The United States and European Union imposed new sanctions against Russia on Friday, tightening financial measures against Moscow over its intervention in Ukraine despite a week-old ceasefire which has brought calm to the embattled east.
President Vladimir Putin called the new sanctions "a bit strange" given the truce, part of a peace deal reached last week between Kiev and pro-Russian rebels.
New sanctions from the European Union would limit access by Russian oil companies to funds. Sanctions from the United States hit Russia's biggest bank and an arms maker, and bar U.S. firms from helping five big Russian oil companies explore hard to reach deposits.
Washington and Brussels have steadily tightened economic sanctions against Russia since it annexed Ukraine's Crimea peninsula in March.
They accuse Moscow of fomenting a rebellion by separatists in Ukraine's east, an area that Putin has named "New Russia", and say Putin escalated the conflict last month by sending thousands of troops across the border. Russia denies aiding the separatists or sending troops.
A ceasefire has largely held since the peace deal was signed a week ago and the front has been quiet for the past few days, although Ukraine's President Petro Poroshenko said on Friday the truce was still "very fragile".
U.S. officials said the new sanctions could be lifted if Moscow withdraws all troops from Ukraine, frees prisoners and creates a buffer zone on both sides of the frontier to prevent cross-border shelling.
"What we’re looking for with regard to Russian action is the complete removal of all military personnel, military equipment, support for military and mercenaries on the territory of Ukraine, release of all hostages," a senior U.S. official told reporters in a conference call explaining the sanctions.
The European Union has said it could lift some or even all of the sanctions if Moscow abides by last week's truce and other parts of the new peace plan.
Moscow has already responded to sanctions by banning the import of most Western food. It said it could take further measures and might appeal to the World Trade Organization.
"Regarding retaliatory measures, the government is thinking about them, but only those that will create better conditions for us will be applied," Putin said after a meeting of a regional security bloc in ex-Soviet Tajikistan.
His Foreign Ministry said it would respond quickly to the "hostile step".
Moscow also said it could use state funds to help support firms hit by sanctions.
The economies of Russia and Europe are deeply entwined, especially in energy: Russia is Europe's main supplier of natural gas. Moscow has floated new retaliatory steps, including barring Western airlines from using its air space, which would cost it hundreds of millions of dollars in over flight fees.
The Ukraine crisis began last year when an elected president in Kiev spurned a free trade pact with the European Union in favor of a deal with Moscow, triggering months of demonstrations that led to his downfall.
Russia responded by annexing Crimea, and Putin has proclaimed the right to intervene to protect Russian speakers who predominate in eastern and southern Ukraine.
Ukraine has since signed up to the free trade deal with the EU, a move that could have triggered damaging Russian trade restrictions on Ukrainian goods. In an apparent move to ease tension, Brussels said on Friday it had agreed with Kiev and Moscow to delay full implementation of the free trade deal until the end of next year to allow more time for negotiations.
Ukrainian goods will still enjoy preferential access to the EU market but Ukraine will not have to cut duties on imports from the EU until 2016, Trade Commissioner Karel De Gucht said.
"This is part and parcel of a comprehensive peace process in Ukraine," he said.
European Commission president Jose Manuel Barroso said the EU could disburse 760 million euros ($984 million) of aid to Kiev next month under a deal reached in March to help stave off bankruptcy.
Exchange of prisoners
Poroshenko took power in June and swiftly ordered a stepped-up offensive against the rebels in Ukraine's east. The rebels were losing ground until late last month when they suddenly launched a counter-offensive, opening up a new front and putting government troops to flight with what the West accuses of being the open support of armored columns of Russian forces.
The anti-government forces were rapidly descending on Mariupol, a government-held port of 500,000 people, when last week's ceasefire halted the conflict. Eastern Ukraine has been largely quiet in recent days and tension following the ceasefire has gradually eased.
Overnight into Friday, Ukrainian forces and the separatists each handed over 37 prisoners-of-war at a site north of the rebel-held city of Donetsk. The exchange of all captives is one of the key elements of the ceasefire.
Interfax news agency quoted Andrei Purgin, number two in the self-proclaimed rebel "Donetsk People's Republic", as saying the next exchange would take place on Sunday.
Purgin also repeated the rebels' position that the regions they control would not be reunited with Ukraine.
"We will not be in a unitary, federal Ukraine ... We can preserve some economic model which allows us not to break the tie with the rest of Ukraine or to keep some socio-cultural connections ... We have earned with our blood the right to do this," he told Reuters.
Poroshenko said Kiev could only offer some autonomy.
"To keep the country united, we need some decentralization of power ... The key issues of security, foreign policy, strategic points of development must be in the hands of the central power," he told a conference in Kiev.