By Jason Bush and Barbara Lewis
MOSCOW/BRUSSELS, March 21 (Reuters) - Russian shares fell sharply on Friday as investors took fright at tougher than expected U.S. sanctions against President Vladimir Putin's inner circle over Moscow's seizure of Crimea from Ukraine.
The United States added 20 names to its sanctions blacklist, including Kremlin banker Yuri Kovalchuk and his Bank Rossiya, 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.
In one immediate consequence, 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.
President Barack Obama said Washington was also considering sanctions against key 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.
Though the MICEX share index lurched about 3 percent lower when trade opened, Putin mocked Obama's announcement of the visa bans and asset freezes on the money men and security officials who accompanied his rise from the mayor's office in Saint Petersburg in the 1990s.
But he said Moscow should refrain from further retaliation against the United States for now.
Prime Minister Dmitry Medvedev, however, 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 contact that should be scrapped because it no longer applied.
Medvedev said the Kharkiv 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 LEADERS MEETING
Russia's parliament rushed to complete ratification of the annexation of the Black Sea region while European Union leaders met in Brussels to discuss steps to reduce their long-term dependence on Russian energy.
The Federation Council upper house approved a treaty on Friday incorporating Crimea into Russia after the State Duma lower house did so a day earlier.
The 28 EU leaders underlined their support for Ukraine's new leadership, rejected as illegitimate by Moscow, by signing a political agreement with interim Prime Minister Arseniy Yatseniuk and promising financial aid as soon as Kiev reaches a deal with the International Monetary Fund.
The signing "recognizes the aspirations of the people of Ukraine to live in a country governed by values, by democracy and the rule of law, where all citizens have a stake in national prosperity," European Council President Van Rompuy said at the ceremony. The accord contained no offer of EU membership.
The IMF is to report next Tuesday on advanced talks with Ukraine on a major loan program that would be linked to far-reaching reforms of the former Soviet republic's shattered economy.
Polish Prime Minister Donald Tusk said the EU leaders were discussing using their collective bargaining power to stop Russia playing off European countries against each other in gas contacts. Up to now, each EU state has negotiated its own deal with Moscow, and some refuse even to share contract details with the European Commission or EU partners.
"We are working hard to make at least one step forward in the area of making community purchases of energy," Tusk told reporters on arrival for the second day of an EU summit.
"In fact it is all about making the EU stronger as a whole versus energy exporters, so that we have a bigger bargaining power, so that we can act more as a community. In simple terms, it is about common purchases of energy."
TUG OF WAR
An East-West tug-of-war has mounted since Russia occupied Crimea, home to its Black Sea fleet and a majority of ethnic Russians, following the overthrow of pro-Russian Ukrainian President Viktor Yanukovich by street protests last month.
Three months of protests were triggered 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.
Russian Deputy Finance Minister Alexei Moiseev said he expected no big immediate impact from western sanctions on Russia's financial sector.
He also criticized the downgrading of Russia's credit outlook by leading ratings agencies, saying there was no basis for the move. On Thursday, S&P and Fitch revised to 'negative' from 'stable' their long-term outlooks on Russia's debt.
"Our creditworthiness has not changed, of course. We're going to have a budget this year that will be better than expected," Moiseev said.
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 Organization for Security and Cooperation in Europe. (Additional reporting by Luke Baker, Adrian Croft, Jan Strupczewski and Martin Santa in Brussels, Oksana Kobzeva, Lidia Kelly, Elizabeth Piper and Steve Gutterman in Moscow; Writing by Paul Taylor; Editing by Will Waterman)