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News Analysis: New Russia Sanctions Seen As Burning Slowly

  • Carl Schreck

The announcement of new sanctions against Russia sparked a further downturn for the ruble, which has lost 13 percent of its value against the dollar this year.

The announcement of new sanctions against Russia sparked a further downturn for the ruble, which has lost 13 percent of its value against the dollar this year.

A fresh round of U.S. and European Union sanctions will not inflict immediate economic shock in Russia but could undermine the country's fiscal stability in the long term if the measures are not rolled back, economists and industry experts say.

The sanctions aimed at punishing the Kremlin for its role in the Ukraine crisis restrict access to Western capital and technology for major companies in Russia's financial, energy, and defense sectors.

They will likely accelerate capital outflow from Russia and could lead to recession as borrowing costs for top banks increase and investment in the Russian economy decreases, economist Sergei Guriyev says.

"It's not going to be catastrophic in the near future, but in the longer run it's very bad news," says Guriyev, who fled Russia last year amid fears that he could face politically motivated prosecution.

The measures announced by the U.S. Treasury Department on September 12 tighten debt financing restrictions for sanctioned Russian state-owned banks from 90 days to 30 days, and also added Russia's largest financial institution, Sberbank, to the list of entities subject to the restriction.

"Sberbank is a very sound and healthy financial institution and, as well as other banks, they will suffer in terms of stock prices and probably costs of borrowing, which will go up even if these banks go to other markets where sanctions are not imposed," says Guriyev, a former member of Sberbank's supervisory board.

Both the U.S. and EU sanctions announced on September 12 ban the export of certain services and technology to top Russian energy companies.

This measure poses a threat to the broader Russian economy because it indicates U.S. and European officials are prepared to carry out coordinated actions targeting Russia's crucial energy sector, Guriyev said.

"Over the course of two or three years, [this] will decrease oil production in Russia and therefore undermine the Russian government's ability to deliver on the promises that [President Vladimir] Putin made in 2012 in terms of raising pensions, salaries and so on," he said.

Oil And Guns

Oil production in Russia could gradually decline beginning next year without access to the Western technology, goods, and services outlined in both the U.S. and EU sanctions, said Mikhail Korchemkin, head of the Pennsylvania-based East European Gas Analysis.

These restriction specifically target Russian companies' ability to conduct oil exploration and production in deep-water, Arctic offshore and shale projects.

"Russia can drill very well in conventional reserves of West Siberia and in European Russia. But in more sophisticated areas like in the Arctic shelf or any offshore fields, it is impossible for Russian companies to work alone," Korchemkin says.

ExxonMobil last month began joint drilling in the Arctic Sea together with Rosneft. A company spokesman said in a statement that it was assessing the sanctions.

The United States and the EU also imposed financial and technology restrictions targeting Russian defense firms.

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The EU restrictions could spell trouble down the road for the Russian defense industry, which relies on imports of sophisticated technology from European producers for its armaments, says Simon Saradzhyan, a Russia expert with Harvard University's Belfer Center.

"If these sanctions hold, then as Russia's existing toolbox ages, they'll have to replace it. And there's nowhere it can turn to to do so, because China doesn't have the technologies. There's only the West," Saradzhyan says.

The technology restrictions will not have an immediate impact, and in the long term, Russia will likely be able to cope by using reverse engineering and developing technologies themselves, Saradzhyan adds. But this will cost time and money.

"These costs will be transferred to the buyers. So they'll have more expensive and, at least initially, less quality products coming from the defense industry," he says.

A senior Obama administration official told reporters in a conference call that the measures would have a "profound effect" and would hinder Russia's ability to resupply weapons in the Ukraine crisis.

A shaky cease-fire is in place between pro-Russian separatists and Ukrainian forces after months of fighting that has left thousands of people dead.

David S. Cohen, the U.S. undersecretary for terrorism and financial intelligence, said in a September 12 statement that the United States, together with the EU, "will impose ever-increasing sanctions that further Russia's isolation from the global financial system unless Russia abandons its current path and genuinely works toward a negotiated diplomatic resolution to the crisis."

The costs of the fresh sanctions were not immediately apparent on targeted Russian companies listed on the country's main stock exchange, the Micex. Gazprom, GazpromNeft, and Rosneft all posted gains of under 2 percent, while Sberbank stock rose 0.5 percent.

The ruble, however, fell 0.4 percent versus the dollar, bringing its slide to 13 percent this year.

Luke Johnson in Washington contributed to this report