BRUSSELS/SIMFEROPOL, Ukraine, warsaw  - The European Union agreed on a framework on Wednesday for its first sanctions on Russia since the Cold War, a stronger response to the Ukraine crisis than many expected and a mark of solidarity with Washington in the drive to make Moscow pay for seizing Crimea.

US President Barack Obama warned Russia it faced costs from the West unless it changed course in Ukraine, and pledged to “stand with Ukraine” as he met with the country’s new prime minister in Washington.

“We will never surrender,” Ukrainian Prime Minister Arseny Yatseniuk vowed as he and Obama met in a White House show of support for the embattled leader.

“Mr. Putin - tear down this wall - the wall of more intimidation and military aggression,” Yatseniuk told reporters in remarks aimed at Russian President Vladimir Putin and a reference to then-President Ronald Reagan’s challenge to the Soviet Union in a 1987 speech at the Berlin Wall.

But Obama and Yatseniuk outlined a potential diplomatic opening that could give Russians a greater voice in the disputed Crimean region, where a referendum is scheduled for Sunday on whether it should become part of Russia. Yatseniuk told a forum in Washington after his White House meeting that his interim government was ready to have a dialogue and negotiations with Russia about Moscow’s concerns for the rights of ethnic Russians in Crimea. Asked what a political solution would look like, Yatseniuk said: “If it is about Crimea, we as the Ukrainian government are willing to start a nationwide dialogue (about) how to increase the rights of (the) autonomous republic of Crimea, starting with taxes and ending with other aspects like language issues.”

China’s top envoy to Germany has warned the West against punishing Russia with sanctions for its intervention in Ukraine, saying such measures could lead to a dangerous chain reaction that would be difficult to control.

In an interview with Reuters days before the European Union is threatening to impose its first sanctions on Russia since the Cold War, ambassador Shi Mingde issued the strongest warning against such measures by any top Chinese official to date.

Meanwhile, Russia launched new military exercises near its border with Ukraine on Thursday, showing no sign of backing down in its plans to annex its neighbor’s Crimea region despite a stronger than expected drive for sanctions from the EU and United States.

In an unusually robust and emotionally worded speech, German Chancellor Angela Merkel warned of “catastrophe” unless Russia changes course.

“We would not only see it, also as neighbors of Russia, as a threat. And it would not only change the European Union’s relationship with Russia,” she said in a speech in parliament. “No, this would also cause massive damage to Russia, economically and politically.”

US Secretary of State John Kerry said a “serious series of steps” would be imposed on Monday by the United States and Europe if a referendum on Crimea joining Russia takes place on Sunday as planned. Merkel, a fluent Russian speaker who grew up in Communist East Germany, has emerged in recent days as a leading figure in threatening tough measures against Moscow.

Meanwhile, US F-16 fighter jets landed at central Poland’s Lask air base on Thursday to take part in military exercises seen as Washington’s gesture of support for its eastern NATO allies after Russia’s intervention in Ukraine, local media reported.

At least 12 F-16 planes and 300 personnel were due to take part in the drills, beefed up at Warsaw’s request after Russian forces seized control of Ukraine’s Crimea peninsula. Both the Polish Defence Ministry and the press officer at Lask declined to comment on the reports of the arrivals. Earlier this week, the US and Poland began wargames in Lask, with the US saying both the air drills and joint naval exercises in the Black Sea were planned before the crisis in Ukraine.

Pro-Moscow separatist politicians, who took power in the province after armed men seized its parliament on February 27, are planning to hold a referendum on union with Russia as soon as Sunday. Western countries say the vote is illegal.

Russia has taken territory from its former Soviet neighbors in the past with no serious consequences - most recently in 2008 when Putin invaded Georgia and seized full control over two breakaway regions with little international opposition. But if Putin was hoping for a similarly tepid response this time, he may have misjudged.

In particular, he seems to have alienated Merkel, the Western leader with whom Putin - a German speaker once based as a KGB spy in Merkel’s native East Germany - has had the closest relationship in the past.

Merkel was initially more cautious than other Western leaders in responding to Russia’s seizure of Crimea, but has emerged in recent days as among the toughest critics of the Kremlin, pushing the European Union to match U.S. sanctions.

The 28 member bloc has agreed on a framework to impose travel bans and asset freezes on Russian individuals and firms. It is expected to implement the measure and announce the target list as soon as Monday, the day after the Crimean referendum.

EU action is critical because Europe does 10 times as much trade with Russia as the United States, buying most of Moscow’s gas and oil exports. Brussels had been widely seen as far less likely to act than Washington, both because of Europe’s closer economic ties with Russia and because of the 28-member EU’s laborious process of decision making and internal divisions.

The prospect that EU measures could be implemented as soon as Monday has weighed down the Russian economy.

