Russia Facing Escalating Sanctions as EU Foreign Ministers Meet

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A man waves the Soviet Union flag near Simferopol's Lenin Square in Ukraine, on March 16, 2014. Close

A man waves the Soviet Union flag near Simferopol's Lenin Square in Ukraine, on March 16, 2014.

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Photographer: Filippo Monteforte/AFP via Getty Images

A man waves the Soviet Union flag near Simferopol's Lenin Square in Ukraine, on March 16, 2014.

European and U.S. officials will probably hold their most punitive sanctions on Russia in reserve as they wait for President Vladimir Putin to show his hand on whether he plans to push his forces deeper into Ukraine.

EU foreign ministers due to meet in Brussels today are set to impose travel bans and asset freezes on some Russian officials as Putin’s government prepares to annex Crimea after today’s referendum on secession from Ukraine. The “additional and far-reaching consequences” that were floated by the bloc on March 6 will be held back until EU leaders meet later this week in a bid to corral Putin’s ambitions in eastern Ukraine.

Juan Zarate, a former White House and U.S. Treasury Department sanctions official and the author of “Treasury’s War: The Unleashing of a New Era of Financial Warfare,” said in an interview that he expects the Obama administration and the EU to begin a “calibrated, escalatory financial campaign that demonstrates there are real costs in the short-term, but allows for diplomatic and financial off-ramps if there’s a breakthrough.”

The most significant diplomatic standoff between Russia and the west since the Cold War has rattled world markets as investors fret that an escalation of the crisis might isolate Russia from the global economy. That could disrupt global gas flows, damage the investments of companies from Siemens AG (SIE) to Exxon Mobil Corp. (XOM) and staunch the flow of money from Russian firms and oligarchs into western economies.

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People vote inside a polling station in Perevalne, Ukraine, on March 16, 2014. Close

People vote inside a polling station in Perevalne, Ukraine, on March 16, 2014.

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Photographer: Spencer Platt/Getty Images

People vote inside a polling station in Perevalne, Ukraine, on March 16, 2014.

“Western governments have the power to put the Russian state into bankruptcy, and broad-based sanctions would have an enormously strong effect on Russia’s economy,” Fredrik Erixon, director of the European Centre for International Political Economy in Brussels, said by phone. “But I don’t think the west is even close to thinking on these terms. Sanctions can lead to unpredictable political consequences.”

Sanctions Coming

Secretary of State John Kerry told Congress last week that a “very serious series of steps” will come today from the U.S. and the EU if Russia moved to annex Ukraine’s southern Crimea region.

EU foreign ministers are due to gather in Brussels at 9.30 a.m. to discuss asset freezes and visa bans on people and “entities” involved in the Crimea seizure. They will also debate a range of additional measures that can be taken when leaders meet for a summit on March 20-21, an EU official involved in the preparations said on condition of anonymity.

Since EU leaders last met, the Ukraine crisis has buffeted Russian markets and weighed on global stocks as investors confront the implications of sanctions on a country that supplies Europe with about a third of its gas. Russia’s benchmark Micex index has plunged 15 percent since the end of February and U.S. and European shares fell last week by the most since January.

’Get Ugly’

The Obama administration will probably start by freezing assets of former Ukrainian President Viktor Yanukovych and 17 others associated with his government, echoing steps taken March 5 by the EU and Canada, with bans on some Russians also possible, U.S. officials said on condition they not be named because the actions are not yet public.

While Kerry warned last week that sanctions “can get ugly fast if the wrong choices are made,” measures cutting Russia off from the global financial system and embargoing its trade -- penalties like those that have strangled Iran’s economy -- remain a long way off and are unlikely to garner global support the way sanctions on Iran have, current and former U.S. officials say.

The debate in Washington and Brussels is over how far it makes sense to go, allowing Putin a face-saving way out before the situation deteriorates into tit-for-tat economic war, they say.

