Sanctions against Russia likely but they’re no easy task

03/03/2014 1:54 PM

10/08/2014 11:43 AM

As Russia tightened its grip Monday on the Crimean peninsula, the Obama administration scrambled to find meaningful ways to sanction a nation that does relatively little U.S. business and exports primarily energy products that allies in Europe badly need.

The first step, a likely boycott of an international summit in Sochi, Russia, in June, is largely a public-relations slap. The administration has stronger tools at its disposal, including going after Russian banks or Russian exports of natural gas. Experts think the most likely scenario is the combination of an international aid package to shore up the fledgling Ukrainian interim government and targeted sanctions on key allies of Russian leader Vladimir Putin to make it harder for them to access European bank accounts.

“Over time, this will be a costly proposition for Russia,” President Barack Obama said during a photo-op Monday, hinting at coming sanctions. He called on Congress to make an aid package for the Ukrainian people a “first order of business.”

In a sign of the potential economic costs for Russia, the Russian ruble lost 2 percent of its value against the dollar Monday. The nation’s stock market fell by 12 percent, and the central bank burned through billions in foreign reserves to prevent a steeper slide of the currency and raised its key lending rate by a steep 1.5 percentage points to entice investors to keep purchasing Russian bonds.

Sharing little information, State Department spokeswoman Jen Psaki on Monday described efforts as “farther along” in preparing a sanctions package, suggesting it was inevitable unless Moscow reverses course and withdraws immediately from Ukraine.

“It’s likely that we will put those in place, and we’re preparing that right now,” Psaki said in a call with reporters, adding that European counterparts were being briefed a day before Secretary of State John Kerry was scheduled to arrive in the Ukrainian city of Kiev to show solidarity with the embattled government.

Trade between the United States and Russia is inconsequential: Russia isn’t among the top two dozen export markets for U.S. products or among the top 12 nations from which the United States imports.

But Russia was the world’s largest oil producer and second largest oil exporter last year. Its oil and natural gas exports go chiefly to its immediate neighbors and to the European Union. The most obvious, yet difficult, target to hit in Russia is the massive energy sector.

To be effective, any sanctions on Russian oil and natural gas must be matched by similar action from the European Union.

“If the EU stops buying (natural) gas from Russia, that’s $100 billion that can’t be exported elsewhere,” said Anders Aslund, a Russia expert for the Peterson Institute for International Economics, adding that “the big thing is to hit Russia’s finances.”

But there’s a rub. The EU needs Russian energy resources, and there aren’t any quick options for replacing supplies of natural gas. Sanctioning Russia could raise the prices of resources, giving Russia a windfall even as its volumes drop. Additionally, the EU is just crawling back from a deep recession, and significantly raising energy prices would surely stifle recovery efforts.

“I don’t think anyone would seriously talk about imposing (a ban on the) sale of oil and gas,” said Cory Welt, a research professor and Russia expert at George Washington University’s Elliott School.

There are other ways to hit at Russia’s powerful energy sector and put pressure on Putin. The Treasury Department, which had no comment Monday, could try to target the assets of individuals tied to Putin, perhaps even those at state-controlled banks and energy companies.

Russia has three large politically connected energy companies: Gazprom, Lukoil and OAO Rosneft. Rosneft inked a deal with ExxonMobil in August 2011 that gave it access to deepwater drilling in the Gulf of Mexico in exchange for ExxonMobil investing $2.2 billion toward Arctic drilling in the Kara Sea.

Hitting Rosneft risks a blowback on U.S. energy companies that operate in Russia.

“It’s not our practice to comment on speculation or private discussions,” said Alan Jeffers, an ExxonMobil spokesman.

One major oil company, ConocoPhillips, sold back its 20 percent stake in Lukoil in August 2012.

Experts think the administration is likely to target rich political allies of Putin, limiting their access to the global financial system. Many park their money in European banks, especially in Cyprus. That was evident last year, when a planned government seizure of bank deposits prompted an outcry from Putin on the behalf of Russians with billions in Cypriot banks.

Those targeted “sanctions would bite, particularly for officials with connections to Europe. They don’t want that kind of isolation,” said Welt. “Putin is not going to back down simply because Europeans impose sanctions but it would increase pressure . . . from below.”

Speaking in Washington on Monday, Sen. John McCain, R-Ariz., also called for hitting the Russian elite he called “these kleptocrats, these corruption people and the people that ordered this.”

He called for economic sanctions and for expanding the Magnitsky Act, which seeks to punish Russian officials by blocking them from entering the United States.

“We could expand it and identify those people and it’d be their last trip to Las Vegas,” McCain said.

Hannah Allam and Lesley Clark contributed to this article.

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