BRUSSELS: The European Union may ban transactions with financial institutions in Crimea as part of its response to the annexation of the Ukrainian peninsula by Russia last month, an EU document obtained by Reuters showed.

EU leaders consider the takeover as illegal and have asked the EU executive arm, the European Commission, to propose economic, trade and financial restrictions on Crimea for rapid implementation.

These proposals are separate from an EU discussion on stepped-up sanctions against Russia if Moscow does not help deescalate tensions in eastern Ukraine between pro-Russian separatists and the government in Kiev.

The document spelt out some of the practical difficulties involved in implementing sanctions specifically against Crimea, now that it is de facto a part of Russia.

“Solutions need to be found that at the same time support the territorial integrity of Ukraine, do not recognise the illegal annexation of Crimea, defend European interests in this region and do not penalise the Crimean people,” the Commission said in a document prepared for EU governments to consider.

One way to discourage or penalise financial institutions in Crimea that cooperated with the annexation could be to restrict capital movements between the EU and those banks, it said, and bar EU citizens or businesses from carrying out transactions with them.

“The same could hold for prohibiting investments by Crimean investors (companies located or registered in Crimea) into the EU and by EU investors into Crimean entities,” it said.

The Commission proposals are still under review and a decision whether to follow them is likely to be taken by EU foreign ministers, whose next meeting is on May 12.

Out of Crimea’s 1,000 bank branches, around 60 were owned by EU banks, the Commission said. Italy’s Unicredit had 20, Austria’s Raiffeisen had 32 and Hungarian OTP had six, the Commission said.

However, Raiffeisen closed its operations in Crimea in early April, it said, and Unicredit wants to transfer its Crimea branches to its Russian subsidiary.

“Russian banks are gradually taking over in Crimea, but the main Russian banks (Sberbank and VTB ) reportedly are reluctant to do so for fear of becoming subject to European or US sanctions,” the Commission document said.

The Commission noted that by the end of April Ukrainian exporters will be in a position to trade under two preferential arrangements with the EU and enjoy significant tariff reductions.

But the exporters need to have a certificate of origin for their goods and Ukraine will stop issuing such certificates to companies based in Crimea.

However, the Commission document noted that there was practically no way to prevent Crimean products from being exported to the EU via Russia, unless they were clearly of Crimean origin, like wine.

The only way to guarantee an absolute ban on imports from Crimea would be to suspend trade with Russia entirely, the document said - an option which it made clear was not feasible.