EU Agrees to Russian Sanctions as Shooting Strains Truce

The European Union decided to enact new sanctions against Russia tomorrow, while promising to ease the curbs once President Vladimir Putin’s government makes a good-faith effort to bring peace to eastern Ukraine.

Ending days of wrangling, representatives of the 28 EU governments agreed to bar some Russian state-owned defense and energy companies from raising capital in the bloc, three EU officials said on condition of anonymity in Brussels. Some EU members had balked at the sanctions, saying they could hurt their economies and provoke Putin to break a fragile cease-fire between Ukrainian government forces and pro-Russian separatists, the officials said.

Facing the most significant penalties against his country since the fall of the Berlin Wall, Putin denies any involvement in the fighting that broke out after he annexed Crimea in March and says Russia’s Cold War foes are to blame for the diplomatic standoff. Russia will retaliate against an “unfriendly policy which doesn’t meet EU interests,” Foreign Ministry spokesman Alexander Lukashevich said in Moscow.

“If it weren’t for Crimea and the southeast of Ukraine, the West would have thought up something else,” Russian Foreign Minister Sergei Lavrov said in an interview with Itar-Tass published on the ministry’s website today. “They’ve set the goal of keeping Russia off balance at any cost.”

Lifting Sanctions

An EU statement later today will spell out what Russia needs to do to get the curbs lifted, guidance the bloc has given after each round of sanctions to date, the EU officials said. EU governments voted for the sanctions on Sept. 5 and then delayed their implementation as the cease-fire between Ukraine and Russian-backed separatists began to take hold.

The sanctions announcement pushed Russia’s Ruble lower for a fourth day. It retreated as much 0.7 percent to a record low 37.5400 per dollar as of 3:17 p.m. in Moscow. The Micex stock index fell 0.5 percent to 1,460.84, while the yield on 10-year local-currency bonds rose four basis points to 9.73 percent, the highest in a week.

Putin said yesterday that the North Atlantic Treaty Organization posed a threat to Russia by building up its forces in eastern Europe. Russia must confront “potential threats to the military security” of the country, Putin said, adding that Russia’s main security task is to keep its nuclear deterrent.

The fighting in Ukraine has killed more than 3,000 people and driven more than 1 million from their homes. Although Ukrainian authorities said separatists continued to fire on government positions, President Petro Poroshenko said Russia is beginning to withdraw troops from the border conflict zones.

Russian Withdrawal

“According to the latest information from our intelligence unit, 70 percent of Russia’s troops have been recalled across the border,” Poroshenko said yesterday in Kiev. “This gives more hope the peace initiatives have good prospects.”

Separatist rebels also released 26 captives from their enclaves in the eastern Ukrainian towns of Horlivka and Donetsk, he said on his Twitter account. Amnesty International said both sides have committed war crimes.

The truce has helped Ukrainian markets rally. The yield on Ukrainian bonds maturing in July 2017 fell 14 basis points, or 0.14 percentage point, to 12.46 percent at 2:31 p.m. in Kiev after falling 32 basis points yesterday. The hryvnia was 0.6 percent stronger to 12.9745 to the dollar.

Arctic Chill

The planned sanctions include barring some Russian state-owned defense and energy companies from raising capital in the EU, according to a European official. The U.S. and EU are also poised to halt billions of dollars in oil exploration by prohibiting cooperation in Russia’s Arctic, deep seas or shale formations, according to three U.S. officials.

EU sanctions decisions require the support of all EU governments, giving any one nation leverage to seek concessions. Several European leaders including Hungary’s Viktor Orban had expressed concerns that further penalties against Russia will hurt their own economies.

In July, the EU barred five state-owned Russian banks from selling shares or bonds in Europe. It also restricted the export of equipment to modernize the oil industry, prohibited new contracts to sell arms to Russia, and banned the export of machinery, electronics and other civilian products with military uses -- so-called dual-use goods -- to military users.

Gas Flows

Russia responded by banning imports of some EU farm goods, a step that has cut off about 5 billion euros ($6.5 billion) of annual trade and left the bloc struggling to aid its producers. Russia has signaled it will retaliate further if extra penalties are enacted.

Russian gas exporter OAO Gazprom curbed supplies to Poland, a member of both NATO and the EU, to prevent it from supplying Ukraine via so-called reverse flows. Gazprom halted sales directly to Ukraine in June.

Gazprom, which meets 15 percent of EU demand through Soviet-era pipes across Ukraine, said it’s doing pre-winter maintenance and filling Russian storage sites. EU officials will meet with Russia and Ukraine in Berlin on Sept. 20 to discuss gas supplies, a spokeswoman for the bloc said today.

The Sept. 5 cease-fire continued to show signs of strain, with the separatists shelling Ukrainian troops 20 times during the past day and 129 times since the truce began, Ukrainian military spokesman Andriy Lysenko said in Kiev today.

‘Frozen Conflict’

Yesterday, there was sporadic fighting around the Donetsk airport, and the border guard service said a bomb killed three personnel in the Luhansk region. The government is building fortifications and bringing in heavy weapons to defend the Sea of Azov port city Mariupol, Lysenko said.

The city was the target of a rebel assault last month that Ukraine said was led by Russian forces not wearing insignia.

Poroshenko indicated he’s willing to grant more autonomy to some eastern regions, where Russian is the main language. He said a draft law on “temporary self-governance in certain districts of Luhansk and Donetsk” will be submitted to parliament next week, while both regions will remain in Ukraine.

Ukrainian parliament Speaker Oleksandr Turchynov said that if the truce doesn’t hold, the government in Kiev “will have no alternative but to mobilize all resources after introducing martial law and to clear the country of usurpers.”

“Our task is prevent Donbas from becoming a zone of frozen conflict,” Turchynov said today. “I rule out a format in which Ukraine agrees that Russia controls part of territories of Donetsk and Luhansk regions.”

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