Sanctions Vows Against Russia Called a Paper Tiger

Four months after Vladimir Putin’s government annexed Crimea, the U.S. and European Union have failed to deliver on threats to cripple Russia’s economy, penalizing fewer than 100 people and companies.

The U.S. has drawn up proposals to deny Russia access to debt markets and to technology with both civilian and military uses, and the EU is weighing similar steps, according to more than a dozen U.S. and European diplomats who asked not to be named discussing internal deliberations. Yet there’s no plan to impose the measures.

The inaction over Russia’s intervention in Ukraine stems from divisions among the 28 members of the EU, a gap between the U.S. and Europe over how to proceed, and disagreements within President Barack Obama’s administration over moving forward without the Europeans.

“Sometimes I’m embarrassed for you as you constantly talk about sanctions and yet candidly, we never see them put in place,” Republican Senator Bob Corker of Tennessee admonished Obama administration officials at a hearing in Washington yesterday. With empty threats, the U.S. risks becoming a “paper tiger,” Corker said.

Inside the U.S. administration, White House officials are wary about acting without the Europeans, not wanting to create a trans-Atlantic rift that would undermine future cooperation with Europe on a number of issues, or to impose bans that would disadvantage U.S. businesses against European ones, according to three U.S. officials.

State, Treasury

On the other side are some in the State Department and Treasury Department who think trade or financial restrictions should have been imposed a month ago to deter Russia from further action in Ukraine and are frustrated that the White House hasn’t acted on proposals that have been submitted, these officials said.

Asked today why the Obama administration has failed to move forward with wider sanctions, White House spokesman Josh Earnest said “the United States in concert with our allies stands prepared to act if necessary,” and he said “the prospect of sanctions remains on the table.”

There’s no “consensus within the U.S. government, let alone within the EU,” said Andrew Weiss, who oversees Russia research in Washington and Moscow for the Carnegie Endowment for International Peace. There’s “a perception that the White House has been unresponsive” to sanctions that could be imposed without the Europeans.

Exploiting Fractures

Russian President Putin has exploited the fractures blocking decision-makers in Brussels and Washington, shrewdly playing on fears of EU states that depend on Russian trade and energy while portraying the U.S. as meddling in Europe’s affairs, according to a European envoy and a U.S. official who weren’t authorized to be identified.

Putin is “trying to drive a wedge” between the U.S. and EU, said Weiss. The Russian leader is capitalizing on “resentment in Europe” over the U.S. championing trade and financial bans that would pinch European economies without affecting most Americans, he said.

“That’s matched by resentment in Washington about Europe’s reluctance to go fast,” said Weiss, a former Clinton administration official who directed Russia and Ukraine policy on the National Security Council. “Even in the best of times, EU decision-making is one step forward and two steps back.”

Asset, Travel Bans

EU governments provisionally agreed to add 11 more people to the 61 individuals and two businesses under European asset and travel bans for supporting separatists in Ukraine.

That blacklist and a similar U.S. Treasury Department roster of 52 individuals and 19 entities have been dismissed by advocates of stronger action as symbolic gestures that failed to alter Putin’s risk-reward calculus.

U.S. and EU officials say Putin continues to aid pro-Russian separatists while voicing support for peace talks. European diplomats say broader sanctions would almost certainly come if Russian forces intervened directly as Ukraine’s military presses an advance that’s under way against the rebels.

One proposal to deter further Russian intervention would bar American financial institutions from buying or selling assets of any Russian bank under sanctions, according to the three U.S. officials, who spoke on condition of anonymity to describe internal deliberations. That would block U.S. banks from underwriting, buying, selling or trading a targeted institution’s bonds, effectively blocking access to debt markets and financing.

European Banks

It’s a measure that Robert Kahn, a former Treasury Department official now at the Council on Foreign Relations in Washington, said the U.S. could impose unilaterally with dramatic effect because of the dominance of the U.S. financial system. Even so, “there’s a value in bringing Europe along for political reasons as much as economic ones,” Kahn said.

