U.S. Sanctions Target Putin’s Inner Circle

Russian President Vladimir Putin
The seizure of international inspectors by pro-Russian separatists last week raised the stakes in the crisis after Russia began military exercises on Ukraine’s border where the North Atlantic Treaty Organization says Russian President Vladimir Putin has massed about 40,000 troops. Photographer: Mikhail Klimentyev/AFP via Getty Images

The Obama administration today imposed sanctions on seven Russian officials and 17 companies linked to President Vladimir Putin’s inner circle over the crisis in Ukraine.

The list includes Igor Sechin, OAO Rosneft chief executive officer, and Sergei Chemezov, director of State Corporation for Promoting Development, Manufacturing and Export of Russian Technologies High-Tech Industrial Products, also known as Rostec, and banks such as InvestCapitalBank and SMP Bank.

The travel bans and asset freezes announced by the White House were levied in coordination with the European Union, which said today it’s adding 15 more names to the list of 55 individuals previously sanctioned. The identities of those targeted by the EU weren’t immediately disclosed.

The U.S. and EU say Russia hasn’t lived up to an accord signed April 17 in Geneva intended to defuse the confrontation between the Ukrainian government and pro-Russian separatists. The U.S. warned it’s prepared to levy additional penalties to hit the broader Russian economy if Putin escalates by sending troops into Ukraine.

“The goal here is not to go after Mr. Putin, personally,” President Barack Obama said earlier today at a news conference in the Philippines. “The goal is to change his calculus with respect to how the current actions that he’s engaging in in Ukraine could have an adverse impact on the Russian economy over the long haul.”

Export Restrictions

The U.S. also expanded export restrictions on defense technologies and services and revoked previously approved export licenses.

The new sanctions list includes Oleg Belavantsev, Putin’s presidential envoy to Crimea; Dmitry Kozak, deputy prime minister of the Russian Federation, and Evgeniy Murov, director of Russia’s Federal Protective Service and an army general.

Most of the companies on today’s list are tied to Gennady Timchenko or brothers Arkady and Boris Rotenberg, who were placed on a sanctions list on March 20. They include the Volga Group, which is controlled by Timchenko, and InvestCapitalBank and SMP Bank, which are controlled by the Rotenbergs.

One of the most prominent individuals on the list is Sechin, 53, who was Putin’s colleague at the St. Petersburg mayor’s office before rising to become the head of state-run Rosneft. Over the past decade he has built it into the world’s largest publicly traded oil company by output and reserves.

Company Ties

Rosneft, in which British oil company BP Plc holds a 20 percent stake, isn’t being sanctioned. The Russian company also has exploration projects with other international oil producers, including a venture with Exxon Mobil Corp. to drill a multibillion-barrel prospect in Russia’s Arctic Ocean.

U.S. companies and individuals aren’t prohibited from doing business with Rosneft, according to a Treasury official, who requested anonymity to provide additional details on the sanctions announcement.

Patrick McGinn, a spokesman for Exxon’s exploration arm, said on April 25 that the company’s Kara Sea project was on schedule. After the U.S. extended the reach of sanctions today to Sechin, he declined to make any additional comment.

Trading Business

Morgan Stanley agreed last year to sell its physical oil trading business to Rosneft, with the deal expected to close in the second half of 2014. Ruth Porat, chief financial officer of Morgan Stanley, said today on Bloomberg Television that while she couldn’t comment on the regulatory environment, the bank’s plans hadn’t changed.

Mikhail Leontyev, Rosneft’s spokesman, didn’t immediately answer his mobile phone or respond to a text messages from Bloomberg.

U.S. companies are prohibited from doing business with individuals and entities on the sanctions list, and all assets of those designated that are within the U.S. jurisdiction must be frozen, according to the U.S. Treasury.

“With the exception of Sechin, this list makes no material difference,” Mattias Westman, who oversees about $3.3 billion in Russian assets as chief executive officer of Prosperity Capital, said by phone. Sanctions against Sechin “may complicate relations for Rosneft with Western companies.”

An Obama administration official, who briefed reporters on condition of anonymity, said that while the additional penalties will put pressure the Russian economy, the White House doesn’t expect an immediate change in policy by Putin.

Russian Markets

The ruble erased declines and rallied 0.4 percent versus the dollar after the U.S. announcement. The Russian currency has lost almost 9 percent this year against the dollar, the second-worst performance among 24 emerging currencies tracked by Bloomberg after Argentina’s peso. While the Micex Index snapped a five-day retreat, Russian stocks are the worst performers globally this year, losing 22 percent.

Standard & Poor’s lowered Russia’s credit rating last week to BBB- and the central bank raised its key interest rate by 50 basis points to 7.5 percent to damp inflation.

“It’s a negative but not as bad as it could have been,” Joseph Dayan, head of markets at BCS Financial Group in London, said of the latest sanctions. “The big risk was sanctions against a major financial institution.”

Earlier Sanctions

“Most of this list is just an re-emphasis on companies that would already have been ‘‘covered’’ under the previous list because their parent companies or ultimate owners were sanctioned,” he said by e-mail.

In the U.S., Republican Senators Bob Corker of Tennessee and Kelly Ayotte of New Hampshire criticized the administration’s action in a joint statement as “just a slap on the wrist” for Putin.

European allies of the U.S. have been reluctant to impose broader sanctions because of the potential harm to their own economies. Gas from Russia accounted for 30 percent and oil for about 35 percent of EU imports in 2011, according to EU data. Germany, Europe’s largest economy, had $89 billion in trade with Russia in 2012.

Preparations are “very advanced” for measures that would affect broader sectors of the Russian economy, EU spokeswoman Maja Kocijancic told reporters in Brussels today.

“I don’t think the West can deal with a blockade of oil and gas and is ready to make the sacrifice for Ukraine,” Westman said. “It will be a real headache if there is no gasoline in Munich, Vienna or Warsaw and then gasoline prices in the U.S. would jump 20-30 percent. Russia would simply load their oil onto tankers to China,” he said.

Tim Ash, the London-based head of emerging markets research for Standard Bank PLC, noted that traders were expecting much worse sanctions.

Companies Excluded

“What is clear from this is that the U.S. government’s very, very eager that companies with traded assets are excluded” from sanctions, to limit the impact on institutional investors and U.S. and European interests, he said.

The seizure of international inspectors by pro-Russian separatists in Ukraine last week raised the stakes in the crisis, after Russia began military exercises on Ukraine’s border. The North Atlantic Treaty Organization says Putin has massed about 40,000 troops.

In the latest violence inside Ukraine, the mayor of the country’s second-largest city, Kharkiv, Gennady Kernes, was in critical condition after he was shot in the back while riding his bike, the city council said in a statement. Kernes is a former supporter of ousted Ukrainian President Viktor Yanukovych who supported separatism in the past before reversing his stance. He was in critical condition, according to a statement on the city’s website.

To the north in the Donetsk region, a Ukrainian soldier was killed and another wounded when a homemade bomb detonated near their unit during a patrol, Russian state-run news service RIA Novosti reported, citing Ukraine’s Defense Ministry.

Pro-Russian separatists in the eastern Ukrainian city of Slovyansk now have 40 hostages, including the observers from the Organization for Security and Cooperation in Europe.

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