European leaders agreed late last night to broaden the list of Ukrainians and Russians whose assets will be frozen and freedom of movement in the EU restricted as a response to Russia's annexation of the Crimean peninsula, bringing the number to 33. A so-called "third stage" of sanctions is now also in the pipeline.

As EU heads of state and government started closed-door talks in Brussels on Thursday afternoon (20 March), US President Obama announced from Washington that the Americans had added 20 new officials to its sanctions list, including Putin's chief of staff, Sergei Ivanov.

Twelve additional persons will be added to the 21 already on the EU blacklist, a move considered "weaker" than the US announcement. The 12 names will be unveiled on Friday (21 March) with their publication in the Official Journal of the European Union.

European leaders also decided to cancel the 3 June EU-Russia summit as well as all bilateral meetings, after the Russian Federation annexed Crimea following a referendum the EU does not recognise and considers "illegal".

"We have said that regarding visa restrictions, we will enlarge that list. The names to be on that list will be published tomorrow," the German chancellor, Angela Merkel, said at her press briefing.

A diplomatic source in Brussels told EurActiv that the EU could not go as far as the US on sanctions due to a different legal base. Therefore, it is unlikely that the EU will add Ivanov or Gazprom's CEO, Alexei Miller, making the list "weak", the source said.

The French president, François Hollande, however, considers that the EU’s blacklist is “close to that of the USA”. But the US also added the bank "Rossiya" – also called "Putin's personal bank" – to the list, taking the sanctions into what the EU calls a third stage - an economic war.

Third phase of sanctions in the pipeline

A “third phase of sanctions” is an option European leaders have but hope will not be necessary as it would entail economic sanctions against “important economic sectors”, Hollande confirmed.

Merkel said that the top priority over the next few days would be to send observers to Ukraine from the Organization for Security and Co-operation in Europe (OSCE). 

If the OSCE mission fails to be deployed, a move which would be considered an escalation, the EU has decided it will send a European mission and prepare to launch a "third phase of sanctions".

"We have asked the Commission today to look at possible broad-based economic sanctions," Merkel stated. 

If the third-stage set of measures was to be activated, it would need to go through a strict procedure. The EU executive would be mandated to determine the sanctions and another EU summit meeting would have to be called to take the formal decision. 

Diplomatic sources cited the industry and the banking sector as possible targets but would not go into more detail yet.

Moscow is ready to retaliate in case of economic sanction, with draft legislation for the confiscation of Western assets in Russia already in the pipeline.

Shortly after Obama's announcement, Russia retaliated by imposing its own sanctions on prominent US officials in Washington including the speaker of the Congress, John Boehner, and the senators Harry Reid and John McCain.

Asked by the press whether the EU feared repercussions from Moscow, Hollande “repeated” what he told his counterparts in the European Council: “For sanctions to be effective, they have to be costly both to those who undergo them and to those who apply them."

EU unity?

EU leaders insist that they should be united in this biggest external challenge for the Union since the end of the Cold War. However, their statements signal broad differences in the approach, with several countries pleading for appeasement.

While some prime ministers from the centre-right European Peoples’ Party (EPP) advocate a tougher line, several leaders from the centre-left Party of European Socialists (PES) warn that escalation could backfire and hurt the European economies.

Lithuania's President Dalia Grybauskaitė pleaded for targeting the “close circle of Putin”, and Swedish Prime Minister Frederik Reinfeldt, both EPP-affiliated, said that by imposing harsh sanctions the Union should be prepared “to hurt itself in a way”.

But Belgian Prime Minister Elio di Rupo, PES affiliated, pleaded “not to add difficulty to difficulty”, for the need of the Union to “keep its nerves” and keep the door open to dialogue. The president of the group of Socialists and Democrats in the European Parliament Hannes Swoboda told EurActiv that the EU needed to be “realistic” and that a trade war with Russia would hurt some economies of EU countries more than others.

It would be however simplistic to divide the countries along political lines, as Hungarian Prime Minister Viktor Orbán, who is EPP-affiliated, is clearly in the camp advocating appeasement, and so is EPP-affiliated President of Cyprus Nicos Anastasiades.

The bottom line is that EU leaders agree that by going too far with the sanctions at this stage, they would be left without “ammunitions” in case Russia would grab new territories from Ukraine. According to some reports, Putin’s ambitions are to deplete Ukraine from access to the Black Sea.

Ukraine a step closer to the EU

Meanwhile, EU leaders are expected to strengthen their cooperation with Ukraine by signing the political chapters of the Association Agreement on Friday.

The deal, rejected at the last minute by former Ukrainian President Viktor Yanukovich, which in November triggered an unprecedented popular uprising in Kyiv, causing the death of dozens of people earlier this year.

EU leaders however resist the idea of offering Kyiv a more tangible European perspective. The French president repeated his country’s opposition to EU membership for the country, saying that “Ukraine cannot claim accession to the EU”.

The Lisbon Treaty’s article 49 states that any country which respects the European values and is committed to promoting them may apply for membership. French diplomatic sources conceded that “maybe one day Ukraine could pretend to membership but we are from that”, recalling Turkey’s long and thorny path from the association to the enlargement process, which took about 30 years.

But EU leaders appear determined in helping Ukraine to become a successful democracy, as they fear further destabilisation from Russia in case of bankruptcy of the country. In the Council Conclusions, they promise rapid macro-economic assistance, but also urge the country to ensure the representative nature and inclusiveness of governmental structures, reflecting regional diversity, the full protection of the rights of persons belonging to national minorities, as well as to investigate acts of violence committed over the period of protests and to fight extremism.

European Commission President José Manuel Barroso said the EU would also bring forward plans to finalise Association Agreements with Moldova and Georgia, signing them by June at the latest rather than by the end of the year.