March 25 (Bloomberg) -- The U.S. is taking aim at Russian markets and the ruble with sanctions against Russian officials and allies of President Vladimir Putin along with the threat of broader economic penalties.
In addition to the sanctions against individuals by the U.S. and European Union, President Barack Obama and the six other leaders of the world’s industrialized democracies joined yesterday to warn of possible sanctions targeting sectors of the Russian economy, including energy and finance.
The U.S. sanctions against the individuals and a Russian bank have “a broader chilling effect on the Russian economy that makes investors think twice about putting their money into Russia,” Deputy National Security Adviser Ben Rhodes said at a briefing yesterday in the Hague. “That has an effect, a knock-on effect, on the ruble.”
The economic costs to Russia for its annexation of Crimea and further threats to Ukraine are already beginning to unfold in the worst standoff between Russia and its former Cold War enemies since the collapse of the Soviet Union.
Russia’s benchmark Micex Index has plunged 13.7 percent this year compared with an almost 5 percent decline in the MSCI Emerging Markets Index. It was down 0.7 percent yesterday in Moscow. The ruble is the second-worst performer against the dollar behind Argentina’s peso among 24 developing-market currencies tracked by Bloomberg, weakening 9 percent. It rose 0.4 percent yesterday.
Investors pulled $5.5 billion from Russian equities and bonds this year through March 20, according to data compiled by EPFR Global, a Cambridge, Massachusetts-based firm tracking fund flows. By comparison, total outflow in 2013 was $6.1 billion.
“The Russians are already feeling the pain due to sharp falls in stock prices and the value of ruble,” said Charles Kupchan, a senior fellow at the Council on Foreign Relations in Washington. “Should the West eventually ramp up the sanctions to go after Russian banks and industries, the pain would increase markedly.”
The EU, moving more slowly than the U.S. on sanctions, expanded its list of Russians and Ukrainians punished with asset freezes and travel bans to 51 on March 21. The U.S. widened its list to 27 Russians and four Ukrainians the previous day. Obama also authorized potential future penalties on Russian industries, including financial services, energy, metals and mining, defense and engineering.
A G-7 declaration released yesterday in The Hague warned of potential future sanctions targeted at economic sectors that “will have an increasingly significant impact on the Russian economy, if Russia continues to escalate this situation.”
A U.S. official, who briefed reporters on condition of anonymity, said the most likely trigger for economic sanctions would be a Russian move deeper into Ukraine.
U.S. intelligence and defense officials have warned that Russia’s army has reinforced columns on approaches to major Ukrainian cities, raising concern that Moscow may be preparing to carve off more provinces the country’s east and south.
Obama and his aides have warned that wider sanctions would affect the global economy because they also would hurt multinational companies that do business in Russia and commerce with Europe. Bilateral trade between Germany and Russia, for example, hit 77 billion euros ($106 billion) last year, and German investment in Russia totals 20 billion euros, according to the German Association of Chambers of Industry and Commerce.
The Standard & Poor’s 500 Index slipped 0.5 percent to 1,857.44 yesterday in New York, and the Stoxx Europe 600 Index lost 1.1 percent as world leaders gathered in The Hague.
Rhodes said the U.S. will be “careful to calibrate” economic pressure on Russia. “We’re not seeking to totally collapse the Russian economy,” he said.
Obama and the other leaders of the seven biggest industrialized democracies -- U.S., U.K., Japan, Germany, France, Canada and Italy -- also suspended Russia’s participation in the Group of Eight nations. The leaders will skip a G-8 meeting that Putin was scheduled to host in Sochi, Russia, in June and hold a G-7 meeting instead in Brussels.
Whether Russia can resume activities with the group will depend on its future actions, Rhodes said.
“As long as Russia is flagrantly violating international law and the order the G-7 has helped to build since the end of the cold war, there’s no need for the G-7 to engage with Russia,” he said. “If there came a point where Russia would deescalate the situation and abide by international law we would not want to foreclose the potential that the G-7 would engage with them.”
Rhodes maintained that the official view from the U.S. is that Crimea could still be returned to Ukraine.
“There are not a lot of takers for recognizing an illegal annexation of a part of another country,” he said. “We’re just not going to recognize a new status quo that allows for the annexation of one piece of Ukraine over the heads of the Ukrainian government.”
Rhodes cited China in saying that Russia’s isolation is evident with even countries that aren’t backing sanctions. Obama met yesterday with Chinese president Xi Jinping and the two discussed the crisis. China abstained from the United Nations Security Council resolution that declared illegal a March 16 referendum supporting Crimea’s secession from Ukraine. Russia vetoed the UN resolution.
For China, “as they speak to their own national security interests, has always put front and center this notion of sovereignty and territorial integrity,” Rhodes said.
While Rhodes said it would be a “dramatic” move for China to support sanctions and it’s not something the U.S. expects, the abstention at the UN speaks to the future of Russia’s respect in the international community when it can’t look to countries that have traditionally offered support.
“Russia is leading no block of countries, there’s no ideological entity like communism that has global appeal,” Rhodes said. “They are isolated in what they’re doing in Ukraine. That’s very much the message that we want to send at the G-7 with the EU,” with the North Atlantic Treaty Organization “over the course of the next several days.”
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