Goldman Sachs revised its prediction for Russian economic growth for this year down to just 1 percent from 3 percent on Thursday, blaming the political tension over Ukraine for fuelling capital flight that would cripple investment. It said $45 billion had already left Russia this year, mostly from Russians stashing money abroad because of uncertainty.

The Russian stock market hit a four-and-a-half-year low on Thursday and is down 20 percent since mid-February. The cost of insuring Moscow’s debt against default rose to its highest level in nearly two years and is up by more than a third this month.

The crisis has already forced several Russian firms to put plans on hold for public offerings to raise cash abroad.

Yet none of that appears to have slowed down Putin, who told officials of the Paralympic Games he is hosting in Sochi that Russia was “not the initiator” of the crisis.

The Russian Defence Ministry said about 8,500 of its troops were taking part in new military exercises near the Ukrainian border, testing artillery and rocket launchers, practicing firing at a conventional enemy up to 15 km (9 miles) away.

It was the second big military exercise Moscow has ordered since the crisis began; the first, involving large infantry units, began days before Russian forces seized Crimea and ended three days after Putin declared his right to invade.

Among efforts by the West to isolate Russia politically, the Organization for Economic Cooperation and Development, a 34-member rich nations’ club, announced on Thursday it was suspending membership talks with Russia, under way since 2007.

Russia has pledged to respond in kind to any Western sanctions. China’s ambassador to Germany warned of a “spiral” of sanctions hurting both sides.

But European leaders appear to be calculating that the damage to Russia would be far worse than to Europe. EU-Russian trade makes up 15 percent of Russia’s economy and just 1 percent of Europe’s. Although EU countries, and Germany in particular, depend on Russian natural gas imports, winter is nearly over and storage tanks are full after a mild season.

German Finance Minister Wolfgang Schaeuble said on Wednesday he was not worried about serious damage to Germany’s economy.

Diplomatic lines have been open between Russia and the West throughout the crisis: US Secretary of State Kerry and Russian Foreign Minister Sergei Lavrov spoke on Thursday as they have nearly every day. They are due to meet in London.

The crisis over Crimea began after pro-Russian president Viktor Yanukovich fled power in Kiev and pro-European politicians took charge, following three months of demonstrations.

A Ukrainian businessman who had wide influence under Yanukovich, Dmytro Firtash, was arrested in Vienna at the request of the United States, which has been investigating him since 2006.

The EU sanctions, outlined in a document seen by Reuters, would slap travel bans and asset freezes on an as-yet-undecided list of people and firms accused by Brussels of violating the territorial integrity of Ukraine.

German Chancellor Angela Merkel said the measures would be imposed on Monday unless diplomatic progress was made. A Russian stock index dropped 2.6 percent and the central bank was forced to spend $1.5 billion to prop up the rouble as investors confronted the prospect that Russia could face unexpectedly serious consequences for its plans to annex Crimea.

Russian troops have seized control of the Black Sea peninsula, where separatists have taken over the provincial government and are preparing for Sunday’s referendum, which the West calls illegal.

The measures outlined by the EU are similar to steps already announced by Washington, but would have far greater impact because Europe buys most of Russia’s oil and gas exports, while the United States is only a minor trade partner. The EU’s 335 billion euros ($465 billion) of trade with Russia in 2012 was worth about 10 times that of the United States. The travel bans and asset freezes could cut members of Russia’s elite off from the European cities that provide their second homes and the European banks that hold their cash.

The fast pace of Russian moves to annex Crimea appears to have galvanized the leaders of a 28-member bloc whose consensus rules often slow down its decisions.

Merkel herself had initially expressed reservations about sanctions but has been frustrated by Moscow’s refusal to form a “contact group” to seek a diplomatic solution over Crimea.

“Almost a week ago, we said that if that wasn’t successful within a few days, we’d have to consider a second stage of sanctions,” Merkel said. “Six days have gone by since then, and we have to recognize, even though we will continue our efforts to form a contact group, that we haven’t made any progress.”

In Crimea, the regional government is led by a Russian separatist businessman whose party received just 4 percent of the vote in the last provincial election in 2010 but who took power on February 27 after gunmen seized the assembly building.

Two days later, Putin announced that Russia had the right to invade Ukraine to protect Russian citizens.

Preparations for Sunday’s referendum are in full swing. Banners hang in the centre of Crimea’s capital, reading: “Spring - Crimea - Russia!” and “Referendum - Crimea with Russia!”

A senior Russian lawmaker on Wednesday strongly suggested that Moscow had sent troops to Crimea to protect against any “armed aggression” by Ukrainian forces during the referendum. Putin and other Russian officials have said armed men who have taken control of facilities in Crimea are local “self-defence” forces.

