EU Aims at Russian Banks, Technology in Widest Sanctions

July 29 (Bloomberg) -- Further sanctions under consideration by the European Union may push Russia into recession, according to Tim Ash, chief economist at Standard Bank Group Ltd. in London. He was speaking with Mark Barton, Ryan Chilcote and Caroline Hyde on Bloomberg Television's "Countdown." (Source: Bloomberg)

The European Union curbed Russia’s access to bank financing and advanced technology in its widest-ranging sanctions yet over President Vladimir Putin’s backing of the rebels in eastern Ukraine.

EU governments agreed today in Brussels to bar state-owned banks from selling shares or bonds in Europe and restricted the export of equipment to modernize the oil industry, a key prop for Russia’s economy, the EU said in a statement. New contracts to sell arms to Russia and the export of machinery, electronics and other civilian products with military uses will also be banned.

“The political implications of the escalation in tensions are likely to cast a further chill over relations between Russia and the West,” Citigroup Inc. (C) analysts including Eric Lee and Tina Fordham said in a note to clients before the EU decision. “Economic costs are starting to bite, but it could be a while before the economic consequences bear domestic political costs for Russia.”

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President Barack Obama will speak on the situation in Ukraine at 2:50 p.m. in Washington, the White House said. The U.S. is also preparing to announce tougher sanctions on Russia after months of separatist unrest in Ukraine’s easternmost Donetsk and Luhansk regions and the July 17 Malaysian Air jet crash¸ which U.S. officials have said was probably caused by a missile fired by pro-Russian rebels. At least 10 soldiers and 28 civilians died in violence over the past 24 hours.

Photographer: Chris Ratcliffe/Bloomberg

The offices of Sberbank CIB Ltd, owned by OAO Sberbank, in London, on March 28, 2014. Close

The offices of Sberbank CIB Ltd, owned by OAO Sberbank, in London, on March 28, 2014.

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Photographer: Chris Ratcliffe/Bloomberg

The offices of Sberbank CIB Ltd, owned by OAO Sberbank, in London, on March 28, 2014.

‘Powerful Signal’

“The package of new restrictive measures agreed today by the European Union constitutes a powerful signal to the leaders of the Russian Federation: destabilizing Ukraine, or any other eastern European neighboring state, will bring heavy costs to its economy,” EU President Herman Von Rompuy said in a statement. “Russia will find itself increasingly isolated by its own actions.”

Subject to Sanction

The sanctions will initially last for 12 months, though they’ll be reviewed by the end of October, according to an EU official speaking on condition of anonymity. It would need unanimity from all 28 members of the bloc to scrap the measures before the 12 months are up.

The new EU package will “track pretty closely” with sanctions already imposed by the U.S., and the Obama administration plans to unveil additional penalties as soon as today, Obama’s spokesman, Josh Earnest, said in Washington. He declined to provide any details of the proposed U.S. measures.

Photographer: Bulent Kilic/AFP via Getty Images

A pro-Russian separatist blocks the way to the crash site of Malaysia Airlines Flight MH17, near the village of Grabove, in the region of Donetsk on July 20, 2014. Close

A pro-Russian separatist blocks the way to the crash site of Malaysia Airlines Flight... Read More

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Photographer: Bulent Kilic/AFP via Getty Images

A pro-Russian separatist blocks the way to the crash site of Malaysia Airlines Flight MH17, near the village of Grabove, in the region of Donetsk on July 20, 2014.

Kerry’s View

“The Russians and their so-called volunteers are continuing to ship arms and funds and personnel across the border,” U.S. Secretary of State John Kerry said in Washington after meeting Ukrainian Foreign Minister Pavlo Klimkin. “While the Russians have said they want to de-escalate the conflict, their actions have not shown a shred of evidence that they really have the legitimate desire to end the violence.”

Due to the reliance of many European countries on Russian oil and natural gas, the EU stopped short of the full-scale commercial warfare that could damage its own economy, which is still shaking off the euro debt crisis. The calibrated blockade buried the notion of Russia, which sends almost half of its exports to the EU, as a “strategic partner” for the bloc and risked retaliation by Putin against European and U.S. companies active in the $2 trillion economy.

Sentiment toward Russian assets has soured this year as Putin’s incursions into Ukraine sparked a slowly tightening wave of sanctions from the U.S. and Europe. The Micex Index (INDEXCF) has dropped 5 percent since Russia’s March incursion into Crimea and the central bank on July 25 unexpectedly raised interest rates for the third time this year as the crisis undercut the ruble.

