James G. Neuger and Volodymyr Verbyany
Bloomberg News

The European Union warned Russia of deeper sanctions unless it stops a separatist rebellion in Ukraine in three days as the government in Kiev announced the extension of a cease-fire.

EU leaders in Brussels demanded that the separatists, whom Ukraine and its allies say are backed by Russian President Vladimir Putin’s government, release hostages and start talks to implement a peace plan drawn up by Ukrainian President Petro Poroshenko by June 30. Failure to do so will result in “further significant restrictive measures” against Russia, the leaders said in a statement.

“If no visible progress is made on these points, then we are prepared to take further decisions, including drastic measures,” German Chancellor Angela Merkel said after the EU summit in Brussels yesterday. “We expect progress to come really in the hours ahead.”

The U.S. reinforced the EU demands. White House press secretary Josh Earnest said the conditions “are very specific steps that the Russians can take by Monday” or face more economic costs.

’Great Day’

Trying to bolster solidarity from richer nations to Ukraine’s west against what it calls Russian aggression, Poroshenko also signed a free-trade pact with the 28-member bloc, which he said showed Ukraine’s “sovereign choice in favor of future membership of the EU.”

“What a great day, maybe the most important day for my country after independence day,” Poroshenko said after signing the agreement in the Belgian capital yesterday. “The external aggression faced by Ukraine gives another strong reason for this crucial step.”

Accusing Putin’s government of allowing weapons, manpower and other support to flow across its border into Ukraine, the U.S. also is preparing sanctions against Russia on technology aimed at exploiting and producing oil and gas products, a major part of that country’s economy, according to three people briefed on the plans.

Without specifying what actions the U.S. would take, Earnest said “the threat of sanctions only looms larger” if Russia fails to take action. Poroshenko’s website today said the cease-fire was extended until June 30.

Rebels Agree

“Should conditions of the cease-fire not be adhered to, Ukraine has the right to end the cease-fire prematurely in areas where it is not adhered to,” Poroshenko and other government officials said in a joint statement.

Rebel representatives agreed with a delegation of the government and the Organization for Security and Co-operation that they will honor the cease-fire through June 30, the Interfax-Ukraine news service reported, citing the press service of the unrecognized Luhansk People’s Republic.

They agreed to exchange captives, release international monitors and to resume talks in three days, Interfax said. Alexander Maltsev, a spokesman for the Donetsk rebels and Vasiliy Nikitin, his counterpart in Luhansk, didn’t answer phone calls seeking confirmation.

Merkel was the prime mover behind the crafting of the EU ultimatum, an official from the bloc said. In charge of the EU’s largest economy and its longest-serving leader as well, Merkel said June 26 that Poroshenko’s account would be crucial to shaping a response.

’Must Press’

The EU has imposed asset freezes and travel bans on 61 people connected with unrest in Ukraine and Russia’s seizure of Crimea in March. It has stopped short of broader curbs on investment and trade that might damage the European economy as it shakes off the effects of the debt crisis.

“The onus is now on Russia,” U.K. Prime Minister David Cameron said in Brussels. “If we don’t see concrete progress, we will remain willing to impose further sanctions on Russia.”

The government in Kiev blames Putin for supporting rebels and stoking violence the United Nations says has killed more than 400 people in the country of more than 40 million.

The rejection of the free-trade accord by the man Poroshenko replaced, Viktor Yanukovych, triggered street protests in Kiev last November that earlier this year ousted the then pro-Russian government after more than 100 people died in clashes. Russia responded by annexing Crimea from Ukraine and has expressed support for Russian speakers in the country’s southeast, who it says are under attack by their own government.

’Artificial Choice’

“The anti-constitutional revolution in Kiev and the attempts to force the Ukrainian people to make an artificial choice between Europe and Russia have led to a split in society,” Putin said at a meeting with new ambassadors in the Kremlin yesterday.

The free-trade deal -- similar versions of which were also signed by Moldova and Georgia yesterday -- gives Ukrainian companies better access to the EU market, the world’s biggest trading bloc.

The EU estimates a 1 billion euro ($1.4 billion) annual boost for Ukraine’s exports, and in exchange, Ukraine pledges to use EU funds to meet EU product, safety, consumer standards, bolster human rights and fight corruption. The deal doesn’t offer Ukraine the prospect of membership.

“This is a landmark agreement for Ukraine, and will be transformational,” said Tim Ash, chief emerging markets economist at Standard Bank Group Ltd. in London.

Trade Penalties

Putin, who is trying to establish a Eurasian trading bloc made up of former Soviet states to rival the EU, has said the agreement will damage Russia’s economy. His government has said those who sign agreements with the EU may face consequences.

About 67 percent of Ukrainians would vote to join the EU in a referendum, according to a June 6-11 Razumkov Center poll of 2,012 voters, versus 20 percent who wouldn’t.

Though the cease fire has been backed by Putin and separatist leaders, violence continued as peace talks this week failed to produce an accord. Along with the deaths, the UN estimates that about 54,000 people have fled their homes to other places inside Ukraine, while 110,000 displaced Ukrainians have arrived in Russia this year.

Displaced People

Rebel activity “decreased significantly” overnight, military spokesman Oleksiy Dmytrashkovskyi said by phone today, adding that militants fired on three government positions, including with mortars. There were no casualties. More than 20 Ukrainian soldiers died in rebel attacks since the cease-fire began, Interior Minister Arsen Avakov said yesterday.

“There are still hostages being held, there are attacks on border posts, there have been violations of the cease-fire,” French President Francois Hollande said in Brussels. “If there’s no improvement, then our foreign ministers will meet to take notice and take actions.”

Russia’s failure to comply with the EU deadline could lead to additional asset freezes and travel bans after June 30. A move toward stage three sanctions could come as early as mid- July, when the leaders are scheduled to meet again to fill high- level positions including foreign-policy chief. They yesterday nominated Jean-Claude Juncker for the job of European Commission president.

EU sanctions require a consensus of the bloc’s 28 governments, making it possible for countries such as Austria, Slovakia or Italy to stand in the way. Austria deepened its economic ties with Russia this week by signing an accord with OAO Gazprom for direct pipeline access to Russian gas.

“The important thing is that for the very first time in history we -- the EU and Ukraine -- agreed on a common stance vis-a-vis Russia,” Polish Prime Minister Donald Tusk told reporters in Brussels.