Germany told Russia it must switch course in Crimea by next week or risk more sanctions as Ukraine’s deposed president warned of a possible civil war.

The European Union will discuss harsher penalties on March 17 barring “obvious changes in Russia’s actions,” German Foreign Minister Frank-Walter Steinmeier said today in Estonia. A planned March 16 referendum in Crimea on whether to join Russia should be halted, he said. Toppled President Viktor Yanukovych told reporters in Russia that lawlessness is spreading in Ukraine, fomented by the “fascists and ultranationalists” who are in charge in Kiev.

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“We don’t want a confrontation, but the actions of the Russian side make the preparations necessary,” Steinmeier said in Tallinn. “We continue to urge Russia to use the last possibilities that are still there for a diplomatic solution against such an escalation. Otherwise, relations between Europe and Russia won’t improve.”

Russia is wresting control of Ukraine’s Crimean peninsula, home to its Black Sea Fleet, sparking the worst crisis between Russia and the West since the Cold War. Moscow-backed Yanukovych, who was ousted in February after three months of anti-government protests, says he’s still Ukraine’s leader. The EU and the U.S. recognize the new administration in Kiev and are helping it secure billions of dollars in aid.

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Sanctions Strategy

The EU announced a three-stage sanctions process against Russia last week, starting with the suspension of trade and visa-liberalization talks. Stage two includes asset freezes and travel bans for as-yet unidentified officials and would be imposed if Russia boycotts international talks on a settlement with Ukraine. Stage three envisages “additional and far-reaching consequences” if Russia further destabilizes Ukraine.

Britain hosted a meeting today to compile a list of people who could be hit by sanctions.

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The U.S. banned visas for Russian officials and others it said were complicit in violating Ukraine’s sovereignty, while President Barack Obama also authorized financial measures.

Russia’s position is unchanged by the threat of sanctions, Foreign Minister Sergei Lavrov said March 4. Three days later, he cautioned Secretary of State John Kerry against “hasty and ill-considered moves” that could hurt relations.

The unrest presents Russia’s economy with a “very challenging backdrop,” Citigroup Inc analyst Ivan Tchakarov said today in e-mailed note. He cut his 2014 growth forecast for gross domestic product to 1 percent from 2.6 percent.

Markets Plunge

The crisis is also hurting financial markets in Russia and Ukraine. Russia’s RTS (RTSI$) stock index has declined 21.4 percent this year, the most in the world, while the ruble’s 9.7 percent weakening against the dollar is the second-worst performance among 24 emerging-market currencies tracked by Bloomberg.

The hryvnia, which has slumped 10.7 percent this year, was little changed at 9.23 per dollar today. The yield on state Eurobonds due 2023 fell 2 basis points to 10.35 percent, snapping four days of increases. GDP grew 3.3 percent from a year earlier in the fourth quarter, data released today showed.

As Ukraine races to secure financing to stave off a possible default, the World Bank said yesterday it had received a request for aid and that it was ready to provide as much as $3 billion this year. World Bank President Jim Yong Kim said the Washington-based lender would help “undertake the reforms badly needed to put the economy on a path to sustainability.”

Western Aid

The U.S. has already promised $1 billion in loan guarantees to Ukraine, while the EU has outlined an 11 billion-euro ($15 billion) package of loans and grants for the coming years tied to the country agreeing on a program from the International Monetary Fund, which sent a mission to Kiev last week.

“The EU will open its doors to exports from Ukraine,” European Trade Commissioner Karel De Gucht told reporters today in Strasbourg, France. This “is more than a gesture, it is an economic lifeline.” The EU has had 610 million euros ready to go as soon as Ukraine reaches an accord with the IMF.

Ukraine, which says almost 19,000 Russian troops have taken control of Crimea, began military drills yesterday to test combat readiness. Infantry, tanks, artillery and military intelligence units participated in exercises today in the eastern Kharkiv region, where pro-Russian demonstrators have rallied. It may create a 20,000-strong National Guard to secure borders and to provide a non-military “answer to destabilization,” Interior Minister Arsen Avakov said today.

Ukraine’s ‘Dismantling’

President Vladimir Putin says the ethnic Russians who dominate Crimea are at risk from the new government in Kiev, an allegation Ukraine denies. He backs the Black Sea region’s recently appointed administration, which plans to hold the referendum on joining Russia.

Organization for Security and Cooperation in Europe head Didier Burkhalter said today that in its current form the vote is illegal as it contradicts Ukraine’s constitution. German Chancellor Angela Merkel called Russian actions in Crimea an annexation during a meeting of her Christian Democratic Union party, according to two officials who asked not to be named because caucus meetings are private.

Polish Prime Minister Donald Tusk said today in Warsaw that Russian efforts to seize Crimea may only be a “stage” in a larger Russian strategy to destroy Ukraine’s independence.

“It’s not out of the question that what we’re witnessing now is only a certain stage of Ukraine’s dismantling before our very eyes,” Tusk told reporters. “The situation has never been so serious.”

Crimean Isolation

As Crimea prepares for the ballot, the isolation of the peninsula from the rest of Ukraine intensified today as Kiev’s Boryspil airport said on its website that flights had been canceled to Simferopol, the region’s capital.

Russian forces have already taken charge of a ferry crossing at Kerch and blocked harbors, according to Ukrainian border guards. Surveillance pictures also show Russia controls the roads leading onto the peninsula, they said March 9.

Yanukovych said in the southern Russian city of Rostov-on-Don that extremists in Kiev are sparking unrest in Ukraine’s eastern and southern regions and “want to integrate nationalist fighters into the armed forces, handing them weapons.”

Ukraine’s State Security Service said today it had detained saboteurs in the eastern cities of Donetsk and Luhansk who may be Russian intelligence officers seeking to stir up further unrest. There’s a danger Russia’s incursions may eventually spread to Ukraine’s east, according to Amanda Paul, a policy analyst and program executive at the European Policy Centre.

“With Crimea apparently well under Russia’s control, it can now play around with the east,” she said by e-mail from Brussels. “Ukraine seems to be doing its best not to be provoked by Russian aggression. But it’s like having your house robbed and having to stand and watch without doing anything.”