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(Adds Moscow comment, NATO, details)
* Moscow calls the sanctions "destructive and short-sighted"
* Says will lead to higher energy prices in Europe
* Moscow imposes ban on Polish fruit and vegetables
* Fighting with Ukraine rebels continues near plane crashsite
* Bankers say Russian firms frozen out of global lending
By Polina Devitt and Gabriela Baczynska
MOSCOW/KIEV, July 30 (Reuters) - Russia fought back onWednesday over new U.S. and EU sanctions imposed over Ukraine,where fighting between Moscow-backed rebels and governmenttroops has intensified since a Malaysian airliner was shot down.
The confrontation between Moscow and the West entered a newphase this week, with the United States and European Uniontaking by far the strongest international steps yet againstMoscow over its support for Ukraine's rebels.
New EU and U.S. sanctions unveiled on Tuesday restrict salesof arms and equipment for the oil industry, while Russian statebanks are barred from raising money in Western capital markets.
Moscow said the sanctions were "destructive andshort-sighted" and would lead to higher energy prices in Europeand damage cooperation with Washington on international affairs.
On Wednesday it banned imports of Polish fruit andvegetables and said it might expand the ban to the entire EU.
On the ground in Ukraine, heavy fighting between governmentforces and the separatists has been taking place near the sitewhere Malaysian flight MH17 crashed into wheat and sunflowerfields on July 17, shot down by what Washington and Brusselsbelieve was a missile supplied by Russia.
Kiev accused the pro-Russian rebels on Wednesday offortifying the area, including with land mines, to prevent thesite from being properly investigated. The land mine reportcould not be independently confirmed. Ukraine is party to atreaty banning land mines; Russia is not.
The new Western sanctions mark the first time Washington andBrussels have adopted measures designed to hurt the overallRussian economy, after weeks of narrow steps targeting onlyspecific individuals blamed for Russia's Ukraine policy.
"Russia's actions in Ukraine and the sanctions that we'vealready imposed have made a weak Russian economy even weaker,"U.S. President Barack Obama said in Washington on Tuesday. "IfRussia continues on this current path, the costs on Russia willcontinue to grow."
German Economy Minister and Vice Chancellor Sigmar Gabrielsaid the measures would hurt the European economy but would hurtRussia more. The price was worth paying, he added: "At a time ofwar and peace, economic policy is not the main consideration."
Even so, Russian markets rallied, as investors deemed thesanctions less severe than feared, with Russian stocks, bondsand the rouble rising.
The Russian Central Bank said it could support banks thatwere hit by sanctions. Russia's second-largest bank, VTB, said it would find funding outside of the EU andUnited States, using currencies other than euros and dollars.
But bankers said Russian firms had been effectively frozenout of global lending, not just in the West, leaving the Russianstate as their only source of funding.
"Right now, all banks are acting the same. No group is anymore cautious or sanctions aware: It's all too important. Asianbanks are the same as European or U.S. banks in this respect," aLondon-based banker at an Asian bank said.
A banker said VTB had been unable to find a lender for a$1.5-$2.0 billion refinancing loan since a previous round ofU.S. sanctions on July 16. VTB declined to comment.
The first European economic victims of the trade war werePolish apple growers, who sell more than half their exports toRussia. Moscow is by far the biggest importer of EU fruit andvegetables, buying more than 2 billion euros' worth a year.
Russia said the ban, covering most Polish fruit andvegetables, was for sanitary reasons and it would look intoexpanding it to the rest of the EU.
Poland's agriculture ministry called it "politicalrepression in response to the sanctions", and said it would seekcompensation from the EU.
FIGHTING
Moscow denies Western accusations that it has armed andsupported rebels who are fighting Ukrainian forces in easternUkraine. But Western countries say flows of heavy weapons acrossthe frontier have only increased since flight MH17 was shot downon July 17, killing all 298 people on board.
Ukrainian military spokesman Andriy Lysenko said the rebelswere digging in for battle near the crash site: "They havebrought a large number of heavy artillery there and minedapproaches to this area. This makes impossible the work ofinternational experts trying to start work to establish thereasons behind the Boeing 777 crash."
Lysenko said 363 Ukrainian troops had been killed and 1,434wounded since Kiev's "anti-terrorist" operation began.
Ukraine's fragile economy is also taking abattering. Parliament will consider austeritybudget amendments on Thursday that are key to receiving IMFsupport and to assign more financing for the army.
