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As Ukraine Heats Up, Exxon to Airbus Eye Growing Risks

July 16 (Bloomberg) -- American Action Forum President Douglas Holtz-Eakin and Bloomberg's Peter Cook react to President Barack Obama's comments on the new sanctions on Russia and the recent violence between Israel and the Hamas-ruled Gaza Strip. They speak with Pimm Fox on "Taking Stock." (Source: Bloomberg)

As the U.S. and Europe escalate sanctions against Russia over its role in the Ukraine crisis, companies such as Exxon Mobil Corp. (XOM), Airbus Group NV (AIR) and Daimler AG (DAI) are facing a threat to their multi-billion-dollar businesses in the country.

“We have enjoyed good relationships with Russian partners,” Airbus Chief Executive Officer Tom Enders said on the sidelines of the Farnborough Air Show near London. “I would only express my hope that these relationships and partnerships will survive the current political tensions.”

In contrast to sanction targets Iran and North Korea, Russia’s $2 trillion economy -- about the size of Italy’s -- is closely linked to global business as multinationals have piled into a promising consumer market and resource producer. That highlights the difficulty the U.S. and Europe face in trying to punish Russian President Vladimir Putin.

The U.S. has accused Russia of funnelling weapons to Ukrainian rebels, who continue to control key cities. President Barack Obama’s administration yesterday imposed new sanctions on large Russian banks, energy companies and defense firms. Among the companies hit were OAO Rosneft (ROSN), Russia’s largest oil company, natural gas producer OAO Novatek and OAO Gazprombank, the country’s third-largest lender, according to an announcement by the U.S. Treasury Department.

Photographer: Chris Ratcliffe/Bloomberg

Airbus Chief Executive Officer Tom Enders said on the sidelines of the Farnborough Air Show near London, “We have enjoyed good relationships with Russian partners. I would only express my hope that these relationships and partnerships will survive the current political tensions.” Close

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Photographer: Chris Ratcliffe/Bloomberg

Airbus Chief Executive Officer Tom Enders said on the sidelines of the Farnborough Air Show near London, “We have enjoyed good relationships with Russian partners. I would only express my hope that these relationships and partnerships will survive the current political tensions.”

The penalties will prohibit any new financing of debt with a maturity of more than 90 days from U.S. sources.

The action also blocks the assets of eight state-owned defense firms, including weapons-maker Kalashnikov Concern, which manufactures the namesake assault rifle.

EU Measures

European Union leaders have imposed measures that would cut off some public financing of infrastructure projects in Russia, and are preparing a blacklist of companies. Their sanctions had so far focused on asset freezes and visa bans for small numbers of political and military figures close to Putin.

“The negative impact of the deepening crisis on Russia’s business ties with the West is almost unavoidable,” said Lilit Gevorgyan, a senior economist at research group IHS.

The highest-profile relationships are in Russia’s state-dominated energy sector, whose revenues have underpinned Putin’s revitalization of the military and welfare spending that’s boosted his popularity.

Cold War Wells

Exxon has bet heavily on its relationship with Rosneft, a state energy producer that’s led by Putin confidant -- and U.S. sanctions target -- Igor Sechin. Next month Exxon expects to begin drilling an Arctic well with Rosneft that will cost as much as $700 million, the most expensive such project ever in Russia. It’s also working on a $300 million shale well project in Siberia.

In a sign of the importance of its Rosneft ties, Exxon CEO Rex Tillerson rebuffed U.S. government appeals to skip an energy forum in Putin’s hometown of St. Petersburg in May, and appeared with Sechin in Moscow last month. An Exxon spokesman said the company’s Russia plans remain unchanged.

Providers of oilfield services have found a juicy potential market in Russia, which needs the latest technology to maintain production from declining Cold War-era fields.

U.S. energy service providers Halliburton Co. (HAL), Schlumberger Ltd. (SLB) and National Oilwell Varco Inc. (NOV) all have significant operations in Russia.

‘Bigger Play’

Halliburton has worked closely with energy group OAO Gazprom, which has threatened to cut off gas supplies to Ukraine over late payment. The Houston-based company, which signed a technology-sharing accord with Gazprom’s oil arm last year, “is certainly trying to make a bigger play” in Russia, said Alexander Robart, a principal at energy-strategy firm PacWest Consulting Partners.

Halliburton and Varco declined to comment. Schlumberger didn’t return e-mails seeking comment.

Threats to business in Russia go beyond the direct impact of sanctions as the economy sputters.

At Canadian airplane manufacturer Bombardier Inc. (BBD/B), “there’s been a little bit more apprehension from our Russian customers to get into big transactions, not just with us,” said Guy Hachey, president of the company’s aerospace business. Along with Airbus, Bombardier has sought to build manufacturing capacity in Russia to meet demand from local airlines.

Corruption Concerns

Yet fewer Russians may be flying soon, as the country’s finance ministry predicts economic growth will drop to about 0.5 percent this year, the slowest since 2009, and will be even lower if sanctions are toughened. Those measures would pile onto existing concerns about corruption, shoddy infrastructure, and stagnant population growth.

Before the current instability, automaker Daimler had backed away from increasing its stake in OAO KamAZ, Russia’s largest producer of heavy trucks, after making earlier plans to boost its shareholding to more than 25 percent. Daimler views its current 15 percent as “more than sufficient,” and the decision was made for “operational reasons,” spokesman Bernd Weber said.

Automakers that are strengthening their ties to Russia are hardly boasting about it. Renault SA (RNO) and Nissan Motor Co. (7201) last month completed a 2012 plan to tighten control of OAO AvtoVAZ, Russia’s biggest carmaker. The companies, which gained majority control of AvtoVAZ, once described the deal as a critical bridgehead into a key emerging market. Yet when the transaction was sealed June 18, they didn’t even put out a press release. Renault and Nissan declined to comment.

Unlikely Companion

Manufacturers and energy firms have an unlikely companion in their efforts to deal with the fallout of the Ukraine crisis: the Pentagon. The U.S. Department of Defense is looking to end its use of Russian-made rocket engines for launching satellites. The U.S. has 16 of the engines in stock, a two-year supply, but developing a homegrown alternative could take six years and cost $1.5 billion, a U.S. government study said in May.

“Because of the Russian actions in the Ukraine, the risk equation has fundamentally changed,” Frank Kendall, the U.S. undersecretary for acquisition, technology and logistics, said in an interview at Farnborough.

Strong sanctions on Russia may be easier for Western governments to contemplate in theory than to impose in practice. For evidence, look to France. Despite pleas from the U.S. to halt the sale, President Francois Hollande’s government is proceeding with the delivery of two Mistral-class assault ships to Russia’s navy, and last month France welcomed a contingent of Russian marines for training. French politicians have defended the deal, saying that cancelling the sale would mean hundreds of jobs lost in the country’s defense industry.

Even so, continued violence in Ukraine is likely to wear down resistance to stronger measures, even in European countries with much to lose, said Cliff Kupchan, the head of the Russia team at political-risk firm Eurasia Group.

“At a certain point, you clearly have a situation of Russian complicity in creating a dysfunctional Ukraine,” he said. “The argument will be very hard to make that it’s just ‘OK, business as usual.’”

To contact the reporter on this story: Matthew Campbell in London at mcampbell39@bloomberg.net

To contact the editors responsible for this story: Keith Campbell at k.campbell@bloomberg.net; Jacqueline Simmons at jackiem@bloomberg.net David Rocks

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