Bloomberg News

U.S., EU Escalate Russia Sanctions as Putin Holds Firm

July 17, 2014

Russian President Vladimir Putin

Russian President Vladimir Putin denounced the action as a reflection of an “aggressive” U.S. foreign policy. Photographer: Andrey Rudakov/Bloomberg

The U.S. and the European Union imposed the most aggressive sanctions to date on Russian business and said more may follow, acting after threats to squeeze the $2 trillion economy over the conflict in Ukraine.

Russia’s ruble and bonds plunged and stocks fell to a more than six-week low after the Obama administration unveiled the plan and Ukraine said a fighter jet was shot down by the Russians yesterday. Targeted companies include OAO Rosneft (ROSN), Russia’s largest oil company, natural gas producer OAO Novatek (NVTK), OAO Gazprombank, the country’s third-largest lender, and eight defense firms. EU leaders agreed to blacklist companies and halt lending to public-sector projects in Russia.

“These sanctions are significant,” U.S. President Barack Obama said yesterday at the White House. “But they are also targeted, designed to have maximum impact on Russia while limiting any spillover effects on American companies or those who are allies.”

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Russian President Vladimir Putin denounced the action as a reflection of an “aggressive” U.S. foreign policy. At a news conference in Brazil yesterday, he warned they are liable to “boomerang” and hurt U.S. business interests. Russia won’t tolerate “blackmail” and reserves the right to respond, the Foreign Ministry said in a statement on its website today, adding it was disappointed the EU “gave in” to the pressure.

Russians’ Attention

“These sanctions get the Russians’ attention,” Steven Pifer, a former U.S. ambassador to Ukraine and senior fellow at the Brookings Institution’s Center for 21st Century Security and Intelligence in Washington, said in an interview. The U.S. is “trying to do this in a graduated way.”

Five Ukrainian servicemen were killed and 11 were wounded in skirmishes with separatists in eastern Ukraine during the past 24 hours, Defense Ministry spokesman Andriy Lysenko told reporters in Kiev today. He said a Russian plane shot down a Ukrainian fighter jet over Ukrainian territory yesterday and another plane was hit in a separate attack.

Waging Financial War

While Obama sought to assure U.S. companies that the impact on them would be limited, penalties announced by the Treasury Department are more aggressive than Europe’s.

The sanctions also crippled the access of Russian companies to the U.S. equity or debt markets for new financing with a maturity beyond 90 days, raising borrowing costs and effectively cutting off medium- and long-term U.S. financing. The measures don’t otherwise prohibit U.S. companies or individuals from doing business with the Russian firms.

Further Sanctions

“At face value this is the first major step of third-stage sanctions, and is just a taste of what can essentially come next,” Simon Quijano-Evans, head of emerging-market research at Commerzbank AG in London, said in an e-mailed note. “However, it now seems quite clear that unless the situation in eastern Ukraine de-escalates within the next few days, we are likely to see further sanctions imposed.”

The U.S. and the EU acted after travel bans and asset freezes aimed at Putin’s inner circle failed to force Russia to meet an ultimatum to end support for separatists in Ukraine’s east. Putin has denied fomenting the rebellion even as Russian troops have begun massing anew on Ukraine’s border recently.

EU Squabbles

The U.S. has been urging the EU to grapple more forcefully with Putin over Ukraine despite its reliance on Russia for about 30 percent of its gas imports. In a sign of the divisions in the 28-nation bloc, EU leaders last night squabbled over the appointment of their next foreign policy chief. Lithuanian President Dalia Grybauskaite rejected an Italian candidate to replace Catherine Ashton as “pro-Kremlin” and western and southern countries opposed a Polish contender as too abrasive toward Moscow.

The EU said it would halt lending for new public-sector projects in Russia by the European Investment Bank, the bloc’s in-house lender, and will use its influence to stop new lending by the European Bank for Reconstruction and Development.

EU leaders also agreed to consider sanctions on “individuals or entities who actively provide material or financial support to the Russian decision-makers responsible for the annexation of Crimea or the destabilization of eastern Ukraine.” The EU didn’t identify individuals or companies at the summit and set a deadline of the end of this month for coming up with a list.

Destabilize System

Andrey Kostin, the chief executive officer of Russia’s second-biggest lender VTB Group, said the latest sanctions threaten to destabilize the Russian financial system.

These types of sanctions “can lead, unfortunately, in essence to the disintegration of the financial system,” he told state-run Rossiya 24 television. The sanctions against financial institutions such as Gazprombank and VEB “affect the interests of hundreds of thousands, millions of people and corporate clients. Undoubtedly the consequences could be negative for the Russian economy.”

German Chancellor Angela Merkel, who has been pushing other European leaders for tough action, said Putin’s government hasn’t met the conditions set out by the bloc last month.

“We are all disappointed that we have to take such substantive measures on Russia,” said Merkel, who conferred with Obama on July 15. “Much too little has happened.”

Raising Price

The U.S. and EU are seeking to raise the price for Russia’s actions as the Russian economy just skirted a recession last quarter. The Micex Index (INVCMCX) entered a bear market on March 13 after Putin moved to annex Crimea and before a referendum in which people in the Black Sea peninsula voted to break away from Ukraine. The Finance Ministry warned last week that growth will slow to a crawl if stiffer sanctions are imposed.

The U.S. action also blocks the assets of eight state-owned defense firms, including Kalashnikov Concern, which manufactures its namesake assault rifle. They also targeted four Russian officials, including a top aide to Putin and a commander in the security service.

Even with the threat of additional sanctions, Russia hasn’t backed down in Ukraine, where Prime Minister Arseniy Yatsenyuk urged its neighbor in a TV broadcast today to “immediately” stop arming the separatists.

U.S. Army Colonel Steve Warren, a Pentagon spokesman, said the Russian troop presence on the Ukraine border is “intimidating.”

“It’s been building steadily over the last several weeks,” he said. The Russian military “certainly has the capability to conduct operations on either side of the border.”

To contact the reporters on this story: Margaret Talev in Washington at mtalev@bloomberg.net; Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net; Ian Wishart in Brussels at iwishart@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Andrea Dudik, Andrew Langley


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