Despite what the West says is an increase in armaments forthe rebels, government troops have advanced since the start ofthe month, when they pushed the rebels out of theirbest-defended stronghold, the town of Slaviansk. Since then,Western countries say thousands of Russian soldiers havereturned to the border from which they had withdrawn weeks ago.
NATO military commander General Philip Breedlove said thenumber of troops along the border was now "well over 12,000",and weaponry was also building up.
Valentyn Nalivaichenko, the head of Ukraine's SBU securityservice, said arms including Grad multiple rocket launchers wereflooding across the border.
"Grads come in from Russian territory, take pre-agreedpositions and fire on the Ukrainians. This is hundreds of rocketlaunches. They come in, shoot around like in a safari. This isserious military aggression," he told a news conference.
The rebels are mainly holed up in the cities of Donetsk andLuhansk, which they have declared capitals of two independent"people's republics", as well as in the surrounding countryside.
A team of Dutch investigators say fighting has preventedthem from reaching the crash site. Most bodies of victims wereshipped out in refrigerated train cars days after the crash andflown to the Netherlands, but some human remains are stillbelieved to be lying untended in the fields.
The UN Secretary-General called for an immediate halt tohostilities so international teams could access the site.
The sanctions are intended to persuade President VladimirPutin to back down from a months-long campaign to seizeterritory and disrupt his neighbour, an ex-Soviet state of 45million where a pro-Russian president was toppled by streetprotests in February.
But Putin, whose popularity at home has surged since heannexed Ukraine's Crimea peninsula in March, has shown no signof backing down from support for the rebellion in parts ofUkraine that he has referred to as New Russia.
The EU had been reluctant to agree tighter sanctions - ithas 10 times more trade with Russia than the United States does,and all 28 members must agree EU decisions - until the downingof the plane en route from Amsterdam to Kuala Lumpur.
Two thirds of the victims were Dutch, turning theNetherlands - the biggest importer of Russian oil bound for therest of the EU - into a strong supporter of tougher measures.
The EU sanctions have nevertheless been crafted so as toinflict the minimum hardship on Europe: Russia's oil industryhas been targeted but not the natural gas that fuels Europeanindustry and lights its cities. Existing contracts are excludedfrom the arms embargo, allowing France to move ahead withdelivery of a warship it has already sold for the Russian navy.
Still, big Western companies, especially in the energysector, will feel pain. Britain's BP, the largest foreigninvestor in Russia with a near 20 percent stake in oil companyRosneft, said its business could be hurt.
French oil major Total, which owned 18 percent of Russianjoint venture partner Novatek at the end of June, saidon Wednesday it had halted buying Novatek shares the day of theplane crash. In April, Total had predicted the Novatek venturewould make Russia its biggest source of oil and gas by 2020.
"We stopped buying shares in Novatek the day of the planeaccident, considering all the uncertainties that this eventcould lead to," Total Chief Financial Officer Patrick de LaChevardiere said. Novatek, which was hit by U.S. sanctions theday before the Malaysian plane crashed, said it was examiningthe impact of sanctions on ventures with foreign partners.
A statement from Russia's foreign ministry highlighted whatis among European leaders' principal concerns.
"By going on a sanctions spree, Brussels, by its own will,is creating barriers for further cooperation with Russia in sucha key sphere as energy. This is a thoughtless and irresponsiblestep. It will inevitably lead to an increase in prices on theEuropean market," it said.
Although Europe buys huge amounts of oil and gas fromRussia, its exports to Russia are far more limited. Neverthelessit is vulnerable to pressure in particular sectors, such asGerman manufacturing and British financial and legal services.
According to European Commission figures, the EU sold 28percent of its fruit exports and 21.5 percent of its vegetableexports to Russia in 2011, totalling more than 2 billion euros.
Tomasz Solis, deputy head of the Polish FruitgrowersAssociation, told Reuters the trade war was no surprise: "Thepolitical situation in Ukraine would sooner or later haveaffected our relations with Russia." (Additional reporting by Tessa Walsh in London, ElizabethPiper, Vladimir Soldatkin and Thomas Grove in Moscow, AleksandarVasovic in Donetsk and Natalia Zinets in Kiev, Wiktor Szary andJakub Iglewski in Warsaw and Julia Fioretti in Brussels; Writingby Peter Graff and Will Waterman)