Crimea has a narrow ethnic Russian majority, and many in the province of 2 million people clearly favour rule from Moscow. Opinion has been whipped up by state-run media that broadcast exaggerated reports of a threat from “fascist thugs” in Kiev.

“Enough with Ukraine, that unnatural creation of the Soviet Union, we have to go back to our motherland,” said Anatoly, 38, from Simferopol, dressed in camouflage uniform and a traditional Cossack fur cap.

But a substantial, if quieter, part of the population still prefers being part of Ukraine. They include many ethnic Russians as well as Ukrainians and members of the peninsula’s indigenous Tatar community, who were brutally repressed under Soviet rule.

“Crimea has been with Ukraine since the 1950s, and I want to know how they will cut it off from what was our mainland,” said Musa, a Tatar. “If the referendum is free and fair, at least a little bit, I will vote against Crimean independence.”

The referendum seems to leave no such choice: Voters will have to pick between joining Russia or adopting an earlier constitution that described Crimea as sovereign. The regional assembly says that if Crimea becomes sovereign, it will sever ties with Ukraine and join Russia anyway.

Still, with the streets firmly in control of pro-Russian militiamen and Russian troops, there is little doubt the separatist authorities will get the pro-Russian result they seek. Many opponents, including Tatar leaders, plan a boycott.

At the White House, Obama ridiculed the referendum, saying: “The issue now is whether Russia is able to militarily dominate a region of somebody else’s country, engineer a slapdash referendum and ignore not only the Ukrainian constitution but a Ukrainian government that includes parties that are historically in opposition with each other.”

“We will continue to say to the Russian government that if it continues on the path that it is on, then not only us but the international community, the European Union and others will be forced to apply a cost to Russia’s violation of international law and its encroachments on Ukraine,” he added.

Obama said the United States and Ukraine recognized the historic ties between Russia and Ukraine, but added: There is a constitutional process in place and a set of elections that they can move forward on that in fact could lead to different arrangements over time with the Crimean region. “But that is not something that can be done with the barrel of a gun pointed at you,” Obama said.

Yatseniuk said his government was eager for talks with Russia about Ukraine but made clear his country “is and will be a part of the Western world.” “We fight for our freedom, we fight for our independence, we fight for our sovereignty, and we will never surrender,” he said at the White House.

While tightening his grip on Crimea, Putin seems to have backed off from his March 1 threat to invade other parts of eastern and southern Ukraine, where most of the population, although ethnically Ukrainian, speak Russian as a first language.

That threat exposed the limits of Ukraine’s military, which would be little match for the superpower next door and has seen its detachments in Crimea surrounded. The authorities in Kiev announced the formation of a new national guard on Wednesday.

But if Putin had expected to be able to seize Crimea without facing any consequences - as he did when he captured parts of tiny Georgia after a war in 2008 - the push toward sanctions suggests he may have miscalculated.

In a statement, the leaders of the G7 - the United States, Britain, France, Germany, Italy, Japan and Canada - called on Russia to stop the referendum from taking place.

“In addition to its impact on the unity, sovereignty and territorial integrity of Ukraine, the annexation of Crimea could have grave implications for the legal order that protects the unity and sovereignty of all states,” they said. “Should the Russian Federation take such a step, we will take further action, individually and collectively.”

The US Senate Foreign Relations Committee approved legislation that would impose strict sanctions on Russians involved in the intervention in Ukraine and provide aid to the new government in Kiev. The bill now goes to the full Senate for a vote and must also be approved by the House of Representatives.

There has been a lot of diplomatic contact between Russia and the West but no breakthrough. Putin spoke on Wednesday to French President Francois Hollande and Swiss Foreign Minister Didier Burkhalter, whose country chairs the Organisation for Security and Cooperation in Europe. US Secretary of State John Kerry is due to meet with Russian Foreign Minister Sergei Lavrov in London on Friday.

Russia has pledged to retaliate for any sanctions, but EU leaders seem to be betting that Moscow has more to lose than they do. Merkel’s finance minister, Wolfgang Schaeuble, said any potential impact on Germany’s economy was likely to be limited.

While the EU has agreed to wording for its sanctions, it is still working on a target list. Talks took place in London this week between officials from Britain, the United States, Italy, France, Germany, Poland, Switzerland, Turkey and Japan.

“My understanding is that there was detailed discussion of names at the meeting,” an EU official said. “No definitive list has been drawn up, but it will be ready by Monday.”

European officials have indicated that Putin and Lavrov will not be on the list, in order to keep channels of communication open. The list is expected to focus on targets close to Putin in the security services and the military, as well as lawmakers.

In the past, US and EU sanctions against countries such as Syria, Libya and Iran have started with lists of only around 20 people and companies. But those lists quickly evolved into more powerful weapons as other people and firms were added.

The EU has said it is also prepared to take further steps, such as an arms embargo and other trade measures.