“The U.S. president has broad authority” to implement crushing sanctions even without additional authority from Congress, “but the question is how to implement it in a measured way to get Putin to back off without leading to a clashing of both economic powers,” Stuart Eizenstat, a former deputy Treasury secretary who led sanctions policy in the Clinton administration, said in an interview. “Miscalculations by both sides could sometimes result in actions that neither side wishes it had taken.”

Sweeping Powers

Under U.S. laws including the International Emergency Economic Powers Act, the president has sweeping powers to freeze another country’s U.S. dollar reserves, cut off foreign financial institutions, including state-owned banks, from the U.S. financial system and bar access to U.S. credit card networks. Any of these measures could force transactions into banknotes, robbing banks of liquidity and killing commerce, analysts say.

Under the U.S. Patriot Act, the president can declare a foreign bank a primary money-laundering concern, turning it into an international pariah.

Russia is the 11th-largest foreign holder of Treasuries, with U.S. bills, notes and bonds totaling $138.6 billion at the end of last year, according to Treasury data. A drop in U.S. government securities held in custody at the Federal Reserve last week fueled speculation that Russia may be shifting its holdings out of the U.S. in preparation for sanctions.

Extreme Case

The extreme case is “a country-based sanctions program that would prevent the export of goods and services to Russia -- most importantly financial services - and all of their foreign currency and bonds would fall under that,” Erich Ferrari, principal in Ferrari & Associates, a Washington law firm that specializes in sanctions, said in an interview.

“That’s full-blown economic warfare, the most severe thing that could happen,” he said. “What I think is most likely is the application of sanctions to a few key Ukrainian and Russian officials and Russian oligarchs. You’re applying pressure to compel change in behavior, and oligarchs will put pressure on the Russian government.”

EU governments are initially set to sidestep Russian business and focus sanctions on scores of individuals with some political involvement in the seizure of Crimea, according to the EU official. While limited, the measures will be significant and are intended to send a signal to those individuals in Crimea and in Russia who are involved in actions that member states consider illegal, the official said.

Possible Targets

Germany’s Bild newspaper reported March 14 that the EU and U.S. planned to impose sanctions on Russians including Alexey Miller, the chief executive officer of Russian gas-export monopoly OAO Gazprom, and Igor Sechin, who heads Rosneft OAO (ROSN), Russia’s largest oil producer. Bild cited sources in Washington and Brussels it didn’t name.

The EU declined to comment on specific names last week, saying the list of individuals was still being drawn up.

EU leaders will consider further sanctions later this week depending on Russia’s response to the initial measures. As of Friday, there was still no agreement among governments on what these measures might constitute nor how they would be triggered, the official said.

‘Calibrated’ Campaign

Zarate, who is now a senior adviser at the Center for Strategic and International Studies in Washington, said that if Western governments were “to take the gloves off,” they could expand the penalties beyond Ukraine, punishing Russian banks that underwrite the Assad regime in Syria as one example.

The State Department favors a tough response, said Eizenstat, a former ambassador to the EU, while Treasury, Commerce Department and trade officials “are being pressured very strongly by major U.S. businesses and associations, all of whom are taking the position that U.S. businesses in Russia” could face backlash from Putin.

German Chancellor Angela Merkel, addressing business leaders in Munich March 14, signaled that she was ready to contemplate steps that would hurt Germany, Europe’s largest economy and Russia’s biggest trade partner in the EU. Bilateral trade with Russia is of a sufficient volume that any rupture could cause harm, she said, “but not to such an extent that it would have an impact on Germany’s entire economic engagement.”

While Western sanctions could target export controls and financial institutions, that’s “something they will hold in reserve until and if the crisis escalates,” said William Pomeranz, Deputy Director of the Kennan Institute for Advanced Russian Studies at the Woodrow Wilson International Center for Scholars in Washington.

The Russian president may not have calculated the financial risks of his actions in Ukraine, Pomeranz said in an interview. “I don’t think Putin really talked to any of his economic advisers,” he said.

To contact the reporters on this story: Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net; Ian Wishart in Brussels at iwishart@bloomberg.net

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net; John Walcott at jwalcott9@bloomberg.net

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