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EU Moving With U.S. on Russia Sanctions, Obama Aide Says

July 28 (Bloomberg) -- Peter Cook reports on U.S. satellite photos alleging shelling from Russian into Ukrainian territory. He speaks on “In The Loop.” (Source: Bloomberg)

The U.S. and European Union will act on stiffer sanctions against Russia as soon as this week as Vladimir Putin’s government is “doubling down” on its support for Ukrainian rebels, an Obama administration official said.

The new sanctions by the EU are aimed at the Russian finance, defense and energy industries as well as Putin’s “cronies,” Deputy National Security Adviser Tony Blinken said. Separately, EU government representatives today agreed on a list of Putin business associates to be subjected to previously announced asset freezes and travel bans.

U.S. President Barack Obama consulted the leaders of France, Germany, Italy and the U.K. during a video and telephone conference earlier today as the allies coordinate their response to Russia’s actions in Ukraine, he said.

“Russia bears responsibility for everything that’s going on in Eastern Ukraine” and “has the ability to actually de-escalate this crisis,” Blinken said.

Russia has extended its support for the separatists in eastern Ukraine since the downing of a Malaysian airliner on July 17, according to Blinken. They have moved more troops to Ukraine’s border and continued supplying the separatists in an effort to destabilize Ukraine’s government, he said.

Photographer: Bulent Kilic/AFP via Getty Images

Pro-Russian militants sit on a tank in Donetsk, eastern Ukraine, as they drive to the front line south of the city, on July 27, 2014. Close

Pro-Russian militants sit on a tank in Donetsk, eastern Ukraine, as they drive to the... Read More

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Photographer: Bulent Kilic/AFP via Getty Images

Pro-Russian militants sit on a tank in Donetsk, eastern Ukraine, as they drive to the front line south of the city, on July 27, 2014.

Blinken’s comments reinforced an earlier statement from French President Francois Hollande’s office.

European Response

“Despite numerous appeals to President Putin, Russia has not effectively put pressure on the separatists to force them to negotiate, and has not taken the concrete steps asked of it to control the Ukraine-Russia border,” the French said. “The five heads of state and government confirmed, under these conditions, their intention to adopt new measures toward Russia.”

The other leaders taking part in today’s call were German Chancellor Angela Merkel, U.K. Prime Minister David Cameron and Italian Premier Matteo Renzi. U.S. Vice President Joe Biden and Ukrainian Foreign Minister Pavlo Klimkin are scheduled to meet in Washington at 4:15 p.m. local time.

Representatives of the 28 EU governments, meeting in Brussels today, agreed on the list of Putin business associates to be added to those hit with asset freezes and travel bans. The names will be published July 30, an EU official said.

Merkel’s chief of staff, Peter Altmaier, said Germany wants the EU to agree to new sanctions aimed at Russia tomorrow. The EU earlier this month promised to consider its strongest sanctions yet against the Kremlin over its purported aiding of the rebels.

Blinken declined to preview the sanctions in more detail.

Adding Names

If Europeans include on their list names that U.S. has not yet banned, the Obama administration is likely to add those names to its list, said Robert Kahn, a former Treasury official who is now a senior fellow for international economics at the Council on Foreign Relations in Washington.

The U.S. might also prohibit additional financial activities such as foreign exchange or commodities trading with certain Russian companies, he said.

“You will see a significant and long-term decline in the Russian economy from these sanctions,” Kahn said in a phone interview today.

The U.S. is likely to deny Russian access to oil-production equipment that could be used in the Arctic and deep waters, and add more banks and energy companies to the list of those banned from U.S. financing, according to analysts David Gordon, Cliff Kupchan and Mujtaba Rahman at the New York-based Eurasia Group, which issued a report today.

Russia’s Economy

Blinken said the sanctions already imposed by the U.S. and EU are biting into Russia’s economy, which has been teetering on the brink of a recession.

Russia’s Micex Index (INVCMCX) dropped 1.9 percent to 1,361.94 at the close in Moscow, an 11-week low, as investors weighed the risk to growth from new sanctions. It has declined 5.7 percent since Russia’s intervention. The ruble weakened 1 percent to 35.5014 versus the dollar.

The International Monetary Fund last week lowered its forecast for Russian economic growth this year to 0.2 percent from 1.3 percent, citing capital flight triggered by the country’s involvement in the Ukraine conflict.

“We’ve seen the financial markets go up and down, the ruble hitting lows,” Blinken said. He cited $70 billion in capital flight and said Russia’s central bank spent 8 percent of foreign exchange holdings, or $37 billion, defending the ruble, resulting in higher borrowing costs and a decrease in the value of Russian savings.

Giving Pause

“The credit rating for Russia was cut to just above the junk level; financial deals are frozen; Russian companies are not issuing bonds to raise capital,” Blinken said. Russia, he said, is giving investors “great pause.”

Capital outflows from Russia triggered by sanctions may reach as much as $200 billion this year, said Anders Aslund, a senior fellow at the Washington-based Peterson Institute for International Economics.

That means “less investment, and less investment leads to less growth,” and so additional sanctions can “easily” make the Russian economy contract, he said by phone today.

In a sign that Russia is girding for more restrictions, Putin held a meeting on replacing imports in the defense industry, according to a statement posted on the Kremlin’s website.

Russian-Made Materials

“The main issue on the agenda today is speeding up work to replace imports in the defense industry and make the broadest possible use of Russian-made materials and components in production of special equipment and arms,” Putin said in his opening remarks published by the Kremlin.

The U.S. has imposed penalties on large Russian banks, energy companies and defense firms that prevent them from accessing U.S. equity or debt markets for new financing with a maturity beyond 90 days.

The U.S. says the crash of the Malaysian Airlines jet that killed all 298 passengers and crew was probably caused by a Russian-supplied surface-to-air missile fired by the rebels.

Fighting near the crash site in east Ukraine again prevented Dutch and Australian investigators from reaching the area.

To contact the reporters on this story: Margaret Talev in Washington at mtalev@bloomberg.net; Roger Runningen in Washington at rrunningen@bloomberg.net; Gregory Viscusi in Paris at gviscusi@bloomberg.net

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net Joe Sobczyk, Laurie Asseo

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