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Obama Seen Gaining on Putin as U.S. Prods EU on Sanctions

July 21 (Bloomberg) -- President Barack Obama said Russian President Vladimir Putin has “direct responsibility” to compel separatists in Ukraine to let investigators recover remains and collect evidence from the Malaysian airliner crash site. Peter Cook reports on “Bloomberg West.” (Source: Bloomberg)

President Barack Obama’s response to the downing of Malaysian Airlines Flight 17 over Ukraine reflects the consensus of U.S. officials that time, evidence, and world opinion are increasingly on his side as he takes on Russian President Vladimir Putin.

Secretary of State John Kerry cited the tragedy yesterday in an effort to prod Europeans into expanding sanctions against Russia, even at some peril to their own economies, in an effort to break Putin’s support for pro-Russian Ukrainian separatists.

“We are trying to encourage our European friends to realize this is a wake-up call,” Kerry said on “Fox News Sunday,” invoking a phrase used last week by Obama.

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U.S. officials, some speaking on the condition of anonymity to discuss administration strategy, said the shooting down of the civilian jetliner —- blamed by the U.S. on pro-Russian separatists armed by Russia —- should ignite anti-Putin sentiment and push reluctant EU countries to catch up to the more stringent sanctions the U.S. had imposed last week. Dutch and other European citizens were among the 298 passengers and crew that perished.

This gives Obama confidence that the U.S. and EU can prevail over Putin in the short-run -- overcoming European reluctance to expand sanctions -- just as the Obama administration believes it will prevail in the long-run over a Russia that has a battered economy and a leader who is overplaying a weak hand, the officials said.

Photographer: Andrew Harrer/Bloomberg

U.S. President Barack Obama. Close

U.S. President Barack Obama.

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Photographer: Andrew Harrer/Bloomberg

U.S. President Barack Obama.

Crash Site

Obama said today at the White House that the “burden is now on Russia’” to ensure separatists let international investigators recover remains and collect evidence at the crash site. A short time later, Malaysian Prime Minister Najib Razak said rebels in eastern Ukraine agreed to hand over bodies of crash victims and grant access to the site.

Waging Financial War

While the timing for EU decisions isn’t set, two European diplomats said previously resistant members such as Italy now are shifting. The bloc’s foreign ministers are scheduled to meet tomorrow, and top leaders also may meet as early as this week, according to the diplomats, who asked that they not be identified because the plans haven’t been announced.

The U.S. and its allies have the capability to further squeeze Russia through punitive measures such as sanctions against entire sectors of its economy, though they want to leave open a course for Putin to back down, according to several officials,

Putin Associates

The EU foreign ministers at their meeting in Brussels may consider blacklisting more Putin associates and, for the first time, Russian companies accused of profiting from Ukraine’s woes. Yet the Europeans may hesitate to ramp up a fight when they need Putin’s influence with the rebels to permit the recovery of passengers’ remains and an international investigation.

The U.K. is pushing for the EU to sanction the entire Russian defense industry, a British official said in London on condition of anonymity. France has repeatedly rebuffed calls to cancel its sale of two Mistral helicopter carriers to Russia. “With so many European Union citizens lost in the Malaysian Airlines crash, it is hard to see how the French Mistral deal can go ahead,” said Timothy Ash, head of emerging markets research at Standard Bank Plc in London.

‘Coercive Statecraft’

The airline disaster follows months of U.S. efforts to persuade the Europeans to raise the costs on Putin for his efforts to destabilize Ukraine. Obama now is “absolutely prepared” to consider more sanctions, and the EU should do likewise, Kerry said on ABC’s “This Week with George Stephanopoulos.”

The top U.S. diplomat appeared on five U.S. Sunday morning talk shows to make the case for further action.

“Since sanctions are the administration’s default instrument of coercive statecraft, I would expect an escalation of U.S. sanctions pressure, specifically targeting more Russian financial institutions, energy companies and military firms,” said Mark Dubowitz, executive director of the Washington-based Foundation for Defense of Democracies, a nonprofit group that focuses on national security issues.

“People are looking for sanctions that are severe enough to change Putin’s mind, but won’t do harm to the U.S. and European economies,” said Andrew Weiss, vice president for studies at the Carnegie Endowment for International Peace, who specializes in Russia and Eurasia.

Putin’s Options

Putin has levers of influence too, including sending Russian forces into eastern Ukraine, as he did in Crimea; reducing natural gas supplies to Europe; and undermining international negotiations seeking to curtail Iran’s nuclear program, one of Obama’s top diplomatic priorities.

