Moscow Fights Back After Sanctions; Battle Rages Near Ukraine Crash Site

(Reuters) - Russia fought back on Wednesday over new U.S. and EU sanctions imposed over Ukraine even as G7 leaders warned of further steps, while Ukraine's government accused pro-Russian rebels of placing land mines near the site of a crashed Malaysian airliner to prevent a proper investigation.

Russia announced a ban on most fruit and vegetable imports from Poland and said it could extend it to the entire European Union, a move Warsaw called Kremlin retaliation for new Western sanctions over Ukraine imposed on Russia on Tuesday.

Moscow called the new EU and U.S. sanctions "destructive and short-sighted" and said they would lead to higher energy prices in Europe and damage cooperation with the United States on international affairs.

The confrontation between Russia and the West entered a new phase this week, with the United States and European Union taking by far the strongest international steps yet against Moscow over its support for Ukraine's rebels.

The new EU and U.S. sanctions restrict sales of arms and of equipment for the oil industry, while Russian state banks are barred from raising money in Western capital markets.

G7 leaders issued a joint statement on Wednesday warning Russia that it would face added economic sanctions if Moscow does not change course on its Ukraine policy.

The statement from the leaders of the G7 countries - the United States, Canada, France, Germany, Italy, Japan and Britain - was a show of solidarity among allies. They expressed grave concern about Russian actions that have undermined "Ukraine's sovereignty, territorial integrity and independence."

"Russia still has the opportunity to choose the path of de-escalation," the statement said. "If it does not do so, however, we remain ready to further intensify the costs of its adverse actions."

In addition, the European Commission published the names of eight Russians, including some of President Vladimir Putin's associates, and three companies that will have their assets frozen as part of the sanctions. The people on the list include Arkady Rotenberg, who is Putin's long-time judo partner and has been on a U.S. sanctions list since March.

Yury Kovalchuk and Nikolai Shamalov - the two largest shareholders in Bank Rossiya, a St. Petersburg company that expanded rapidly after Putin moved to Moscow and became president in 2000 - were also blacklisted.

The companies named include Russian National Commercial Bank, which was the first Russian bank to go into Crimea after the region's annexation by Russia this year. The other two firms are anti-aircraft weapons maker Almaz-Antey and airline Dobrolyot, which operates flights between Moscow and Simferopol in the Crimea.

FIGHTING NEAR THE CRASH SITE

On the ground in Ukraine, heavy fighting between government forces and separatists has been taking place near the site where Malaysian flight MH17 crashed into wheat and sunflower fields on July 17, shot down by what Washington and Brussels say was a missile supplied by Russia.

Kiev accused the pro-Russian rebels on Wednesday of fortifying the area, including with land mines, to prevent the site from being properly investigated. The land mine report could not be independently confirmed. Ukraine is party to a treaty banning land mines; Russia is not.

Ukrainian military spokesman Andriy Lysenko said the rebels were digging in for battle near the crash site: "They have brought a large number of heavy artillery there and mined approaches to this area. This makes impossible the work of international experts trying to start work to establish the reasons behind the Boeing 777 crash."

The G7 leaders called on all sides to establish a ceasefire at the crash site.

The new Western sanctions mark the first time Washington and Brussels have adopted measures designed to hurt the overall Russian economy, after weeks of narrow steps targeting only specific individuals blamed for Russia's Ukraine policy.

German Economy Minister and Vice Chancellor Sigmar Gabriel said the measures would hurt the European economy but would hurt Russia more. The price was worth paying, he added: "At a time of war and peace, economic policy is not the main consideration."

Even so, Russian markets rallied, as investors deemed the sanctions less severe than feared, with Russian stocks, bonds and the ruble rising.

The first European economic victims of the trade war were Polish apple growers, who sell more than half their exports to Russia. Moscow is by far the biggest importer of EU fruit and vegetables, buying more than 2 billion euros' worth a year.

Russia said the ban, covering most Polish fruit and vegetables, was for sanitary reasons and it would look into expanding it to the rest of the EU.

Moscow denies Western accusations that it has armed and supported rebels who are fighting Ukrainian forces in eastern Ukraine. But Western countries say flows of heavy weapons across the frontier have only increased since the airliner was shot down, killing all 298 people on board.

Lysenko said 363 Ukrainian troops had been killed and 1,434 wounded since Kiev's "anti-terrorist" operation began.

Ukraine's fragile economy is also taking a battering.

Parliament will consider austerity budget amendments on Thursday that are key to receiving IMF support and to assign more financing for the army.

GOVERNMENT TROOPS ADVANCE

Despite what the West says is an increase in armaments for the rebels, government troops have advanced since the start of the month, when they pushed the rebels out of their best-defended stronghold, the town of Slaviansk. Since then, Western countries say thousands of Russian soldiers have returned to the border from which they had withdrawn weeks ago.

NATO military commander General Philip Breedlove said the number of troops along the border was now "well over 12,000", and weaponry was also building up.

Valentyn Nalivaichenko, the head of Ukraine's SBU security service, said arms including Grad multiple rocket launchers were flooding across the border.

"Grads come in from Russian territory, take pre-agreed positions and fire on the Ukrainians. This is hundreds of rocket launches. They come in, shoot around like in a safari. This is serious military aggression," he told a news conference.

The rebels are mainly holed up in the cities of Donetsk and Luhansk, which they have declared capitals of two independent "people's republics", as well as in the surrounding countryside.

The sanctions are intended to persuade Putin to back down from a months-long campaign to seize territory and disrupt his neighbor, a former Soviet state of 45 million where a pro-Russian president was toppled by street protests in February.

But Putin, whose popularity at home has surged since he annexed Ukraine's Crimea peninsula in March, has shown no sign of backing down from support for the rebellion in parts of Ukraine that he has referred to as New Russia.

The EU had been reluctant to impose tighter sanctions - it has 10 times more trade with Russia than the United States does, and all 28 members must agree EU decisions - until the downing of the plane en route from Amsterdam to Kuala Lumpur.

The EU sanctions have nevertheless been crafted so as to inflict the minimum hardship on Europe: Russia's oil industry has been targeted but not the natural gas that fuels European industry and lights its cities. Existing contracts are excluded from the arms embargo, allowing France to move ahead with delivery of a warship it has already sold for the Russian navy.