By Douglas Busvine and Timothy Heritage
MOSCOW (Reuters) - German Chancellor Angela Merkel took Russian President Vladimir Putin to task over a clamp-down on dissent and treatment of the Pussy Riot punk band when they held frosty talks on Friday.
But despite the chill descending on relations, they signed a host of economic deals underlining the importance of mutual trade which Putin put at $72 billion in 2011, as well as Germany's dependence on Russia as an energy supplier.
Often looking uncomfortable as they sat together at a business forum in the Kremlin, Merkel and Putin tried to put on a show of unity. But they could not hide their differences over human rights and democracy at a news conference.
Merkel was particularly blunt in her criticism. She said she had expressed concern about the passage of laws that could be used to stifle dissent since Putin returned to the presidency in May after four years as prime minister.
"We spoke about the situation of civil society in Russia and I expressed my concern about plans for certain laws," Merkel told the joint news conference with Putin in the Kremlin.
"I think we need to speak openly and honestly about these issues. This dialogue is a precondition for understanding each other and identifying the conflicts."
Putin, who this year has faced the biggest protests since his political domination of the world's largest country began in 2000, said Western powers did not fully understand Russia.
"As for political and ideological issues, we hear our partners. But they hear about what's happening from very far away," he said.
Merkel made clear she regarded as overly harsh the jailing of two women from the Pussy Riot band who staged an anti-Putin protest in February in Moscow's main Russian Orthodox church.
But the Kremlin chief said Pussy Riot had offended believers and accused one of the band of taking part in what he said was an anti-Semitic protest by another radical group called Voina which pretended to hang a Jew in a supermarket.
"We need to understand what sort of people we are dealing with. I don't think that modern-day Germany should support anti-Semitism," he said.
Pussy Riot quickly denied the allegation, saying the Voina protest was not anti-Semitic and was intended to draw attention to the abuse of migrant workers and homosexuals, and Putin's comment quickly became the object of satire on social media.
OLD FOES, NEW FRIENDS
Relations between Berlin and Moscow, long strained by memories of World War Two and ideological differences during the Cold War, warmed up after the collapse of communist rule and the fall of the Soviet Union in 1991.
But Putin, a German speaker who spent five years in Dresden for the KGB, has never had as strong a relationship with Merkel as with her predecessor, Gerhard Schroeder.
Germany's parliament last week expressed concern at the state of human rights in Russia and urged Merkel to raise the problems with Putin, in a resolution that contributed to the growing chill in relations.
Laws brought in since Putin was elected president for a six-year third term in March included legislation increasing control of the Internet and a law broadening the definition of treason which was enacted this week.
Putin defended the freedom of information in Russia and the independence of the judiciary. Dismissing any comparison with Soviet dictator Josef Stalin's show trials of political enemies, he said: "It's not 1937 here."
But despite their differences, Germany and Russia have managed to keep business ties on track. Germany's dependence on Russia for 40 percent of its gas and 30 percent of its oil also means Merkel must also be mindful of the damage any criticism of Russia over human rights could do to German business interests.
Berlin is wary of angering Moscow because it could provoke it into reducing energy supplies to Europe in retaliation, as has happened before during Russian price disputes with its neighbor Ukraine.
"We want Russia to succeed ... Our ideas don't always coincide, but what matters is that we listen to each other," Merkel said, underlining that more than 6,000 German firms operate in Russia.
She said Germany needed Russia for raw materials such as gas and oil, while Moscow needed Berlin to help in modernization, infrastructure and health care.
Deals concluded during the visit included Russian Railways signing a letter of intent to buy nearly 700 locomotives from Germany's Siemens for about 2.5 billion euros ($3.2 billion).
The European Union has challenged the pricing policy of state energy export monopoly Gazprom, and opened an investigation into whether this policy is fair. Putin complained about this again at the news conference but there appeared to be no new developments in the dispute.
(Additional reporting by Noah Barkin in Berlin and Nastassia Astrasheusskaya and Andreas Rinke in Moscow; Writing by Timothy Heritage; Editing by Jon Boyle and Robin Pomeroy)
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