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West Sanctions Moscow, With Caveats

West Sanctions Moscow, With Caveats

The United States and the European Union unveiled new sets of economic sanctions against Russia and threatened to ratchet them up even further if Russian strongman Vladimir Putin continues to support separatists in Ukraine. Behind the tough talk, however, is a careful set of measures with so many loopholes that they are unlikely to hobble the Russian economy.

The coordinated moves by Washington and Brussels began Tuesday, when European leaders took their broadest swipe yet at key sectors of the Russian economy and announced measures designed to block Russian banks from using the continent’s capital markets, curtail the export of oil industry equipment, and ban member countries from signing new defense contracts with Russia. But the EU left some loopholes large enough to send a couple of giant warships through, as the French government still plans to do. Also left largely untouched was Russia’s all-powerful gas industry.

Hours later, President Barack Obama announced new sanctions designed to match the EU move, keeping Russian oil companies from buying Western firms’ technology to extract its hard-to-reach deep-sea and shale oil reserves. It’s unclear whether that prohibition will hit existing energy contracts.

The new European sanctions go further than ever before but still fall short of the type of "sectoral sanctions" that would block business with entire Russian industries. That reflects EU leaders’ concerns that hitting Russia too hard would also hurt their own companies and industries. The arms embargo, for instance, doesn’t apply to existing agreements. That means the $1.6 billion French deal to sell Mistral warships to Russia, which had come under fire from British officials last week, will be allowed to go forward, though France has said it will only deliver the first one while re-evaluating whether to also deliver the second.

That’s not the only sacred cow left untouched. While the new coordinated measures target future oil production, they don’t touch the natural gas business, a pillar of Russia’s export economy and a lifeline for Europeans. Both the United States and Europe took steps to restrict trade in key oil industry equipment needed for extracting oil from deep waters, in the Arctic, and from shale — all areas where Russia hopes to boost its oil output in years to come. The U.S. Commerce Department said it will limit the export of crucial oil technology to Russia, but it is not yet clear exactly what goods and services will be banned, how that will affect Russia’s current oil production, or even how much U.S. and European firms will be hit by export bans on certain oil projects.

But in theory, the measures could put the pinch on Russian energy production in years to come: Russia needs to increase output by about 1.5 million barrels per day by the end of the decade to compensate for declining production at old fields. Tapping tight oil could be the key — but that requires lots of oil-field services, such as drilling rigs, which the country does not have, despite efforts by state-owned Rosneft and others to bolster Russia’s domestic oil-field services sector. Russia could also turn to other countries, such as China, for energy technology. Putin has already proven adept at finding other customers in the midst of the battle with Europe, such as a mammoth $400 billion natural gas deal with China that will diversify Russia’s energy exports.

EU nations may also be able to buy certain military equipment from Russia to help maintain existing tanks and weapons bought from Moscow, according to a report by the Wall Street Journal. That could keep the measures from taking too much of a bite out of the Russian defense industry.

The Obama administration, for its part, moved to shut three more Russian financial institutions — VTB Bank, Bank of Moscow, and Russian Agricultural Bank — out of U.S. capital markets. The move doesn’t block Americans from dealing with the banks entirely, but expands an earlier list of banks that are prohibited from seeking medium- and long-term financing from U.S. investors. The targeted Russian banks now make up 30 percent of the Russian banking sector, by assets, according to an Obama administration official. The United States also added a navy shipbuilder, the government-owned United Shipbuilding Corporation, to its list of blacklisted defense companies, barring American companies and individuals from dealing with them.

Obama said the new U.S. measures would further weaken an already wobbly Russian economy. Russian economic growth was already down heading into 2014, but the combination of Moscow’s foray into Ukraine and the threat of sanctions has driven economic forecasts down further. Economists say Russia could see $100-$150 billion in capital outflow this year, with growth close to zero.

The EU’s turn toward targeting industries comes amid growing evidence that Putin is escalating his support for pro-Russian separatists inside Ukraine. U.S. officials believe that the rebels used a Russian-provided anti-aircraft missile to down a civilian airplane, killing all of the nearly 300 passengers on board. American officials say that Putin has moved 15,000 troops to its border with Ukraine in recent weeks and fired into the country from positions inside Russia.

"The package of new restrictive measures agreed today by the European Union constitutes a powerful signal to the leaders of the Russian Federation: destabilizing Ukraine, or any other eastern European neighboring state, will bring heavy costs to its economy," Herman Van Rompuy, the president of the European Council, said in a statement. The details of the EU measures are expected to be published Thursday, which is when they will go into effect.

Still, the big unknown in the West’s sanctions equation is how far the United States and its allies would need to go to force Putin, whose popularity has soared since the Ukrainian crisis began, to change course. The White House recognized in a briefing Monday that Putin had been "doubling down" and providing more weaponry and support to the pro-Russian separatists, a point Obama emphasized when he announced the new sanctions.

"Today, Russia is once again isolating itself from the international community, setting back decades of genuine progress," President Obama said in a press conference Tuesday afternoon.

Russian lawmakers were already considering countermeasures, including legislation that could bar firms from certain countries from operating in Russia, according to reports by state-owned media. The ban would target big transnational firms like Deloitte, PricewaterhouseCoopers, and KPMG, according to a report by the Financial Times.

Despite the tough talk from Washington and Brussels, Obama took pains to avoid saying anything that could ratchet up tensions with Putin even further.

"No, it’s not a new cold war," the president said in response to a shouted question. "What it is, is a very specific issue related to Russia’s unwillingness to recognize that Ukraine can chart its own path."