By Lidia Kelly and Jeff Mason
MOSCOW/BRUSSELS, March 26 (Reuters) - The economic impact of annexing Crimea from Ukraine could drive Russia into a sharp recession this year even if the West stops short of trade sanctions, the World Bank warned on Wednesday.
The gloomy assessment, far more negative than Russian government forecasts, came on a day when U.S. President Barack Obama was meeting European Union and NATO leaders to discuss how to reduce Europe's dependence on Russian energy and bolster NATO defenses of east European allies bordering Russia and Ukraine.
Obama and leaders of the Group of Seven major industrialized nations agreed this week to hold off on tougher economic sanctions unless President Vladimir Putin takes further action to destabilise Ukraine or other former Soviet republics.
Western concern has focused on Russian troops massed on Ukraine's eastern border amid Kremlin allegations of attacks on Russian speakers in that industrial region of the country.
But Polish Prime Minister Donald Tusk said on Wednesday it seemed likely that the firm Western response so far would stop Russia undertaking what he called "other acts of aggression and interference on the territory of Ukraine".
A World Bank report on the Russian economy, compiled before the most recent evidence of the scale of capital flight, made clear Moscow was already set to pay a significant price in lost growth due to the most serious East-West confrontation since the end of the Cold War.
Gross domestic product (GDP) could contract by as much as 1.8 percent in 2014 if the crisis persists, it said. That high-risk forecast assumes that the international community would still refrain from trade sanctions.
"An intensification of political tension could lead to heightened uncertainties around economic sanctions and would further depress confidence and investment activities," the World Bank said.
"We assume that political risks will be prominent in the short-term."
Under a low-risk scenario, assuming only a short-lived impact from the crisis, GDP could grow by 1.1 percent, just half the bank's 2.2-percent growth forecast published in December.
RUSSIAN STOCKS REBOUND
Russia is refusing to recognize the Kiev government chosen by parliament after the overthrow of Moscow-backed President Viktor Yanukovich on Feb. 22 following months of street protests against his refusal to sign a pact on closer ties with the EU.
So far, the United States and the EU have imposed personal sanctions against Russian and Crimean officials involved in the seizure of the peninsula and Washington has slapped visa bans and asset freezes on senior business figures close to Putin.
Russian markets and the rouble have been shaken, resulting in massive capital outflows, now estimated by the Economy Ministry at up to $70 billion in the first quarter alone compared with $63 billion in the whole of last year.
However, Russian stocks clawed back more ground on Wednesday and the rouble strengthened as a relief rally continued due to signs of an easing of tensions over the Crimea crisis.
At 1050 GMT the rouble-denominated MICEX index was up 2 percent and the dollar-denominated RTS was up 2.6 percent.
Russian assets have rallied this week as investors calculate that the annexation of Crimea will not trigger more serious Western sanctions.
The Economy Ministry has yet to revise its early 2014 growth forecast of 2.5 percent for the year but a deputy minister said on Monday that it was anticipating GDP growth of "around zero" for the first quarter.
The European Union was set to press Obama at a summit in Brussels to help reduce Europe's reliance on Russian energy by exporting U.S. natural gas and oil, restricted by U.S. laws.
Russia provides around one third of the EU's oil and gas and some 40 percent of the gas is exported through Ukraine.
After visiting a World War One graveyard, Obama had just 75 minutes over lunch with the EU's top officials to tackle issues ranging from transatlantic trade negotiations to climate change.
The Ukraine crisis has largely pushed aside strains in the U.S.-EU relationship over last year's disclosures of large-scale spying by Washington on European allies.
Obama planned to assuage European concerns in a speech to some 2,000 guests reaffirming Washington's commitment to defend NATO allies and work in partnership with the EU, before leaving for Rome later in the day.
"Right now, as we look around the world, there is a powerful reason for Europe and the United States to come together to demonstrate that they can take their relationship to a new level," said U.S. Trade Representative Michael Froman.
Obama affirmed that message when he visited war graves on Flanders Field in Waregem in western Belgium, where U.S. soldiers fought a century ago in battles where chemical weapons were first used on a massive scale.
"This visit, this hallowed ground reminds us that we must never, ever take our progress for granted. We must commit perennially to peace, which binds us across oceans," he said.
Obama did not mention tensions with Russia over Crimea but emphasized instead international cooperation - including with Moscow - to disarm Syria of its chemical weapons.
"Our nations are part of the international effort to destroy Syria's chemical weapons, the same kinds of weapons that were used to such devastating effect on these very fields," he said.
NUCLEAR, SHALE GAS IN FOCUS
The quest to reduce reliance on Russian oil and gas supplies has prompted the EU to accelerate efforts to develop its internal energy market and revisit alternative sources such as liquefied natural gas, nuclear energy and shale gas, although the latter options raise strong environmental concerns.
British Prime Minister David Cameron said on Tuesday energy independence and the adoption of technologies like shale gas fracking should top Europe's political agenda, calling Crimea a "wake-up call" for states reliant on Russian gas.
"Some countries are almost 100-percent reliant on Russian gas, so I think it is something of a wake-up call," Cameron told reporters after a nuclear security summit in The Hague.
He pointed to reserves of shale gas in southeastern Europe, Poland and England that could be extracted by the process of pumping liquids at high pressure into underground rock formations known as fracking, widespread in the United States.
"I think it's a good opportunity," Cameron said. "Energy independence, using all these different sources of energy, should be a tier-one political issue from now on, rather than tier-five."
Environmentalists say fracking is a threat to the water table and can cause earthquakes and landslides. Countries such as France and Bulgaria have banned it and others such as Britain and Poland have faced anti-fracking protests. (Additional reporting by Steve Holland and Robin Emmott in Brussels, Marcin Goclowski in Warsaw, Jeff Mason in Waregem, Belgium, William James in The Hague and Jason Bush in Moscow; Writing by Paul Taylor; Editing by Alastair Macdonald)