USA and EU Introduce New Sanctions Against Russia

Sanctions poorly timed

On 16 July 2014, the US announced a new package of financial and economic sanctions against Russia. The black list includes two large banks (VEB, Gazprombank), two oil and gas companies (Rosneft and Novatek), 8 military-industrial enterprises (including Uralvagonzavod, Almaz-Antey and Kalashnikov), one infrastructure enterprise (Feodosia Oil Company) and four Russian officials.

Traditional "hard" sanctions apply with regard to the military-industrial enterprises and the Feodosia Oil Company. Their assets in the United States are frozen and they will not be able to make payments through American financial institutions. This makes any financial and economic cooperation between them and US companies and US citizens impossible.

For those included in the black list of banks and oil companies, "soft" sanctions have been introduced. This means that US companies and citizens must not give them credit for more than 90 days, or buy shares and property (including subsidiaries). However, other forms of business are not banned. Thus Rosneft and Novatek, which fall under this category of sanctions, will be able to sell oil and gas to Western, including American, consumers although it seems that western companies and banks will not be able to invest in them. This will definitely deal a blow to cooperation with US oil and gas corporations (Exxon Mobil, BP) and jeopardize a number of joint projects such as the development of the Arctic Ocean shelf, the construction of a factory for the production of liquefied natural gas in Sakhalin (Rosneft) and a similar plant at Yamal (Novatek), etc.

The Russian banks and companies on the black list will not only be unable to obtain financing (loans or investments) from US commercial structures. They will likely be closed off from the European credit market given the USA’s ability to impose large fines on foreign banks violating the sanctions regime (this was clearly demonstrated in the case of BNP Paribas, which was punished for transactions with Sudan, Cuba and Iran). The Asian credit market offers Russians a pretty weak hope, although it’s possible that Chinese banks will be able to provide funding for certain major projects. Therefore, the credit position of sanctioned banks and companies now becomes a matter of concern for Russia.

At the same time, the limited nature and selectiveness of the American sanctions is noteworthy. According to the State Department, the sanctions are designed to punish Russia for "destabilization of Ukraine and supporting separatists". However, apart from the desire to punish Moscow, Washington is guided by a desire to minimise potential damage to the US economy and the interests of its European allies.

Previously, Washington repeatedly threatened Moscow with the introduction of so-called sectoral sanctions - sanctions that affect whole sectors of the national economy (energy, finance, military-industrial enterprises, etc.). But the measures adopted on 16 July cannot be considered fully "sectoral". They affect the interests of some large companies, which play an important role in their respective industries (Rosneft, Gazprombank), but not other large industry participants (Gazprom).

The reason for this is to be found in the fact that the largest consumers of Russian oil and gas are the European countries. The introduction of "hard" sanctions against large companies such as Rosneft and Gazprom would threaten to interrupt the supply of hydrocarbons, which would cause an energy crisis in Europe. This would have been regarded by Europeans as a stab in the back on the part of Washington and an attempt to address issues US foreign policy issues at the expense of European interests. Thus, in all likelihood, the Americans will only impose tough sanctions on the energy sector in the most extreme case - if Russia puts into question the very existence of the Ukrainian state (for example, by a large-scale military intervention).

It should be noted that the time for sanctions was badly chosen – something clearly indicated by the negative reaction of the European stock market. Recently, Moscow showed a conciliatory tone towards the Ukrainian authorities and renounced the use of military force, which allowed European businesses to hope for some easing in the West’s official anti-Russian position. In this situation, the White House decision signals a “game of aggravation”: yielding to the pressure of the "hawks" in the American political establishment, Barack Obama wants to show the strength and stiffness of American foreign policy and is willing to take a risk. Such a policy is fraught with the risk of further destabilization of relations between Russia and the Western countries and unpredictable complications in the Ukrainian situation. Inevitably, it will not only hit Russian banks and companies, but the interests of American, as well as European, business in Russia.

The US decision on sanctions discords with the measures agreed by EU countries at the 16 July 2014 summit. The Europeans decided to discontinue funding for new projects in Russia by the European Bank for Reconstruction and Development and the European Investment Bank (which does not mean closing the existing programs). It was also stated that before the end of July the EU could extend its blacklist of Russian entities and individuals. This means that whilst Washington tried to dictate synchronous and tough measures against Moscow to Brussels, the EU's policy towards Russia was again softer than the US line.

USA EU sanctions