Russia's crumbling economy could be hit further after the EU agreed on more santions over its intervention in Ukraine.
Fresh punitive measures - banning investment in Crimea to target Russian Black Sea oil and gas exploration - were agreed at the end of the European Council summit in Brussels.
New EU president Donald Tusk said they needed to create a long-term strategy to stop Russia President Vladimir Putin's defiance of the West.
"We need to be realistic, we have to treat this as a long-term game. We must go beyond being reactive and defensive."
He called on Europeans to "regain our self-confidence and realise our own strength" when dealing with Russia.
David Cameron warned Mr Putin that Russia's economy was in "serious" trouble after being hit by a slump in oil prices and sanctions from the EU and US.
"I think that something very important is being made clear here, which is that if you want to have full access to the international capital markets you cannot behave in a way that flies in the face of the international rules and how to behave towards other countries.
"If it takes Russian troops out of Ukraine, and it obeys all the strictures of the Minsk agreement, these sanctions can go.
"But until that happens these sanctions should not go and there was a very clear and unanimous and unified view in the EU tonight."
Speaking at his annual end-of-year media conference, Mr Putin hit back saying the sanctions have not had a big effect and accused the West of behaving like "an empire".
He also accused the West of trying to "chain" the Russian bear.
"Probably our bear should just relax and sit quietly and just eat honey instead of hunting animals. Maybe then they will leave the bear in peace.
"But they will not. What they are trying to do is chain the bear and when they manage to chain the bear they will just take out its fangs and claws."
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