entities," said one of the sources, adding that some EU nations remain concerned about placing sanctions on Putin associates.
WIDER SECTOR SANCTIONS
German Defence Minister Ursula von der Leyen said 13 observers from the Organization for Security and Cooperation in Europe (OSCE) had been seized, including three members of the German armed forces, a German translator and a Danish national.
"It is critical that we use all diplomatic channels to free this team immediately and unhurt," von der Leyen said, adding that officials were trying to establish the captors' demands.
Russia denies allegations it is directing the separatists, who have taken control of large parts of eastern Ukraine over the past three weeks.
But the White House said Obama and European allies agreed on Friday that Russia had escalated tension in the region, where the rebels have declared an independent "People's Republic of Donetsk".
Putin has scoffed at the sanctions so far imposed, which have been limited to travel bans and overseas asset freezes on individuals. The standoff has led to heavy capital flight from Russia, prompting credit rating agency Standard & Poor's to cut the country's ratings on Friday. That forced the central bank to raise its key interest rate to reverse a drop in the rouble.
The G7 leaders told Russia that "the door remains open to a diplomatic resolution of this crisis" on the basis of the Geneva accord and urged Moscow to take that path.
Europe has been reluctant to impose tough sanctions due to its reliance on Russian gas and trade ties with Moscow. But the G7 leaders warned that "we continue to prepare to move to broader, coordinated sanctions, including sectoral measures, should circumstances warrant."Obama spoke to four European leaders on Friday night about new sanctions against Russia, stressing the need to move quickly, Rhodes told reporters aboard Air Force One.
"Everybody understood that if Russian troops on the border invade Ukraine then sector sanctions will be a response. We need to have a spectrum of sanctions we can impose," said Rhodes. "We understand that there is unease about the economic consequences of increased sanctions on a large economy like Russia. Our response is that the long-term consequences of allowing Russia to engage in this type of destabilising activity is going to carry its own type of economic costs."
UKRAINIAN FORCES MOVE TO OUST SEPARATISTS
Ukraine sent in troops to try to dislodge the separatists for the first time on Thursday, killing up to five rebels around Slaviansk in what it said was a response to the kidnapping and torture of a politician found dead on Saturday.
Russia's foreign minister, Sergei Lavrov, accused authorities in Kiev of waging "war on their own people".
"This is a bloody crime, and those who pushed the army to do that will pay, I am sure, and will face justice," Lavrov said.
The Kremlin says it has the right to defend Russian speakers anywhere if they are under threat and has deployed extra troops on the border with Ukraine, which NATO says number up to 40,000.
They began military exercises on Thursday and Ukraine said they had approached to within 1 km (0.6 mile) of its border and that it would treat any incursion as an invasion.
Ukrainian special forces launched a second phase of their operation on Friday by mounting a full blockade of Slaviansk, the rebels' military stronghold, a presidential official said.
One of its military helicopters was hit by rocket fire and exploded while on the ground at an airport near the city, the Defence Ministry said.
Pro-Western leaders in Kiev, who took power in February after Moscow-ally President Viktor Yanukovich fled following mass protests against him, say they fear Russia will try to take over eastern Ukraine.
Russian troops seized Ukraine's Crimean peninsula on the Black Sea soon after Yanukovich left for Russia in February. Moscow denies interfering in eastern Ukraine, as it did in Crimea before admitting its forces had gone in.
(Additional reporting by Gabriela Baczynska in Moscow, Roberta Rampton and Arshad Mohammedin in Washington, Maria Tsvetkova in Donetsk, Alexei Anishchuk, Lidia Kelly and Oksana Kobzeva in Moscow, Alastair Macdonald and Pavel Polityuk in Kiev, Alexandria Sage in Paris, James Mackenzie in Rome and Erik Kirschbaum in Berlin; Writing by Will Waterman and Philippa Fletcher; Editing by Mark Trevelyan, Mohammad Zargham and Michael Perry)