By Gregory L. White, Anton Troianovski and Laurence Norman
Pro-Russia rebels in eastern Ukraine saw some of their worst
battlefield setbacks in weeks Monday as the West agreed on tougher
sanctions aimed at forcing Moscow to cut support for the
militias--posing fresh challenges on two fronts for Russian
President Vladimir Putin.
Ukrainian forces were advancing from the north and south in an
effort to cut off Donetsk, one of two remaining separatist
strongholds, from fellow rebels in the other, Luhansk, as well as
their supply lines to the Russian border, officials on both sides
of the fighting said.
At the same time, the U.S. and Europe said they would adopt the
harshest economic sanctions yet on the Kremlin this week. The
European Union--Russia's largest trading partner--is expected to
move as early as Tuesday to restrict transactions with Russia's
state banks, as well as limit technology exports vital for the
country's oil and weapons industries. The U.S. has vowed to follow
suit.
In the past, every time such sectoral sanctions were threatened,
the Kremlin managed to head them off with moves that appeared to
signal de-escalation of the conflict. In reality, those moves "were
only meant to buy time," a European official said. "Now, they are
no longer trying to buy time."
Instead, Moscow appears to be digging in, even as the situation
for the pro-Russia rebels in Ukraine deteriorates.
At a hastily called news conference, Igor Girkin, a Russian
citizen who is the top defense official in the separatist Donetsk
People's Republic, said his forces had evacuated more than 100
wounded fighters to Russia because "I can't rule out the total
siege of Donetsk from all sides."
The Donetsk separatists' top political leader, Alexander
Borodai, had left for Moscow for consultations, his deputy
said.
The new sanctions were agreed to during a conference call Monday
that included U.S. President Barack Obama, German Chancellor Angela
Merkel, French President François Hollande, U.K. Prime Minister
David Cameron and Italian Prime Minister Matteo Renzi.
The leaders agreed Moscow hadn't done enough to deprive the
separatists of arms or to push the separatists toward a truce with
the Kiev government, U.S. and European officials said. Although
Russia offered modest concessions for international monitoring, it
has actually substantially stepped up supplies of weapons to rebels
across the border, according to Western officials.
"We expect the European Union to take significant additional
steps this week, including in key sectors of the Russian economy,"
said Tony Blinken, Mr. Obama's deputy national security adviser.
"In turn, and in full coordination with Europe, the United States
will implement additional measures itself."
The Kremlin has taken steps to prepare Russians for deeper
international isolation. On Monday, Mr. Putin gathered top
defense-industry officials at his residence to discuss how to
replace imported technologies amid "risks of a political
nature."
In a nationally televised speech to security chiefs last week,
he warned that while Russia's nuclear deterrent protects it from
military conquest, rivals still seek to undermine the country "in
the economic sphere and politically." Mr. Putin vowed to work to
head off any such threats to Russia's "sovereignty and territorial
integrity."
Mr. Putin's balancing act over the past several months--keeping
the pressure on Kiev with covert support for the rebels while
avoiding serious economic penalties from the West--had managed to
satisfy both the nationalist hard-liners and the business elite
within Russia.
But pressure was building even before the Malaysian jetliner was
downed over rebel-held territory on July 17, amid growing
frustration in Europe with the lack of progress toward a resolution
of the crisis. Scenes of separatists roving through the crash site
amid the bodies of the victims and their belongings cemented
Western support for tough new measures.
The crash created "a completely new situation that makes
further-reaching measures necessary," a spokeswoman for Ms. Merkel
said Monday.
Broadening the sanctions "will be in some way a disaster,"
economically and politically, for both sides, said one longtime
European diplomat. "But we cannot be indifferent. We had to
react."
Even Russian officials have acknowledged that the impact of
sectoral restrictions is likely to be much more painful than the
sanctions targeting individuals and companies that have been
imposed to date--a list that the EU is also preparing to extend to
include, for the first time, some Russian oligarchs.
Russia's stock market and currency dropped Monday as investors
girded for the worst.
"The room for maneuver is now minimal," says Alexei Makarkin,
analyst at the Center for Political Technologies, a Moscow
political consultant.
"From the pragmatic point of view, it would probably be best to
pull back" and allow the Ukrainian military to defeat the
separatists, he said. "But now that's very difficult. The public
wouldn't understand."
Some observers say the Kremlin seems to have misread the rising
frustration in the West and assumed that the close economic ties
with Europe would again save it from tougher action.
Moscow "thought that the West wouldn't go further" with
sanctions because the risk of economic blowback would "outweigh
moral principles," Alexei Venediktov, editor of independent Ekho
Moskvy radio said.
"The situation is much more ominous than it was a week ago,"
said Thomas Graham, a former White House Russia-policy chief.
"Putin is underestimating the West. But are we underestimating how
much he will risk in Ukraine?"
European officials said the looming sanctions would be carefully
modulated to allow them to be tightened if the situation worsened
and lifted if Mr. Putin took real steps toward defusing the
conflict.
Pro-Kremlin commentators have warned in recent days that backing
down now in Ukraine would lead the West to turn its focus to
returning Crimea, which Moscow annexed from Ukraine in March. The
threat of a sudden collapse of the separatist forces under pressure
from Kiev could also prove intolerable for the Kremlin, spurring
even deeper intervention.
Some Kremlin advisers say the conflict with the West is seen in
increasingly existential terms in Moscow.
"The long-term [Western] goal--though no one talks about it--is
political change inside Russia, regime change, if you will," Fyodor
Lukyanov, head of a Kremlin foreign-policy advisory panel, said in
an interview Monday with a Russian online-news site. Western
officials say the sanctions are aimed only at changing Kremlin
policy in Ukraine.
"Expecting Putin to back off, or his close friends to persuade
him to change tack or else the 'oligarchs' to pressure the Kremlin
into beating a retreat betrays a lack of understanding of the
gravity of the situation," Dmitry Trenin, director of the Moscow
Carnegie Center, wrote in a commentary Monday. "It is no longer the
struggle for Ukraine but a battle for Russia."
Carol E. Lee, Alan Cullison, Stacy Meichtry and Matthew Dalton
contributed to this article.
Write to Gregory L. White at greg.white@wsj.com, Anton
Troianovski at anton.troianovski@wsj.com and Laurence Norman at
laurence.norman@wsj.com