Russia’s State Banks Targeted in EU Sanctions Proposals

A ban on European purchases of bonds or shares sold by Russia’s state-owned banks is among the options for stepped-up sanctions on the Kremlin being weighed by the European Union, according to a proposal presented to member states.

Delegation chiefs from the 28 EU governments got a first look today at a range of measures to curb Russia’s access to capital markets and energy-production technology, which would require a unanimous vote by EU leaders to take effect.

“Restricting access to capital markets for Russian state-owned financial institutions would increase their cost of raising funds and constrain their ability to finance the Russian economy,” according to the options paper presented by the European Commission in Brussels. “It would also foster a climate of market uncertainty that is likely to affect the business environment in Russia and accelerate capital outflows.”

The options in the document for responding to Russia’s intimidation of Ukraine included something for virtually every EU government to dislike. France has held out against an arms embargo, German industry fears for its exports to Russia, Britain and Cyprus have been reluctant to scare away wealthy Russian investors, and Hungary has opposed wider sanctions altogether.

Government Debt

The commission, the bloc’s executive agency, will start working the ideas into formal legal proposals after today’s meeting. EU history suggests that many ideas will be discarded before decisions are made. National leaders, who would have to sign off on the plans, have pledged to meet as necessary to respond to the situation in Ukraine, although their next scheduled summit isn’t until Aug. 30.

Debate over broader sanctions coincides with moves to bar individual Russian companies from business in the EU. So far, the bloc has blacklisted 72 people and two state-owned companies in Crimea, which was annexed by Russia in March. New blacklists targeting companies and confidants of Russian President Vladimir Putin’s are due in coming days.

About 10 people will be put on the next list of individuals while the measures on business may be broadened to cover as many as 20 companies, said a German government official who asked not to be identified because the decision is pending.

‘Way Beyond’

While the options paper goes “way beyond” what the EU has done so far, “any decision still has to be taken with agreement by all 28 member states and, as we know, there are different opinions on how to deal with Russia,” said Paul Ivan, a former Romanian diplomat now with the European Policy Centre in Brussels.

The financing ban would cover securities with more than 90 days maturity and target Russian banks with more than 50 percent state ownership, the draft said. The commission predicted “sharply increased costs of issuance,” ultimately saddling the Russian government with the bill.

Russian government bond sales could continue in the EU for “an initial stage,” since Russia is a “significant investor” in European government debt, the paper said. Nor would the EU forbid equity and debt sales by privately owned companies or syndicated loans.

Deep-Sea Drilling

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.

Other ideas include halting the export of technology for deep-sea drilling, shale oil production and Arctic exploration, according to the document. The EU could also restrict technologies with both civilian and military applications.

Special materials, quantum key distribution systems, some machine tools and high-performance computers and electronics are examples of the dual-use technologies that could be made off-limits to Russian buyers, the options paper said.

Manufacturers in Germany, the bloc’s largest economy and the world’s no. 3 exporter according to 2012 World Trade Organization data, are leading the resistance to curbs on the sale of high-tech equipment and machinery. Germany accounts for 30 percent of EU exports to Russia, and in turn buys more than a third of its oil and gas from there.

Chancellor Angela Merkel’s backing for the general goal of sanctions doesn’t necessarily extend to the specifics, the German official said. A leader of a business lobby tied to Merkel’s party urged her to be “prudent” with steps that could hurt sales by German companies.

“As soon as the sanctions have an effect, for the next five to 10 years we have to rebuild the damage that has been done on all sides,” Kurt Lauk, who heads the Christian Democratic-linked Economic Council in Berlin, said in an interview yesterday.