U.S. Plays Down Russian Industry Sanctions Over Retaliation Risk

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Officials in the U.S. and European Union are playing down the prospect of punishing Russia with sanctions targeting entire industries, opting instead to focus on tightening pressure by targeting more individuals and companies.

Policy makers say they are concerned that broad-brush sanctions on Russia’s energy and financial sectors, the two areas mentioned as possible targets, risk provoking economically costly retaliation by Russia.

“The Europeans don’t want to have a clear, transparent move to sectoral sanctions,” said Robert Kahn, a senior fellow for international economics at the Council on Foreign Relations in Washington. “What we might see therefore is sort of creeping into sectoral sanctions through the naming of the specific firms, so it wouldn’t be necessarily the whole sector or all transactions, but it would be partial.”

OAO Gazprom (OGZD), Russia’s gas-export monopoly, yesterday threatened to cut off supplies to Ukraine, a reminder of the power Russia wields over energy supplies to the rest of Europe. A gas cutoff by Russia would wipe out half of Ukraine’s supply and could severely disrupt supplies to the EU. The EU, Turkey, Norway, Switzerland and the Balkan countries got 30 percent of the natural gas they burned from Russia last year, according to the U.S. Energy Department.

“We have to be very careful not to hurt ourselves more than we hurt the other side,” Polish Foreign Minister Radoslaw Sikorski said yesterday in a speech in Brussels, echoing comments made last week by U.S. Treasury Secretary Jacob J. Lew.

French Warships

In a sign of Russia’s ability to use its economic clout to drive a wedge between its adversaries, France’s government said this week it will deliver Mistral helicopter carrier warships to Russia as planned, rejecting requests from its European and U.S. allies to cancel the sale.

Sectoral sanctions aren’t totally off the table: EU foreign ministers, meeting in Brussels, pledged to accelerate preparations for broad economic penalties should Russia disrupt the Ukrainian presidential election due May 25.

Meanwhile, the EU yesterday for the first time used penalties against companies, including natural gas producer Chernomorneftegaz, that were expropriated after Russia annexed Crimea. It also added 13 people to a list of individuals facing asset freezes and travel bans, including Vyacheslav Volodin, first deputy chief of the Russian presidential staff, and Vladimir Shamanov, commander of Russia’s airborne troops.

Russian stocks advanced yesterday on bets the latest penalties won’t hurt the economy. The Micex Index gained 0.3 percent to 1,375.31. while the ruble strengthened 0.4 percent to 35.1005 per dollar. Ukraine’s hryvnia fell 1.1 percent, extending this year’s slide to 30 percent.

Disputed Referendums

Tensions escalated after rebels in eastern Ukraine said they’re seeking to join Russia after disputed referendums and as the government in Kiev was handed a deadline to pay for Russian gas.

The self-styled Donetsk People’s Republic declared itself a sovereign state after saying 90 percent of voters backed breaking away from Ukraine. Separatists in neighboring Luhansk announced a similar move. Gazprom said Ukraine must pay for next month’s supplies by June 2 or face a shutoff the next day.

Russia continued to voice support for the separatists, saying the referendums “convincingly show the real sentiment of citizens in the Donetsk and Luhansk regions.”

The U.S., which is leading the global effort to force Russian President Vladimir Putin to change his actions, has blocked 45 individuals, including OAO Rosneft Chief Executive Officer Igor Sechin, a Putin associate, and 19 entities, including SMP Bank and Bank Rossiya. Rosneft is Russia’s largest oil producer.

Avoiding Retaliation

In an interview last week on Bloomberg Television’s “Political Capital With Al Hunt,” Lew stressed the need to avoid retaliation by Russia that could hurt the U.S. and Europe, even as he reiterated he has the authority to impose sectoral sanctions.

The administration of President Barack Obama has “made very clear that our goal is not to go to the maximum degree that one can to hurt the Russian economy. It’s to get President Putin to change Russia’s policy,” Lew said.

“We have been moving step by step and in a very surgical way,” he said. “The goal here is not to hurt the European economy, the American economy. It’s not to hurt the Russian people.”

Sanction Supporters

Supporters of stronger actions, such as Senators Robert Menendez, a Democrat from New Jersey, and Robert Corker, a Republican from Tennessee, favor freezing assets of Gazprom and major banks such as Russia’s largest lenders OAO Sberbank and VTB Group.

Some companies are urging caution. USA*Engage, a coalition of U.S. businesses, agriculture groups and trade associations, says the U.S. shouldn’t impose sectoral sanctions on its own.

“If sanctions are going to have any chance of achieving their intended goal, the experience has shown, they have to be multilateral,” Richard Sawaya, the Washington-based group’s director, said in an interview yesterday.

U.S. financial institutions, including Bank of America Corp. and Citigroup Inc., are already cutting exposure to Russia, while the investment unit of VTB is considering getting rid of most of its New York staff if the U.S. imposes further sanctions.

The U.S. must maintain pressure on its European allies to toughen sanctions, said Mark Dubowitz, executive director of the Washington-based Foundation for Defense of Democracies, a non-profit group that focuses on national security issues.

“There is no substitute for U.S. leadership for, without it, Europe will continue to dither,” he said. “Washington needs to continue to create a U.S. secondary sanctions architecture that increases the risk premium for international companies in their dealings with Russia. This will also force the EU to develop its own made-in-Europe sanctions that will be more timely and forceful than they would otherwise be.”

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