The European Union reached outline agreement on Friday to impose the first economic sanctions on Russia over its behavior in Ukraine but scaled back their scope to exclude technology for the crucial gas sector. The sanctions on access to capital markets, arms and hi-tech goods are also likely to apply only to future contracts, leaving France free to go ahead with the controversial delivery of Mistral helicopter carriers being built for Russia. After months of hesitation, the 28-nation EU toughened its stance toward Moscow after last week's downing of a Malaysian airliner, killing 298 people, in an area of eastern Ukraine held by Russian-backed separatists.
But the narrowing of the proposed measures highlighted the difficulty of agreeing to tough sanctions among countries which have widely different economic interests and rely to varying degrees on Russian gas. After a discussion that lasted all day Thursday and part of Friday, ambassadors asked the executive European Commission to draw up a legal text setting out economic sanctions for possible agreement as early as next week.
Key measures included closing EU capital markets to state-owned Russian banks, an embargo on arms sales to Moscow and restrictions on the supply of dual-use and energy technologies. They would not affect current supplies of oil, gas and other commodities from Russia.
European Council President Herman Van Rompuy wrote to EU leaders saying the discussion among ambassadors had led to "an emerging consensus on some key principles." One was that "the measures in the field of sensitive technologies will only affect the oil sector in view of the need to preserve EU energy security," the letter said, according to an EU source.
The Commission had proposed restricting equipment for deep-sea drilling, shale oil and Arctic energy exploration.
If the sanctions had applied to gas technology, they could have affected Gazprom's huge South Stream pipeline project to Europe and Novatek's Arctic Yamal liquefied natural gas (LNG) facility.
That in turn would have hit large EU energy suppliers and manufacturers with an interest in the project, including in Germany, Austria and Italy. The prospect of EU sanctions sent shares in French energy services firm Technip plunging 8 percent on Thursday. Gazprom's main partners in South Stream are Italy's Eni, France's EDF, Austria's OMV and Germany's Wintershall [WINT.UL], a subsidiary of German chemical giant BASF.
A second agreement cited by Van Rompuy was that "the principle of non-retroactivity will apply across all targeted sectors, notably in the field of arms trade and restrictions on access to capital markets". France was determined to uphold existing contracts with Russia to preserve a 1.2 billion euro ($1.61 billion) 2011 deal to supply two Mistral helicopter carriers. A third agreement was that the ban on exports of dual-use technology - that can be used in both military and civilian products - would be limited at this stage to military end-users.
Van Rompuy assured leaders that the package would maintain an overall balance across all sectors and all EU countries. He asked leaders to delegate authority to their ambassadors to agree on the sectoral sanctions without a special EU summit.
One official said there was "an overall preliminary agreement on the concept" at Friday's meeting but ambassadors would hold more discussions next week on the basis of the legal text.
Maja Kocijancic, spokeswoman for EU foreign policy chief Catherine Ashton, said there was still work to be done. "The direction of travel here is very clear but we are still traveling," she told reporters.
Separately, the EU was due to publish later on Friday the names of 15 individuals and 18 entities, including companies, subject to asset freezes for their role in supporting Russia's annexation of Crimea and destabilisation of eastern Ukraine. That will bring the number of people under EU sanctions to 87 and the number of companies and other organizations to 20.
Hiding Behind France
Member states will scrutinize the draft legal text over the weekend and give their feedback to the Commission on Monday, one diplomat said. A revised draft may be adopted on Tuesday, when ambassadors are due to return to the issue, he said.
Remaining stumbling blocks were over issues such as existing contracts as well as on a so-called "off-ramp" - how to scale back sanctions if Russia began to play a more constructive role in de-escalating the situation in Ukraine, the diplomat said. Dutch Prime Minister Mark Rutte, whose country is seen as having a key role in shaping the EU response because it lost 194 citizens in the plane crash, said he would back sanctions unless Moscow halts weapons supplies to the rebels.
"We want as a country that has acquired a certain moral obligation as a result of this tragedy to promote Europe taking a common line on this," he told parliament in The Hague. "All indications are that Russia is continuing to arm the separatists. There's an easy way out for Russia: to distance themselves from the separatists, and stop arming them."
German Foreign Minister Frank-Walter Steinmeier said any negative consequences must be borne by Europe as a whole.
France's warship sale was the most discussed example of European defense cooperation with Russia but more was going on behind the scenes, Steinmeier said in an interview with Deutschlandfunk radio made available on Friday.
"There are many working to ensure that this remains the only example. But I can assure you, there are some other European states which are continuing their defense cooperation with Russia in the same way and are keen to hide behind France. If we are serious, we cannot exclude the defense sector from future sanctions," he said.
Spreading the burden evenly among EU member states is a delicate balancing act. Britain is strong in financial services, Germany in technology and machinery, France in arms sales, while Italy is heavily dependent on Russia for energy.
"To a degree everyone is reverting to trying to protect their own national interests from harm," a senior European diplomat said. As things stood, Britain would probably face more pain than any other state from the proposed measures because of London's key position as a financial center. In a sign of the widening economic fallout, an Italian-Russian project to build a new generation small submarine has been suspended because of the "political situation", Itar-Tass news agency said on Friday.
German business sentiment fell to its lowest level in nine months in July, suggesting that firms are worried about the crises in Ukraine, Iraq and Gaza. ($1 = 0.7436 Euros)