U.S. Russian Sanctions Seen Ineffective as Putin Provoked

The Obama administration's decision to tighten the noose around Russian President Vladimir Putin's inner circle risks provoking a cycle of retaliation that escalates the crisis in Ukraine.

The penalties imposed on seven officials and 17 companies are spurring a “maximal consolidation of elites in the past 10 to 15 years,” according to Andrei Belousov, Putin’s top economic aide and a former economy minister. Deputy Foreign Minister Sergei Ryabkov told Interfax that Russia won’t let the measures go unanswered.

The only way that sanctions will “alter Putin’s course of action is if they inflict enough pain on the oligarchs who support his regime that they tell him it’s not worth it,” Gary Hufbauer, an economist and sanctions specialist at the Peterson Institute for International Economics in Washington, said in a telephone interview today. “I don’t think these sanctions are going to do that.”

Warned by U.S. Secretary of State John Kerry about making an “expensive mistake” in Ukraine, Putin has seen his approval rating soar to a six-year high in the wake of the seizure of Crimea. While markets breathed a sigh of relief as Russia’s largest banks avoided U.S. sanctions, Putin may take the latest salvo of sanctions more personally, according to Konstantin Simonov, president of Russia’s National Energy Security Foundation.

Gradual Impact

Obama administration officials, who briefed reporters in Washington today on condition they not be named in order to discuss internal deliberations, acknowledged they don’t expect an immediate change in Putin’s behavior from the new sanctions. One senior official said the administration’s goal is to steadily show Russia that there is going to be much more severe economic pain and political isolation, and that Russia stands to lose far more by continuing its actions in Ukraine over time.

A second official insisted that the sanctions the U.S. imposed last month have already had a significant impact on Russia’s economy. The official stressed that the U.S. has additional powerful sanctions against sectors, individuals and institutions lined up, and that their deterrent effect should not be underestimated.

Step Forward

“These new sanctions don’t represent a full-throated financial campaign to punish Russia, but they do move forward on beginning to isolate additional actors in the Russian economy,” Juan Zarate, senior adviser at the Center for Strategic and International Studies in Washington and a deputy national security adviser under President George W. Bush, said today in an e-mail. “Such measures will have some impact, but they are not likely to impose the types of costs that will change Moscow’s behavior in the short term.”

The list of officials and companies sanctioned by the Obama administration includes Igor Sechin, OAO Rosneft (ROSN) chief executive officer, and Sergei Chemezov, director of State Corporation for Promoting Development, Manufacturing and Export of Russian Technologies High-Tech Industrial Products, also known as Rostec. While the sanctions don’t apply to Rosneft, banks such as InvestCapitalBank and SMP Bank are on the list.

The measures are an effort to apply “symbolic pressure” on high-placed officials and probably won’t change Russia’s policies, according to Fyodor Lukyanov, head of the Council on Foreign and Defense Policy in Moscow. The measures

Little Difference

“With the exception of Sechin, this list makes no material difference,” Mattias Westman, who oversees about $3.3 billion in Russian assets as chief executive officer of Prosperity Capital, said by phone. “I don’t think the West can deal with a blockade of oil and gas and is ready to make the sacrifice for Ukraine.”

The sanctions, announced by the White House today, are being imposed in conjunction with the European Union, which said today it is adding 15 names to its list of previously sanctioned individuals.

“The White House is obviously making creative use of sanctions, and doesn’t even know what kind of impact they will have,” said Daveed Gartenstein-Ross, senior fellow at the Foundation for Defense of Democracies in Washington. “Such experimentation is a positive thing, but the various sanctions that the U.S. has imposed are only a small part of a larger set of policies designed to deal with Russia’s incursion into Crimea.”

Inner Circle

The new sanctions list targeted people in Putin’s inner circle, such as Dmitry Kozak, deputy prime minister of the Russian Federation, and Vyacheslav Volodin, first deputy chief of the presidential staff.

InvestCapitalBank and SMP Bank are controlled by Arkady and Boris Rotenberg, who were placed on the sanctions list March 20; The Volga Group, which is owned or controlled by Gennady Timchenko, who was put on the list March 20. Moscow-based Sobinbank, owned by OAO Bank Rossiya, was also added after its parent was put on the sanctions list last month, according to a statement on the U.S. Treasury’s website today.

Also singled out for sanctions: Transoil, a Russia-based rail and freight operator that specializes in the transportation of oil and oil products.

“It’s clear the U.S. chose as a personal victim and will battle him until victory -- Putin has been declared evil,” Simonov said. “He won’t be able to respond economically, so he’ll retaliate politically. There will be escalation in the east of Ukraine and a new spiral of sanctions.”

Geneva Accord

The U.S. and the EU say Russia hasn’t lived up to an accord signed April 17 in Geneva intended to defuse the crisis in Ukraine. The U.S. warned it’s prepared to levy additional penalties to hit the broader Russian economy if Putin escalates by sending troops into Ukraine.

“The goal here is not to go after Mr. Putin, personally,” President Barack Obama said earlier today at a news conference in the Philippines. “The goal is to change his calculus with respect to how the current actions that he’s engaging in Ukraine could have an adverse impact on the Russian economy over the long haul.”

The future of Ukraine is hanging in the balance, with unrest spreading after an offensive against pro-Russian separatists in the east failed to dislodge militias.

Ukrainian Unrest

The mayor of Ukraine’s second-largest city, Kharkiv, was shot in the back and rushed to hospital today after the seizure of international military inspectors by pro-Russian separatists last week. Early this morning, a group of 30 gunmen seized a state security building in the city of Konstantinovka.

Rival protest groups clashed in Donetsk, according to Ukraine’s Channel 5, and RIA Novosti reported that a Ukrainian soldier was killed when an explosion ripped through the eastern city today.

Putin has parliamentary approval to deploy troops in Ukraine to protect Russian speakers and those of Russian heritage. He has about 40,000 troops massed on the border with Ukraine, according to NATO.

With Russia on the brink of recession, Putin will blame his economic woes on outside pressure, according to Dmitri Trenin, director of the Carnegie Moscow Center.

“The Russian government will now have an excellent reason to explain away the coming economic hardships: U.S. sanctions,” he said. “Making Putin back down and concede defeat in Ukraine is improbable. Driving wedges between the Russian leader and his close associates is equally hopeless.”

To contact the reporters on this story: Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net; Kasia Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Paul Abelsky

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