European states have studied halting new financing for Russia from the European Bank for Reconstruction and Development and the European Investment Bank, according to two European officials who asked not to be named because of the sensitivity of the issue. Russia is the top recipient of project-financing from the London-based EBRD, amounting to 1.8 billion euros last year.

Another proposal would stop U.S. sales of dual-use technology, such as spare parts for helicopters, machine parts and drills. The measure would have less impact if Europe didn’t impose a similar ban on its own companies, Kahn said.

‘Close Consultation’

At yesterday’s hearing of the Senate Foreign Relations Committee, Assistant Treasury Secretary Daniel Glaser said the U.S. is working on numerous options in a “broad range of sectors” that it could impose if Russia “does not take immediate steps toward de-escalation.”

This “involves close consultation with our partners to maximize the impact on the Russian economy,” said Glaser, who said he traveled to France, Germany and the U.K. in the last two weeks to advance sanctions preparations.

John Herbst, a former U.S. ambassador to Ukraine who now is director of the Atlantic Council’s Eurasia Center in Washington, said in an interview that “strong leadership from Washington could move the Europeans in the right direction. It may be painful in terms of certain business interests, but if we don’t stop Putin now, what might he do next?”

Russia’s Economy

The EU’s next chance to discuss broader sanctions on Russian industry, finance and trade would be at a July 16 leaders’ summit. With Russia engaged in talks aimed at restoring a cease-fire, however, there’s little appetite for punitive action that could undermine negotiations, the European diplomats say.

EU and U.S. officials say the mere threat of additional sanctions has hit Russia’s economy by stoking market uncertainty and discouraging investment.

Russia is struggling to steady its $2 trillion economy in the face of an estimated $80 billion in capital outflows in the first five months of 2014 and a ruble that’s down 3.3 percent against the dollar this year.

At the same time, there’s a risk to threatening more and doing less, said Kahn, an economist who worked for the International Monetary Fund. “As soon as you stop threatening, markets rally,” he said.

Russia’s Micex index has risen 21 percent from this year’s low on March 14, just before Crimea’s referendum to join Russia.

EU policies require unanimous consent, and states including Italy, Austria, Slovakia, France and Greece have raised objections to wider sanctions for economic and political reasons.

Pressing Sanctions

In internal debates, northern and northeastern nations including Poland and the Baltic States are pushing for sanctions against entire sections of the Russian economy, diplomats say. That includes the four nations -- Latvia, Lithuania, Estonia and Finland -- that rely solely on Russia’s OAO Gazprom for natural gas and are most vulnerable to a Russian cutoff but that also have checkered histories with their mammoth eastern neighbor.

Cyprus, Italy and other southern European states rely on Russian capital, trade and tourism and fear ruining traditionally good relations, the diplomats said, while Slovenia and Hungary are among nations worried about Russia retaliating by cutting energy supplies. Most EU nations are concerned that sanctions could boomerang on economies still recovering from the euro crisis.

European Dependence

“Our decision on sanctions is so difficult because it is linked to European dependence on Russian gas” for 30 percent of supply and deep economic ties with the country, Jerzy Buzek, chairman of the European Parliament’s industry and energy committee, said in an interview. Buzek, a former Polish prime minister who favors tougher sanctions, acknowledged they pose “some threats to us here in Europe.”

U.S. and EU leaders have sought to keep the threat of sanctions alive, with German Chancellor Angela Merkel warning on July 2 that broader sanctions haven’t been ruled out if Russia fails to back peace efforts. A day earlier, U.S. Treasury Secretary Jacob J. Lew said more penalties could drive Russia into recession.

Debate over economic warfare has “sucked the oxygen out of the larger policy debate,” Weiss said. While sanctions are a tool to pressure Putin, he said they won’t force Ukraine and Russia to reach an accord.