European leaders are weighing whether to ban a few prominent Russian companies from doing business with the 28-member European Union to show Russia the cost of continuing to destabilize Ukraine.

German Chancellor Angela Merkel, British Prime Minister David Cameron, French President Francois Hollande and other EU leaders gather today in Brussels to elect a new president and foreign-policy chief of the bloc, and also will meet with Ukrainian leader Petro Poroshenko.

The proposal to target Russian companies is among several possible moves to toughen the sanctions against Russia over the worsening conflict in Ukraine, where Russian-backed separatists are making gains against the army, and the death toll has exceeded 2,500.

Others include banning syndicated loans to targeted Russian companies, tightening restrictions on debt-market financing and extending an arms embargo to existing military contracts, which would halt the sale of two French Mistral helicopter carriers to Russia for an estimated 1.2 billion euros ($1.6 billion), according to four European diplomats involved in the deliberations who requested anonymity to discuss them.

Studying Sanctions

“New measures could tighten the squeeze already under way across strategic Russian sectors including finance, energy, defense and media,” said Howard Mendelsohn, a former U.S. assistant secretary of the Treasury and now managing director of the Camstoll Group, an advisory firm with offices in Washington and Los Angeles. Even so, Mendelsohn said, “economic sanctions have not deterred Moscow from further destabilizing Ukraine.”

The EU isn’t expected to adopt any new sanctions today, the diplomats said. Instead, leaders will assign officials to study what measures could be implemented quickly without taking a disproportionate toll on the economies of European nations that depend more heavily on Russian commercial ties, they said.

The U.S. and Europe are threatening Russia’s President Vladimir Putin with more penalties after the North Atlantic Treaty Organization reported a surge of Russian equipment into the war zone, with more than 1,000 Russian troops operating in Ukraine and 20,000 more in the border area.

Merkel’s chief spokesman, Steffen Seibert, said reports from the ground in Ukraine “amount to a Russian military intervention.”

‘Fresh Muscle’

“The effective rebel counteroffensive followed Russia’s injection of fresh muscle into the insurgency and looks set to lead to a further wave of U.S. and EU sanctions,” Christopher Granville, managing director of London-based research group Trusted Sources, said yesterday in an e-mailed note.

Ukrainian Prime Minister Arseniy Yatsenyuk has called for parliament in Kiev to consider NATO membership to protect against Russia seizing more territory after its annexation of Crimea in April.

NATO Secretary General Anders Fogh Rasmussen yesterday reaffirmed a 2008 Bucharest summit pledge that “Ukraine will become a member of NATO” if it so wishes and provided it fulfills the necessary criteria.

The EU and the U.S. already have slapped visa bans and asset freezes on Russian individuals and companies, and since July have imposed steadily tougher sanctions targeting the country’s energy, finance and defense industries.

‘Lehman Moment’

The ruble sank 1.1 percent against the dollar yesterday, weakening for a fourth session after closing at a record low on Aug. 28. The Micex Index plunged 1.6 percent, extending the previous day’s 1.7 percent tumble, the steepest since Aug. 6.

Russia’s equity markets may face a “Lehman moment” if the Ukraine crisis deteriorates further, JPMorgan Chase & Co.’s Moscow-based research head Alexander Kantarovich said in a note. The collapse of Lehman Brothers Holdings Inc. helped trigger a global recession in 2008.

French president Hollande warned that Russia risks more penalties if the fighting continues to escalate. U.S. President Barack Obama said Russia faces “more costs and consequences” because it “has deliberately and repeatedly violated the sovereignty and territorial integrity” of Ukraine.

Stephen Myrow, a former U.S. Treasury official now at Washington-based Beacon Policy Advisors LLC, said he expects the U.S. to add more Russian individuals or companies to the sanctions list, but doubts the Obama administration will take broader steps such as cutting off all Russian banks or going after OAO Gazprom, which supplies 30 percent of Europe’s imported natural gas.

Banking System

Banning Russia from the Brussels-based Society for Worldwide Interbank Financial Telecommunication, or SWIFT, the messaging system for most international money transfers, isn’t under consideration at this point either, two of the European officials said. Yesterday, a British government official had said the U.K. will press EU leaders to consider blocking Russian access to the messaging system.

The Ukrainian army is on the defensive again after pushing back rebels for several weeks. The United Nations says the conflict has claimed 2,593 lives.

Pro-Russian separatists made more gains yesterday near the Sea of Azov. Russia disputed NATO allegations of its involvement and said the militants are defending civilians from Ukrainian army shelling.

“Ukraine isn’t ready to kneel in front of the aggressor,” Ukrainian military spokesman Andriy Lysenko said yesterday in Kiev. “We’re ready to fight until the end.”

Putin’s Stance

Putin, who’s repeatedly called for a cease-fire, said talks would “easily” resolve issues such as border security. He hailed the rebel counteroffensive, likening Ukrainian military tactics to those of Nazi Germany.

“Why do they call this a military-humanitarian operation?” Putin said at a youth camp outside Moscow. “What’s the purpose of today’s actions? To push artillery and rocket launchers away from big cities so people aren’t killed.”

Ukraine, which is reintroducing the military draft, is seeking U.S. support and special partner status, Mykhailo Koval, the deputy head of Ukraine’s National Defense and Security Council, told reporters.

“Despite Moscow’s hollow denials, it is now clear that Russian troops and equipment have illegally crossed the border into eastern and southeastern Ukraine,” Rasmussen told reporters in Brussels. “Russian forces are engaged in direct military operations inside Ukraine.”

Russia is masterminding the rebel counteroffensive, with more than 1,000 of its troops operating inside Ukraine to man sophisticated weaponry and advise the separatists, NATO said yesterday. The rebels may be planning to establish a land corridor to Crimea, Brigadier General Nico Tak told reporters.

Russian Foreign Minister Sergei Lavrov dismissed NATO’s allegations.

“There was news that space imagery shows movements of Russian troops and the images turned out to be from computer games,” he told reporters yesterday in Moscow.

--With assistance from Patrick Donahue in Berlin, James G. Neuger in Brussels, Helene Fouquet in Paris and Kasia Klimasinska in Washington.

To contact the reporters on this story: Volodymyr Verbyany in Kiev at [email protected]; Ilya Arkhipov in Moscow at [email protected]; Indira A.R. Lakshmanan in Washington at [email protected] To contact the editors responsible for this story: Balazs Penz at [email protected]; John Walcott at [email protected] John Walcott, Larry Liebert