MOSCOW/BRUSSELS (Reuters) - President Vladimir Putin signed laws completing Russia's annexation of Crimea on Friday, as investors took fright at a U.S. decision to slap sanctions on his inner circle of money men and security officials.
Putin promised to protect a bank partly owned by an old ally, which Washington has blacklisted, and his spokesman said Russia would respond in kind to the financial and visa curbs.
Russian shares fell sharply after President Barack Obama also threatened on Thursday to target major sectors of the economy if Moscow tried to move on other areas of Ukraine beyond the Black Sea peninsula.
Europe also tightened the screws by widening its sanctions list, and Germany suspended approval of all defense-related exports to Russia, ordering defense contractor Rheinmetall to halt delivery of combat simulation gear. France suspended military cooperation with Moscow.
In a Kremlin ceremony shown live on state television, Putin signed a law on ratification of a treaty making Crimea part of Russia as well as legislation creating two new Russian administrative districts: Crimea and the port city of Sevastopol, where Moscow keeps part of its Black Sea fleet.
Officials and lawmakers in Moscow have largely laughed off Western sanctions imposed after Russian troops seized control of Crimea. A referendum in the majority Russian-speaking region - which overwhelmingly backed union with Russia but was denounced by Washington and the European Union as a sham - then opened the way for the annexation.
Obama's decision to go for the financial jugular of the people who accompanied Putin's rise from the mayor's office in St Petersburg in the 1990s to the Russian presidency has deepened the diplomatic confrontation.
Putin said Bank Rossiya, singled out by Washington as the personal bank for senior Russian officials, had nothing to do with the events in Crimea and promised to keep his salary there. The St Petersburg-based bank is chaired and partly owned by Yuri Kovalchuk, an old associate of Putin's.
Other names on the U.S. blacklist includes oil and commodities trader Gennady Timchenko and the brothers Arkady and Boris Rotenberg, who are linked to big contracts on gas pipelines and the Sochi Olympics, as well as Putin's chief of staff and his deputy, the head of military intelligence and a railways chief.
Russian Deputy Finance Minister Alexei Moiseev said he expected no big immediate impact from the sanctions.
A consortium led by Stroitransgaz, owned by Timchenko, is set to win a 3.5 billion euro ($4.8 billion) deal to build a section of the South Stream natural gas pipeline across EU member Bulgaria, industry sources said.
But, underlining how Washington can apply pressure via the international financial system, U.S. credit card companies Visa and MasterCard stopped providing services for payment transactions with Russia's SMP bank, owned by the Rotenberg brothers, the bank said.
Obama said Washington was also considering sanctions against
economic sectors including financial services, oil and gas, metals and mining and the defense industry, if Russia made military moves into eastern and southern Ukraine.
Diplomats said the mere mention of such a possibility would chill investment in Russia, charging an immediate price for Moscow's action in Crimea and serving as a potential deterrent to going further.
The EU also extended its personal sanctions to another 12 middle-ranking Russian and Crimean officials.
A PANDORA'S BOX OF SANCTIONS
Russia's MICEX stock index fell about 3 percent when trade opened, although it recovered some of the losses later. Promsvyazbank analyst Oleg Shagov said Obama had "opened a Pandora's box full of sanctions", with future sanctions to be "directed against whole sectors of the Russian economy".
Negative market sentiment was reinforced by warnings from credit ratings agencies Fitch and S&P that they were changing their outlooks on Russia to negative from stable because of the possible impact of sanctions on Russia's economy and business climate. Both agencies presently rate Russia BBB.
Prime Minister Dmitry Medvedev made clear that Russia would step up financial pressure on Ukraine. He said the former Soviet republic should repay Moscow $11 billion under a gas supply contract that should be scrapped because it no longer applied.
Medvedev said the agreements under which Russia was to provide cheap gas in return for the lease of the Sevastopol naval base in Crimea were "subject to denunciation", giving Russia a legal right to sue for money back from Ukraine.
Altogether, Kiev owed Moscow $16 billion, he added.
EU SUPPORT FOR KIEV
In Brussels, the 28 EU leaders underlined their support for Ukraine's new leadership following the fall of Moscow-backed President Viktor Yanukovich in street protests last month.
They signed a political agreement with interim Prime Minister Arseniy Yatseniuk and promised financial aid for the government - rejected as illegitimate by Moscow - as soon as Kiev reaches a deal with the International Monetary Fund.
The IMF is to report next Tuesday on advanced talks with Ukraine on a loan program that would be linked to far-reaching reforms of the shattered economy.
An East-West tug-of-war has grown over Ukraine. Three months of protests were set off by Yanukovich's refusal to sign an association agreement with the EU, the political part of which was signed on Friday.
The EU leaders agreed to impose asset freezes and visa bans on 12 more mid-ranking Russian and Crimean officials and to consider wider economic sanctions if Russia further destabilizes the situation in Ukraine. But they said Europe did not have a legal basis to extend the personal sanctions against Putin associates without proof of their direct involvement in the violation of Ukrainian sovereignty.
"Small measures in the EU are worth more than big measures in the United States," a senior European official said, noting that EU trade with Moscow was 10 times the U.S. volume.
"It's about cutting off Russia politically and diplomatically," the official said, dismissing criticism that EU sanctions looked weaker than the U.S. measures.
In one glimmer of diplomatic progress, Russian Foreign Minister Sergei Lavrov said an agreement was near on sending a monitoring mission by the pan-European OSCE security watchdog. The EU had threatened to send its own monitors if Moscow continued to block a mandate at the Organisation for Security and Cooperation in Europe.