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Forcing Russia Out of Markets Seen as Ukraine Leverage

By Kasia Klimasinska
April 17, 2014 12:00 AM EDT 176 Comments
A Ukrainian Army helicopter flies over a column of Ukrainian Army combat vehicles on the way to the town of Kramatorsk on April 16, 2014.
Photographer: Evgeniy Maloletka/AP Photo
A Ukrainian Army helicopter flies over a column of Ukrainian Army combat vehicles on the way to the town of Kramatorsk on April 16, 2014.

Forcing Russia out of global financial markets is the strongest tool at U.S. President Barack Obama’s disposal if he wants to stop Vladimir Putin’s territorial ambitions, according to former government officials and sanctions specialists.

Secretary of State John Kerry is meeting with Russian, Ukrainian and European Union officials in Geneva today to discuss the situation in eastern Ukraine.

An administration official warned yesterday that if the talks fail, the U.S. is ready to take further steps, targeting people in the Russian president’s inner circle and entities they oversee. Industry-specific sanctions are also an option, according to the official, who spoke about private talks on condition of anonymity. Experts say these may produce more significant results.

“The biggest weapon in terms of sanctions would be similar sanctions to what we did in Iran and basically try to exclude Russia from international financial markets,” said William Pomeranz, deputy director of the Kennan Institute for Advanced Russian Studies of the Woodrow Wilson Center in Washington. “The Russians fear that, and that is what the Russians want to avoid.”

Obama avoided specifics in an interview yesterday with CBS News while vowing new punishment if Putin doesn’t halt support for Ukraine’s separatist militias and pull back troops from the border.

“Putin’s decisions are not just bad for Ukraine, over the long term they’re going to be bad for Russia,” Obama said.

Treasury’s Powers

The U.S. Treasury Department has powers to freeze Russia’s access to bank loans, credit cards, clearing and settlements of transactions. That would basically force Russia out of the global markets, said Robert Kahn, a senior fellow for international economics at the Council on Foreign Relations in Washington.

Treasury could develop a list of specific transactions that it is prepared to block, communicate that to the Russians, and then follow up with specific guidance, said Kahn, a former official at the International Monetary Fund, Treasury and Federal Reserve.

So far, the Treasury has designated two companies -- OAO Bank Rossiya and Crimean natural gas company Chernomorneftegaz - - and a group comprised mostly of Crimean separatist leaders and oligarchs connected to Putin, such as Gennady Timchenko, who partly owns natural-gas producer OAO Novatek.

Targeting Banks

Going after a single bank has a larger “ripple effect” than blocking an individual or a company in any other industry, said Douglas N. Jacobson, a sanctions lawyer at Jacobson Burton PLLC in Washington.

“It does have a secondary effect,” Jacobson said, “because the large European banks and the large Japanese and the other, more Western banks, will be much more reluctant to engage” with banks that would be blocked by the U.S.

The reach of sanctions used so far on the financial industry was demonstrated when the U.S. designated Bank Rossiya, leading Visa Inc. and MasterCard Inc. to cut services for the St. Petersburg-based lender.

The U.S. Treasury has used financial-industry sanctions extensively with Iran. It worked together with European counterparts to exclude the regime from banking services and to ensure lenders observe the sanctions.

Penalties Paid

ING Groep NV in June 2012 agreed to pay $619 million to settle U.S. charges it falsified financial records to bypass sanctions on countries including Cuba and Iran. HSBC Holdings Plc in December 2012 agreed to pay $1.92 billion to settle U.S. probes of laundering funds of sanctioned nations.

Under the threat of significant fines for violating sanctions, JPMorgan Chase & Co. temporarily suspended a payment of less than $5,000 to a Russian firm that isn’t even on the blacklist. It let the payment go through earlier this month, following consultation with the U.S. regulators.

“Because such financial sanctions rely on the judgment of banks, which are easily scared into doing even fewer financial transactions that they were permitted to do, those sanctions can easily become even more serious than originally intended,” said former Central Intelligence Agency official Paul Pillar. “That’s exactly what we’ve seen happening in Iran.”

In the case of Iran, allies in Europe joined the sanctions. Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington, said that in Russia’s case, cooperation with other global players isn’t as necessary.

“The U.S. has massive impact in the world of finance since the world is so interconnected,” he said. “Do sanctions on the four big Russian state banks and that will have a big negative impact and continue to sanction Putin’s cronies.”

To contact the reporter on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Brendan Murray, Steven Komarow

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