Mediators held in Ukraine; more sanctions loom for Russia

The United States and the European Union are expected on Monday to impose new sanctions on Russian individuals, sources said on Friday, as the Ukraine crisis escalated with armed pro-Russia separatists seizing a bus carrying international mediators.

The Pentagon said Russian aircraft breached Ukraine's airspace several times over the past 24 hours, but did not offer more details. Pentagon spokesman Colonel Steve Warren called on Russia to 'take immediate steps to de-escalate the situation.'

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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 bringing 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 fresh U.S. and EU sanctions come in response to Russia's alleged efforts to destabilize eastern Ukraine, said sources familiar with the matter, speaking on condition of anonymity.

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 United States is expected to impose sanctions on entities and individuals, including 'cronies' of Russian President Vladimir Putin, they said.

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.

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 U.S. President Barack 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'.

Britain and Germany agreed further sanctions were in order, building on targeted U.S. and European sanctions against Russian and Ukrainian individuals following Russia's annexation of Crimea.

'We are working with our international partners to make sure that when we do it, we do it in an effective way,' U.S. Treasury Secretary Jack Lew said.

Putin has scoffed at the sanctions so far imposed, which have been limited to travel bans and overseas assets 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 ruble.

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.

The White House statement came after Obama pressed four European leaders on the need for more robust action against Russia. Europe is reluctant to impose tough sanctions due to its reliance on Russian gas and trade ties with Moscow.

'The president noted that the United States is prepared to impose targeted sanctions to respond to Russia's latest actions,' it said. 'The leaders agreed to work closely together, and through the G7 and European Union, to coordinate additional steps to impose costs on Russia.'

Britain agreed the current sanctions would need to be extended given what it said was Russia's refusal to support an international peace agreement that it signed up to last week under which all sides agreed to work to disarm illegal groups.

German Chancellor Angela Merkel said the leaders would have to react. 'Because of the lack of progress we will have to contemplate further sanctions,' she said before the call.

France said sanctions had been discussed and the leaders had called for a 'speedy reaction' to the crisis from leading industrial nations. Italy said the leaders had agreed on the situation but gave no details.

'The leaders underscored that Russia could still choose a peaceful resolution to the crisis, including by implementing the Geneva accord,' the White House statement said.

Lavrov said Moscow was committed to implementing the Geneva agreement but accused Washington of distorting it with 'one-sided demands'. However, Russia's Defence Ministry said it was ready for 'unbiased and constructive' talks with the United States to stabilize the situation.

U.S. Secretary of State John Kerry said Russia was using propaganda to hide what it was trying to do in eastern Ukraine - destabilize the region and undermine next month's Ukrainian presidential elections - and decried its 'threatening movement' of troops up to Ukraine's border.

Ukraine's Prime Minister Arseny Yatseniuk said Russia wanted to start World War Three by occupying the country and creating a conflict that would spread to the rest of Europe.