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Fragile Europe Weakens U.S. Push for Russia Sanctions

By Sangwon Yoon
April 14, 2014 7:29 PM EDT 487 Comments
Russian soldiers stand guard outside the Ukrainian regional administration building in the eastern Ukrainian town of Slovyansk, on April 14.
Photographer: Ilia Pitalev Kommersant Photo via Getty Images
Russian soldiers stand guard outside the Ukrainian regional administration building in the eastern Ukrainian town of Slovyansk, on April 14.

The U.S. readiness to impose new economic sanctions on Russia over Ukraine is offset by the European Union’s reluctance to introduce stronger measures that could threaten its already fragile economic recovery.

While the Obama administration said yesterday that it’s prepared to ramp up sanctions, possibly to target specific sectors of the Russian economy such as financial services and energy, the EU limited its decision to expanding an existing list of individuals under asset freezes and travel bans.

U.S. officials concede that squeezing Russia’s economy is the only realistic weapon the U.S. and its European allies have to respond to the clashes between pro-Russian separatists and Ukrainian authorities. Without European support, though, U.S. sanctions will have little effect on Russian President Vladimir Putin’s ambitions in Ukraine, said Simon Mandel, vice president for emerging Europe equity sales at Auerbach Grayson & Co.

Full coverage of the Crisis in Ukraine:

“The level of trade between the U.S. and Russia directly is quite limited,” Mandel said in a phone interview. “Whatever sanctions the U.S. comes out with, unless the Chinese government or the EU are willing to support them, they will still have a minimal impact on the Russian government.”

“It will have a meaningful impact in terms of the perception, and that will, I think, come as a detriment to the market generally,” said Mandel, who’s based in New York. “But in some of the fundamental impact, I think that would be quite limited.”

EU Meeting

EU foreign ministers agreed yesterday in Luxembourg to add new names to a list of people facing sanctions following Putin’s annexation of Crimea last month.

A wider EU blacklist may hit “other entities” deemed to be involved in destabilizing Ukraine in addition to individuals, Irish Deputy Prime Minister Eamon Gilmore said. EU leaders may meet next week to decide on new sanctions against Russia, according to French Foreign Minister Laurent Fabius.

A Snapshot of Ukraine's Past and Future

The U.S. is weighing further measures under executive orders signed by U.S. President Barack Obama to “allow for all kinds of different sanctions,” White House Press Secretary Jay Carney told reporters in Washington yesterday before a call between the American and Russian presidents.

Energy, Mining

The administration is considering measures targeting individuals, as well as “certain sectors of the Russian economy such as financial services, energy, metals and mining, engineering and defense,” U.S. State Department spokeswoman Jen Psaki said yesterday.

Any meaningful sanctions by the U.S. “over the long-term would be lining up the European allies at a very fragile time for some very significant economic risk of their own,” said Sean Kay, a professor of international relations at Ohio Wesleyan University who specializes in Europe.

“They have signaled strongly that they don’t want to have to go down a further road of sanctions, but if Russia were to take overt actions in eastern Ukraine, they’d be prepared to do that,” Kay said in a phone interview.

Russia is vulnerable to economic pressure, data compiled by Bloomberg indicate. More than half the revenue of the 50 firms that make up the benchmark Micex stock index comes from outside Russia -- almost 56 percent, compared with slightly less than half five years ago.

Lukoil’s Revenue

Energy giant OAO Lukoil (LKOH), the No. 4 company on the Micex top 50 list, gets more than 81 percent of its revenue from foreign sources. The Moscow-based company produces more than 16 percent of Russia’s oil, almost 17 percent of its oil refining and paid the Russian government $39.3 billion in taxes in 2012.

Even so, investors have deposited $721 million in Russia-focused exchange-traded funds since early March, according to data compiled by Bloomberg.

Still, doubts now may be taking root amid the continuing unrest and the threat of additional sanctions: The ruble declined to a three-week low yesterday, the Micex retreated 1.3 percent and Brent crude oil advanced to a five-week high.

The EU already has blacklisted 51 Russian and Ukrainian political and military figures. Its challenge now is how to inflict stiffer punishments without harming Europe’s economy, such as by provoking Russia to cut off gas and oil deliveries.

U.K. Prime Minister David Cameron discussed Ukraine yesterday with German Chancellor Angela Merkel, and the two agreed that the EU foreign ministers should discuss “how work on potential further sanctions can be accelerated,” Cameron’s spokesman, Jean-Christophe Gray, told reporters in London.

EU Divided

While the German government has been coordinating the next phase of sanctions behind the scenes, there’s growing dissent among EU governments about the nature of additional sanctions and when they should be imposed, said a high-ranking German official who asked not to be named, citing government policy.

Lithuanian Foreign Minister Linas Linkevicius urged striking at Russia’s banking and financial system, tactics the U.S. and EU have used to isolate Iran over its suspected nuclear weapons program. In the Ukraine crisis, the U.S. already has sanctioned St. Petersburg-based Bank Rossiya, owned by close associates of Putin.

Linkevicius voiced frustration with the consensus-based decision-making that forces the 28-nation EU to move at the pace of its slowest member. “We shouldn’t focus too much on washing dishes when the house is on fire,” he said.

Countries farther from the EU’s eastern borders are in less of a hurry than those such as Lithuania and Poland that were under Soviet domination for five decades. Greek Finance Minister Evangelos Venizelos called for diplomacy, and Luxembourg Foreign Minister Jean Asselborn said Russia has sanctioned itself, citing the ruble’s drop and jitters among foreign investors.

“The serious risk for Russia in that is that the oligarchs will feel pain, its economy would feel pain and crucially they would lose the vital gas sales they need to sustain their economy and financing of their debt,” said Kay, the Ohio Wesleyan professor.

Camouflaged Gunmen

“There are a lot of incentives to see this de-escalate, but the danger is that there could be an inadvertent escalation of danger or crisis that causes miscalculations,” Kay said.

“The best thing that can be done right now is some significant diplomatic engagements that would try to find off-ramps, that would both reassure Ukraine about its sovereignty and also find innovative ways or creative ways to make sure that the Russians in eastern Ukraine are also satisfied with the existing state of affairs,” Kay said.

EU foreign-policy chief Catherine Ashton said after the meeting in Luxembourg yesterday that she’ll attend an April 17 meeting in Geneva with diplomats from Ukraine, Russia and the U.S to seek a diplomatic solution to the crisis.

Ashton said the point of the Geneva meeting -- shadowed by speculation that Russian Foreign Minister Sergei Lavrov may not appear -- is “to begin the conversation about how do we de-escalate the situation.”

To contact the reporter on this story: Sangwon Yoon in Washington at syoon32@bloomberg.net

To contact the editors responsible for this story: John Walcott at jwalcott9@bloomberg.net Larry Liebert

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