Holdings Reassessed

Last week, Norway’s $890 billion sovereign wealth fund, the world’s biggest, said it’s reassessing its holdings in Russia. Today’s EU sanctions decision came after Russia’s stock market closed, though the news sparked a drop in U.S. stocks. The Standard & Poor’s 500 Index (SPX) was 0.1 percent lower at 2:24 p.m. in New York.

The EU measures, endorsed today by representatives of national leaders, will take effect when the legal texts are published on July 31.

Constrained by the need for consensus among the 28 governments, the EU had lagged behind the U.S. -- with fewer business links to its former Cold War enemy -- in upping the pressure on Putin. Rival interests among Europe’s leading powers prevented the EU from going further today, with France resisting a retroactive embargo that would scrap the sale of two warships to Russia.

EU Blacklist

Until now, the EU had blacklisted 87 people and 20 companies and groups accused of engineering Russia’s annexation of Crimea in March and the subsequent infiltration of eastern Ukraine. The bloc decided yesterday to extend the blacklist to cover eight more people, including four Putin confidants, and three organizations, the officials said. Those names will be released late tomorrow.

EU attitudes were hardened by the Malaysian Air disaster, which killed all 298 people aboard, the bulk from the Netherlands. A key U.S. and EU demand is unfettered access to the rebel-controlled crash site. Dutch forensic workers failed in an attempt to reach the location today.

In eastern Ukraine today, residential areas of the city of Donetsk, once home to 1 million people, came under artillery fire, killing two people, according to the local council. Twenty-one civilians were killed overnight and today in the city of Horlivka in the Donetsk region, with five dying overnight in the neighboring Luhansk region, according to local authorities.

Capital Flight

For the first time, the EU sought to hobble broad swathes of Russian industry, with the goal of accelerating the flight of capital from the country. Russian economic growth will slow to 0.2 percent in 2014 from 1.3 percent last year, the International Monetary Fund said last week.

“Russia needs the opposite, Russia needs internationalization, globalization to make Russia a better place to do business,” Tim Ash, an emerging-market economist at Standard Bank Plc in London, told Bloomberg Television earlier today. “In the short term, the impact of sanctions could be to push Russia into recession.”

Taking aim at the Russian financial system, the EU prohibited state-owned banks from selling securities with more than 90 days maturity to European investors. The result will be “sharply increased costs of issuance,” the European Commission predicted in a background paper last week.

Loan Slump

Russian companies have drawn increasingly upon state-controlled lenders OAO Sberbank and VTB Group since the Ukraine crisis deterred outside banks. Dollar loans from international banks slumped to $7.9 billion in the first half of 2014 from $25 billion a year earlier.

Financial curbs “could be very important for Russia,” Yannick Naud, who helps manage $190 million at Sturgeon Capital Ltd. in London, told Bloomberg Television earlier today. “Both the banks as well as companies are relying a lot on foreign capital.”

Seeking to starve Russia’s oil industry of capital for expansion and modernization, the EU restricted the export of technology for deep-sea drilling, shale-oil production and Arctic exploration. Natural gas projects weren’t affected. The EU also barred the export of “dual-use” technologies for military purposes.

Russian Energy Ministry spokeswoman Olga Golant declined to comment by phone.

Hardened Attitudes

Curbs on the sale of high-tech machinery reflected a stiffening of attitudes in Germany, the bloc’s largest economy. Germany supplies 30 percent of EU exports to Russia and buys more than a third of its oil and gas from there, leading industry to fear the cost of an embargo on Russia.

German public opinion shifted after the shooting-down of the plane over Ukraine, with 52 percent now in favor of tougher measures toward Russia, up from 25 percent in March, according to a TNS-Infratest poll commissioned by Spiegel magazine.

Today’s EU move was “inevitable,” and “additional steps are possible,” German Chancellor Angela Merkel said in a statement. “It’s now up to the Russian leadership to decide if it wants to follow the path of de-escalation and cooperation.”

The EU arms curbs won’t stop France from selling two Mistral helicopter carrier warships to Russia, under a contract signed in 2011. The newspaper Le Monde has valued the contract at 1.2 billion euros ($1.6 billion). While Russian sailors are already in France to take delivery of the first ship, French President Francois Hollande last week held out the prospect of canceling the second sale.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Jonathan Stearns in Brussels at jstearns2@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net Eddie Buckle, Paul Abelsky

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