West seeks to inflict more economic pain on Russia

JULIE PACE
Associated Press

WASHINGTON (AP) — Citing Russia’s stalled growth rate and a flow of foreign capital out of Moscow, U.S. and European officials hope a new round of sanctions targeting energy and defense entities, as well as major banks, will deepen Russia’s economic pain even further and force President Vladimir Putin to end provocations in Ukraine.

Roughly 30 percent of Russia’s banking sector assets are now constrained by U.S. sanctions, Obama administration officials said Tuesday, shortly after announcing new penalties. The sanctions target five of Russia’s six largest state-owned banks and aim to curtail their access to U.S. debt markets.

The West is also halting future sales to lucrative Russian economic sectors, with the U.S. announcing plans to block future technology sales to the oil industry and Europe approving an arms embargo. The Europeans also backed sanctions Tuesday against state-owned banks and the energy sector, though the specific EU targets won’t be made public until later in the week.

Western officials insist the new sanctions will damage an already struggling Russian economy. The International Monetary Fund has slashed Russia’s growth forecast for this year to nearly zero, and the U.S. says more than $100 billion in capital is expected to flow out of the country.

“Russia’s actions in Ukraine and the sanctions that we’ve already imposed have made a weak Russian economy even weaker,” President Barack Obama said Tuesday.

Yet it remained uncertain whether the tougher penalties would have any impact on Russia’s actions in Ukraine — nor was it clear what other actions the U.S. and Europe were willing to take if the situation remains unchanged. In the nearly two weeks since a Malaysia Airlines passenger plane was felled in eastern Ukraine, Russia appears to have only deepened its engagement in the conflict, with the U.S. and allies warning that Russia was building up troops and weaponry along its border with Ukraine.

The West blames pro-Russian separatists for firing a missile at the jetliner and Moscow for supplying the equipment and training needed to take down a plane. Nearly 300 people were killed in the attack, including more than 200 Europeans.

The shocking incident spurred Europe in particular to impose dramatically tougher economic sanctions. Europe has a far stronger economic relationship with Russia than the U.S., but until this week, European Union leaders had been reluctant to impose harsh penalties in part out of concern about a negative impact on their own economies.

EU President Herman Van Rompuy and the president of the European Commission, Jose Manuel Barroso, said the sanctions sent a “strong warning” that Russia’s destabilization of Ukraine could not be tolerated.

“When the violence created spirals out of control and leads to the killing of almost 300 innocent civilians in their flight from the Netherlands to Malaysia, the situation requires urgent and determined response,” the two top EU officials said in a statement.

The new EU sanctions put the 28-nation bloc on par with earlier sector sanctions announced by the U.S. and in some cases may even exceed the American penalties.

Obama said coordinating Tuesday’s actions will ensure that the sanctions “will have an even bigger bite.”

Despite the West’s escalation of its actions against Russia, Obama said the U.S. and Europe were not entering into Soviet-style standoff with Russia.

“It’s not a new cold war,” he said in response to a reporter’s question.

The new European penalties placed a ban on the unapproved sale to the Russians of technology that has dual military and civilian uses or is particularly sensitive, such as advanced equipment used in deep-sea and Arctic oil drilling. The EU also approved an arms embargo, though it would not restrict past agreements, allowing France to go forward with the delivery of two warships to Russia, a deal that has been sharply criticized by the U.S. and Britain.

To restrict Russia’s access to Europe’s money markets, EU citizens and banks will be barred from purchasing certain bonds or stocks issued by state-owned Russian banks, according to EU officials.

The U.S. sanctions target three major Russian banks: the Bank of Moscow, Russian Agricultural Bank and VTB Bank, Russia’s second largest bank.

Analysts said the effort was aimed at cutting off access to resources that these banks would need to support their own lending operations, an action that could weaken economic activity in Russia.

“This limits the ability of these banks to do new business. That means the Russian economy will suffer because the banks will not be able to make as many loans,” said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University Channel Islands.

He said that barring financing from U.S. institutions to these banks likely would have a ripple effect. “It is likely that other Western banks and banks in Asia will be reluctant to do business with them,” Sohn said.

The U.S. also targeted the St. Petersburg-based United Shipbuilding Corp., a defense technologies firm, and was blocking future technology sales to Russia’s oil industry.

___

Dahlburg reported from Brussels. Associated Press writers Geir Moulson in Berlin, Elaine Ganley in Paris, Juergen Baetz in Brussels and Martin Crutsinger in Washington contributed to this report.

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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