Sunday, October 26, 2014


Russia

Explainer: How Much Of An Escalation Is Latest Round Of U.S. Sanctions?

Washington has widened the sanctions to include two major Russian banks, Vneshekonombank (above) and Gazprombank, as well as the state-run oil giant Rosneft and the country's second-largest gas producer, Novatek.
Washington has widened the sanctions to include two major Russian banks, Vneshekonombank (above) and Gazprombank, as well as the state-run oil giant Rosneft and the country's second-largest gas producer, Novatek.
By Tom Balmforth

MOSCOW -- The United States has unveiled a major, third wave of sanctions on Russia and the European Union announced that it would also strengthen its sanctions against Moscow. What effect will the new round of sanctions have?

How does the latest round of U.S. sanctions differ from previous rounds? Does this mark a serious escalation?

This is the third round of sanctions imposed on Russia -- and each round has escalated slightly from the previous one.

These sanctions are significant in that, while stopping short of Level-3 sanctions that cover entire sectors of the economy, as is the case with Iran, they target two key energy companies, two major banks, and eight arms firms.

In the first round of sanctions, announced in March, the United States and the European Union imposed travel bans and asset freezes on specific Russian individuals.

The United States followed up on April 28 with a second round that widened the net to include powerful individuals in Putin's inner circle and also placed sanctions on 17 holdings linked to them. Brussels also widened its list of sanctioned individuals at that time, but its list was not as extensive as Washington's.

This time, Washington has widened the sanctions to include two major Russian banks, Vneshekonombank and Gazprombank, as well as the state-run oil giant Rosneft and the country's second-largest gas producer, Novatek. Also sanctioned are eight armaments firms, including Kalashnikov, which manufactures that famous assault rifle. 

The United States also sanctioned Ukraine's two self-proclaimed separatist entities, the Luhansk and Donetsk "people's republics," blocking their assets and prohibiting U.S. citizens from doing business with them. The entities also face asset freezes where applicable.

Finally, the United States expanded its list of sanctioned individuals by five Russian citizens, including Donetsk separatist leader Aleksandr Borodai and Sergei Beseda, a top Federal Security Service (FSB) official. 

What are the practical implications for Russian companies and for the Russian economy as a whole?

Analysts say they will not have big implications for the companies, but have indirect implications for the Russian economy.

President Barack Obama described the sanctions as "significant, but targeted." Analysts say they will have indirect implications for the Russian economy.

The banks and energy companies are restricted in their access to U.S. capital markets, limiting them from longer-term borrowing from U.S. sources. They are not, however, prohibited from doing business with U.S. companies. This is particularly significant in the case of Rosneft, which is involved in a joint venture with U.S. oil giant Exxon-Mobil.

Rather than taking a wrecking ball to sectors of Russia's economy, the sanctions aim to send a strong warning to the Kremlin by targeting major Russian companies, analysts say.

"It is a further turn of the screws within the framework of the existing sanctions regime," says Chris Weafer, a founding partner of Macro Advisory, a Moscow consulting firm. "It is designed to generate headlines and increase the pressure on Moscow -- and it has done that. I think we are now moving closer and closer to a critical point where either the situation will start to be resolved, or will start to get worse. We're probably a few weeks away from that."

Neither Novatek nor Rosneft -- both increasingly looking to Asia -- are dependent on U.S. capital markets and are therefore not heavily exposed. But the inclusion of prominent companies on the list sends a message to Western investors, who will be jittery and less inclined to gamble on investments in Russia.

The sanctions, analysts say, will have more of an indirect impact on the Russian economy.

Russian stocks on July 17 fell to their lowest level in six weeks and the ruble weakened, putting inflationary pressure on the economy. A weakening ruble also erodes Russian savings and fuels capital flight.

Russian economic growth is near zero and the economy is in recession, according to the International Monetary Fund. Moreover, capital flight has increased dramatically since the Ukraine crisis began. And investors will likely remain nervous as long as the threat of further sanctions remains. Investors' jitters also can endure as long as the potential threat of sanctions looks credible. Weafer says indirect pressure on the Russian economy is the goal of the sanctions.

And if it so chooses, the United States still has the option to escalate to Level-3 sector sanctions in the future.

Why now? What are the EU and United States trying to achieve?

The United States has been threatening for weeks to widen its sanctions if Moscow did not take steps to de-escalate the crisis in eastern Ukraine.

Speaking on July 16 as he announced the new sanctions, U.S. President Barack Obama specifically said Russia "must halt the flow of weapons and fighters across the border into Ukraine."

How are the U.S. and EU sanctions different? Are Washington and Brussels working in tandem or are their tactics toward Russia diverging?

The EU and United States have collaborated closely over sanctions throughout the Ukraine crisis. But while Washington published its sanctions list on July 16, Brussels said only that it had agreed to beef up its sanctions -- and that it would announce a list of entities and individuals by the end of the month.

The European Union did, however, say that its investment and development funds are suspending projects in Russia.

The 28-member EU has shown less resolve than Washington in imposing punitive measures on Russia, largely because of starkly differing interests and security concerns.

Germany, for example, relies on Moscow for approximately 40 percent of its natural gas, slightly more than a third of its oil, and has considerable business interests in Russia. Great Britain is likewise concerned about an exodus of Russian capital from financial markets in the City of London.

When in April Washington targeted key members of Putin's inner circle, Brussels imposed travel bans only on figures directly implicated in backing separatism in Ukraine or annexing Crimea.

The EU's next sanctions list will be announced in two weeks and analysts say the staggering helps maintain pressure on Moscow.

Weafer describes the process as a game of "good cop/bad cop."

What has been Russia's reaction so far?

The Russian Foreign Ministry called the U.S. sanctions "a primitive attempt at revenge because the events in Ukraine have not unfolded as Washington wanted"  and accused the EU of caving in to "blackmail" from the United States.

Putin slammed the sanctions as counterproductive.

"As a rule [sanctions] have a boomerang effect and without any doubt they will push U.S.-Russian relations into a dead end, will cause very serious damage, and I am sure that this also damages national long-term strategic interests of the U.S. government and the American people," he said.

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