U.S. Sanctions Russian Banks and Energy Companies

Obama issues his strongest sanctions yet to pressure Moscow out of the Ukraine conflict.

By , a senior staff writer at Foreign Policy, and

Barack Obama’s administration on Wednesday made good on threats to sanction Moscow for continuing to support pro-Russian separatists in Ukraine, imposing tough new restrictions on major Russian energy companies, banks, and weapons-makers.

Charting a middle course between full-scale sanctions that would go after whole sectors of the Russian economy and the surgical sanctions used so far, the Obama administration’s latest steps are its strongest effort to date to dissuade Russia from continuing to back armed separatists who are trying to undermine the new Ukrainian government.

On Monday, July 14, the U.S. State Department released a list of evidence it says proves Moscow is still supplying Ukrainian militants with weapons, financing, and Russian fighters. On Tuesday, Russian-backed rebels destroyed a Ukrainian apartment building close to the border with Russia. Videos released Wednesday appeared to show Russian-made rockets being fired at Ukrainian targets from inside Russian territory.

However, in the absence of full-throated cooperation with key European countries, it is unclear just how effective the latest U.S. measures will be. Capital markets in Europe, for example, remain open for Russian firms. And Gazprom, the main source of Russian energy exports to Europe via Ukraine, has yet to be targeted directly by any U.S. sanctions. What’s more, Russia and China, among other developing economies, announced the creation this week of a new international development bank precisely to allow them to start sidestepping Western dominance of the international financial system.

Speaking at the White House, President Obama said he had repeatedly told Russian President Vladimir Putin to stop sending weapons and fighters into Ukraine and pursue internationally mediated talks with Kiev. At least so far, Obama said, "Russia has failed to take any of the steps that I mentioned."

"Russia’s support for the separatists and violations of Ukraine’s sovereignty have continued," Obama said, adding that the United States and its allies would continue to pursue measures designed to further weaken Russia’s economy and increase its isolation on the world stage unless Putin relented.

Despite the tough talk, the United States didn’t cut off whole sectors of the Russian economy, but it went after four big energy and finance firms. The Treasury Department banned a pair of big Russian banks — Gazprombank and VEB, Russia’s state-owned development bank — from issuing any new debt or equity in U.S. markets. It also banned two energy giants, Novatek and Rosneft, from tapping U.S. debt markets. But the United States did not target Gazprom, Russia’s mammoth oil and gas firm, directly.

The United States also blacklisted eight Russian arms firms and a list of senior Russian officials.

The sanctions announced Wednesday will essentially close U.S. capital markets to those big firms. That limits those big firms’ abilities to roll over or refinance their debts, making it more expensive for them to borrow new money. Officials said those firms would likely have to turn to Russia’s Central Bank to try to fill their financing needs.

The Obama administration left the door open to further sanctions if Russia continues its destabilization activities in eastern Ukraine. The administration can "expand the scope of the prohibitions and the list of the entities affected if the situation warrants," a senior administration official said.

The new U.S. sanctions come as European leaders are considering going after Russian companies too, but the European Union’s measures are not expected to go as far as Washington’s new prohibitions.

The United States coordinated the latest sanctions with top European leaders, including British Prime Minister David Cameron, German Chancellor Angela Merkel, and French President François Hollande, officials said. Even though the European Union has not embraced sanctions as tough as what the United States has urged, the importance of the dollar as the principal global reserve currency means the closure of the U.S. capital markets will have an outsized impact on the Russian companies, officials said.

Before the announcement Wednesday, many U.S. businesses were leery of the prospect of unilateral sanctions on Russia. The Obama administration had floated the idea of barring trade in advanced energy technology between U.S. and Russian firms, for example. Many U.S. firms feared that they would pay the price for unilateral actions because European firms would be able to step into the breach.

In recent weeks, major trade groups have publicly opposed the idea of imposing economic restrictions without broad participation from the rest of the world. The U.S. Chamber of Commerce and the National Association of Manufacturers have been campaigning, in newspaper ads and blog posts, against U.S.-only sanctions against Russia.

"U.S. unilateral economic sanctions have been shown to impose little, if any, cost on the targeted country, while disproportionately harming U.S. industry and workers," Linda Dempsey, the National Association of Manufacturers’ vice president for international economic affairs, wrote in a blog post last week.

Even top administration officials warned Congress in recent days that such unilateral sanctions could be ineffective in the absence of full cooperation from Europe. By targeting Russian firms’ ability to tap U.S. capital markets rather than U.S. exporters, the administration has sidestepped for now that potential boomerang.

Additionally, the latest U.S. steps take aim at key individuals involved in the annexation of the Crimean peninsula, the Russian military, and the Russian defense establishment.

The defense sanctions include U.S. asset freezes on big Russian arms firms, including the country’s largest, Kalashnikov Concern, as well as a tank manufacturer and companies that make missiles and other projectiles.

Americans are also banned from buying new guns from Kalashnikov, famous for producing ubiquitous, cheap automatic rifles like the AK-47. That could sting because the company, despite its reputation for making guns used in armed conflicts the world over, has come to rely more and more on the U.S. consumer market to make up for flagging demand in Russia. The company signed a five-year contract in January to sell up to 200,000 guns a year in North America, according to state-owned news company RT. And in 2012, demand from U.S. customers made up 40 percent of civilian sales from one factory, according to a New York Times report.

Individuals added to the sanctions list, which includes a U.S. asset freeze, are Alexander Borodai, the self-proclaimed prime minister of the Donetsk People’s Republic and a prime mover behind the annexation of Crimea. Other individuals named include Sergey Beseda, a top official in the Russian security service FSB, and Russia’s minister for Crimean affairs, Oleg Savelyev.

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP

 Twitter: @jtrindle