Some of the U.S. officials said they see Putin fighting a losing geopolitical battle over time as neighboring states such as Ukraine, once regarded as the breadbasket of the Soviet Union, shift toward western European economies. That also may make him unpredictable and dangerous, they said.

The long-term strategy, these officials said, is to further isolate Putin, who they say is presiding over the decline of a country facing economic, demographic and social problems. While it has an economy comparable in size to Italy’s, Russia’s per capita gross domestic product, at $14,612, is less than half of Italy’s $34,619, according to World Bank data for 2013.

‘Diminished Stature’

“From the beginning, Russia’s aggression in Ukraine has been a reflection of its diminished stature and influence in Europe and the world,” said former White House Press Secretary Jay Carney, who worked for Vice President Joe Biden during the Russia reset and once worked in Time Magazine’s Moscow bureau.

The U.S. last week imposed targeted sanctions on selected Russian banks, military, and energy companies including OAO Rosneft, Russia’s largest oil company, after the EU was unable to agree on more than limited additional sanctions.

“The president imposed a greater cost on Vladimir Putin the day before this shoot-down took place,” Kerry said. “And what we are doing now is trying to bring our European counterparts along” because 4 percent of Russia’s trade is with the United States while “50 percent of their engagement is with Europe.”

The U.S. has been urging the EU to act more forcefully despite its reliance on Russia for about 30 percent of its gas imports. U.K Prime Minister David Cameron said he agreed with his French and German counterparts that Europe should be ready to impose further sanctions this week.

Financial Sector

“There’s value, political and economic,” in waiting to see what the Europeans do because Obama wants to show a united front, said Robert Kahn, a former Treasury official who is now a senior fellow for international economics at the Council on Foreign Relations.

The U.S. could consider adding more companies to the list of those it has sanctioned, he said. “First and foremost you look to the financial sector,” he said. “That’s where our sanctions are most powerful because of our central role in the financial system.”

Some Republicans in Congress, such as Senator Lindsey Graham of South Carolina, are pressing Obama to impose sectoral sanctions and begin providing weapons to Ukrainian government forces fighting the pro-Russian rebels.

The U.S. and European allies should impose “very severe economic sanctions” and also consider “symbolic” actions, such as canceling the 2018 World Cup in Russia and banning landing rights to OAO Aeroflot, Russia’s largest airline carrier, Representative Peter King, a New York Republican, said yesterday on CBS’s “Face the Nation” program.

‘Significant Toll’

Already, the existing sanctions are threatening to tip Russia into a recession as they exacerbate a bond sell-off and drive credit risk higher.

“While aggressive unilateral U.S. sanctions would impose a significant toll on Russia’s economy and U.S. business interests, the efficacy of further sanctions really turns on the resolve of the European Union,” Michael L. Burton, a sanctions lawyer at Jacobson Burton Pllc in Washington, said in an e-mail. “Member states of the EU must reconcile the tension between their sense of morality and their economic interests, recognizing that the EU ultimately will bear the highest costs and be judged most critically.”

Incremental Action

Stephen Myrow, managing partner of Beacon Policy Advisors LLC, an independent research firm in Washington, said the U.S. is likely to increase sanctions only incrementally absent strong steps by the EU.

“The big picture here, though, is whether the increase in pressure -- whether through sanctions, diplomacy or other means -- prompts Moscow to begin to take meaningful measures to reduce tensions,” Howard Mendelsohn, managing director at the Camstoll Group in Washington and previously an acting assistant secretary at the Treasury’s Office of Intelligence and Analysis, said in an e-mail. “First and foremost that is what officials are looking to see.”

There’s no guarantee that more sanctions will push Putin in the right direction, said Samuel Charap, a fellow at the Washington branch of the International Institute for Strategic Studies, a London-based policy group.

“The moral and political case for more sanctions is clearly easier to make now,” Charap said. “The problem is that the theory of the case remains as questionable as before -- that this kind of pressure will produce the kind of policy change from Moscow that the West is seeking. In fact, it might well have the opposite effect.”

In a phone call with Cameron, Putin said it’s “important” to refrain from “hasty conclusions and politicized statements” before international investigators determine the reasons for the Malaysian Air crash, according to an e-mailed statement from Russian government.

To contact the reporters on this story: Terry Atlas in Washington at tatlas@bloomberg.net; Jonathan Allen in Washington at jallen149@bloomberg.net

To contact the editors responsible for this story: John Walcott at jwalcott9@bloomberg.net Larry Liebert

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