Sound The Trumpet : EU Joins U.S. in Escalating Pressure on Russian Economy

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“EU Joins U.S. in Escalating Pressure on Russian Economy”
by Bloomberg
July 30th, 2014

July 29 (Bloomberg) -- President Barack Obama speaks about the new sanctions against Russia. (Source: Bloomberg)

The U.S. and European Union sought to put more pressure on Russia’s stumbling economy by targeting banking, energy and defense industries for sanctions in another attempt to get President Vladimir Putin to back down in Ukraine.

EU governments agreed yesterday on their most sweeping sanctions against Russia to date, barring state-owned banks from selling shares or bonds in Europe, restricting the export of equipment to modernize the oil industry and barring export of equipment with military uses.

That was followed hours later by U.S. penalties against three Russian banks and a state-owned shipbuilder, adding to sanctions announced two weeks ago.

The confrontation with Russia is “not a new Cold War,” U.S. President Barack Obama said at the White House. “What it is, is a very specific issue related to Russia’s unwillingness to recognize that Ukraine can chart its own path.”

The EU sanctions now align the 28-member bloc with the actions taken by U.S. With many European countries reliant on Russian oil and natural gas, the sanctions stopped short of the full-scale commercial warfare that could damage the European economy, which is still shaking off the euro debt crisis.

Investors are signaling concern about the impact of sanctions on Russia’s $2 trillion economy with government bonds headed for their worst monthly losses since May 2009.

Photographer: Andrey Rudakov/Bloomberg

Growth Forecast

The International Monetary Fund last week lowered its forecast for Russian economic growth this year to 0.2 percent from 1.3 percent, citing capital flight triggered by the country’s involvement in the Ukraine conflict.

The Micex Index (INDEXCF) has dropped 5 percent since Russia’s March incursion into Crimea and the central bank on July 25 unexpectedly raised interest rates for the third time this year as the crisis undercut the ruble.

Photographer: Mikhail Klimentyev/AFP via Getty Images

“Because we’re closely coordinating our actions with Europe, the sanctions we’re announcing today will have an even bigger bite,” Obama said. “Russia’s energy, financial, and defense sectors are feeling the pain. Projections for Russian economic growth are down to near zero.”

The EU action move was “inevitable,” and “additional steps are possible,” German Chancellor Angela Merkel said in a statement. “It’s now up to the Russian leadership to decide if it wants to follow the path of de-escalation and cooperation.”

Banks Targeted

The new U.S. sanctions target VTB Bank, Bank of Moscow and the Russian Agricultural Bank, as well as United Shipbuilding Corp. The U.S. also is suspending government-backed financing for new deals in Russia and prohibiting export of some equipment used for oil exploration and production.

Along with the sanctions on Russian banks, energy companies and defense firms announced two weeks ago, the U.S. penalties now are affecting institutions holding 30 percent of total assets in the Russian financial sector, according to an Obama administration official, who briefed reporters on condition of anonymity.

That includes five of the six largest Russian state-owned banks. The three banks added to the sanctions list today have as much as 100 percent of their long-term debt in dollars, according to the administration.

Futures contracts on VTB Bank (VTBR)’s Moscow-listed shares tumbled after the U.S. announcement, falling 2.9 percent.

The EU is set to announce today the names of eight more people and three organizations being blacklisted in earlier sanctions.

Economic Impact

This round of sanctions won’t have any noticeable impact on the U.S. economy and only limited impact on Europe and Russia, Stephen Myrow, managing partner at Washington-based Beacon Policy Advisors LLC and a former Treasury official, said in a phone interview.

“As long as Russia’s gas exports are not affected and major Russian banks are still able to transact business globally, these sanctions will not have a sufficient direct economic impact on Russia to alter its behavior,” Myrow said. “Rather, the West hopes to create as much political risk as possible to increase Russia’s cost of capital and exacerbate its capital outflows.”

Treasury Secretary Jacob J. Lew, speaking to reporters yesterday in Riverdale, Iowa, said U.S. sanctions are designed to maximize the economic pain on Russia while minimizing the damage elsewhere.

“Russia is barely growing now,” Lew said. “With these increased sanctions, it’s going to grind Russia into either a flat or a negative economy.”

Escalating Conflict

The allies were moved to act after pro-Russian separatists continued to impede an investigation into the July 17 downing of a Malaysian airliner by a surface-to-air missile over territory held by the rebels in eastern Ukraine. The U.S. also says Russia continues to provide arms to the rebels and has fired artillery into Ukraine from Russian territory, escalating the conflict.

EU attitudes were hardened by the airplane disaster, which killed all 298 people aboard, the majority from the Netherlands. A key U.S. and EU demand is unfettered access to the rebel-controlled crash site. Dutch forensic workers failed in an attempt to reach the location yesterday.

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