You're reading: US prods EU to take tougher line against Russia

America broke ranks with the European Union on July 16 and announced heightened, unilateral sanctions against Russia over its support of separatists in eastern Ukraine, targeting some companies in the country’s energy, financial and defense industries. But the new measures fell short of the long-threatened sanctions that would target these three key sectors of the Russian economy in a comprehensive way. 

Specifically, the new sanctions hit two major energy firms, including the giant Rosneft. They also named eight weapons firms, including Kalashnikov, two powerful financial institutions and five more individuals, including the head of the self-proclaimed Donetsk People’s Republic, a Russian citizen.

The moves are expected to hurt Russia’s $1.8 trillion economy, but no analysts could be found who predicted that the new steps alone would be enough to get Russian President Vladimir Putin to back off his war against Ukraine.

The moves by the U.S. did, however, put pressure on the European Union to introduce a fresh round of sanctions of its own and exposed a rift between America and the 28-member bloc over how strongly to punish Russia for annexing Crimea and instigating violence in the east. EU leaders said on July 16 that their sanctions would come later this month, but many expect the Europeans to go softer on the Kremlin.

Ukrainian reaction

Speaking with the Kyiv Post on July 17, a Ukrainian presidential administration official expressed his mixed feelings about the sanctions: “Something is better than nothing.” Moreover, the official added, Kyiv is not likely to receive more help from the West this summer, leaving Ukraine in the lurch.

“Tomorrow will begin U.S. and EU vacations for summer, so Ukraine will face Russia alone,” the official said. The next summit of EU leaders is expected on Aug. 30.

Prime Minister Arseniy Yatseniuk was a bit more optimistic. “It’s time to pay for violation of international law, for military aggression, constant supply of weapons by Russia to Ukraine’s territory, financing of bandits that kill the peaceful population and try to destroy Ukraine. And Russia will pay for the war it started against Ukraine,” Yatseniuk said.

Russian reaction

The new sanctions irked Russian officials, who denounced them as the country’s stock market dipped slightly. On July 17, Putin predicted that sanctions would have a “boomerang effect” on the U.S.

“Without any doubt, they will push U.S.-Russian relations to a dead end and cause very serious damage,” Putin said.

Russian Prime Minister Dmitri Medvedev, at a government meeting on July 17, said that “all these sanctions, alas, will not help Ukraine in any way.”

Rosneft chief Igor Sechin called the sanctions “baseless, subjective and illegal.”

Russia’s Ministry of Foreign Affairs called them “a primitive attempt to retaliate because events in Ukraine unroll not according to the Washington scenario. “We have no intention to tolerate blackmail, we reserve the right for retaliatory measures,” according to a statement.

Military industry targeted

Washington’s stepped-up sanctions deliberately target Russia’s military-industrial complex, with the implicit aim of constraining its ability to further destabilize eastern Ukraine. They include freezing the U.S.-based assets of eight Russian state-owned defense companies and forbid American individuals or firms from conducting business with them.

Among them are Kalashnikov Concern, which makes the famous Kalashnikov assault rifles, and Bazalt, a Moscow-based arms producer and manufacturer of the rocket-propelled grenade launchers that separatists have used on several occasions against Ukrainian army aircraft.

Also included on the list are Uralvagonzavod, the world’s largest battle tank manufacturer, and Sozvezdie, Russia’s leading developer of electronic warfare and radio communications systems.

Lack of a parallel arms embargo by the EU paves the way for France to complete its planned sale of two Mistral-class helicopter carriers to Russia worth $1.6 billion. The country remains defiant in pursuing its deal with Russia, receiving a contingent of Russian troops last month for training on the warships.

Latvia and Iceland have called for France to abandon the deal in light of latest reports of Russian involvement in Ukraine and stressed its incompatibility with the newly-introduced sanctions regime.

Lithuanian President Dalia Grybauskaite said on arrival at the July 16 summit that the EU was “still far away” from an arms or technology embargo, Reuters reported.

Expanded sanctions against Russia come amid growing evidence of its direct military involvement in the armed conflict, with videos appearing to show rockets being fired into Ukraine from Russian territory surfacing on the day of the U.S. announcement.

The U.S. Defense Department furthermore claims thousands of Russian troops have massed along the Russo-Ukrainian border, a charge Moscow denies.

“We believe there are now between 10,000 and 12,000 Russian troops on the border… I can’t speak for what they intend to do. Certainly, it is intimidating,” Pentagon spokesman Army Col. Steve Warren said on July 16.

Russian businesses hit

In addition to 10 companies whose American assets it blocked and blacklisted for doing business with in March and April, 12 Russian companies were penalized in the energy, defense, finance and transport sectors.

Rosneft, Russia’s largest oil and gas company, and two privately-held energy firms were banned from new borrowings in the U.S. beyond a 90-day period. Identical sanctions apply to state development bank Vneshecombank, and Gazprombank, the country’s third largest bank.

That will raise borrowing costs and effectively cut off medium- and long-term U.S. financing, according to Bloomberg. They don’t otherwise prohibit U.S. companies or individuals from doing business with these Russian firms, however.

“This represents a seismic hit to Russia, and to Russian markets,” wrote Timothy Ash, senior analyst of emerging markets for Standard Bank in London. “The fact that such prominent companies as VEB, Gazprombank, Novatek and Rosneft are being sanctioned suggests that the U.S. administration is deadly serious about sending a clear message to Moscow not to mess with Ukraine and to stop intervening directly in Ukraine.”

Meanwhile, the European Investment Bank and European Bank for Reconstruction and Development were asked to suspend any new financing projects in Russia, following a July 16 summit of EU leaders in Brussels.

EU leaders also agreed to go after Russian companies and oligarchs deemed to be helping the Kremlin wage its covert war on Ukraine, reported the EU Observer. Their “first list” of entities will be prepared “by the end of July,” added the online newspaper.

News of the sanctions sent Rosneft’s stock price down by 3.2 percent, while Micex, Russia’s largest trading platform retreated 2.9 percent, the fourth straight day of declines. The ruble also weakened 1.5 percent versus the U.S. dollar, its biggest drop in four months. 

An EU diplomat told the EU Observer that the European Commission will furthermore suspend the vast majority of grants for Russia earmarked for 2014-2020.

Although the latest EU sanctions are expected to be lighter and not target whole sectors or industries of the Russian economy, Ash said “it does not really matter what the EU itself does, but the fact that these Russian companies are being sanctioned by the U.S. will force European companies with business interests in the U.S. to comply – every Western business is ultimately forced to comply with the Securities and Exchange Commission, Office of Foreign Assets Control and U.S. Treasury.”

But no change in Russian behavior is expected immediately.

“The impact might prove more potent going forward, especially as the U.S. signaled by its latest move it is prepared to ratchet up the pressure on Russia and continue with ‘sectoral’ restrictions,” said a Dragon Capital note to investors.