U.S., EU Escalate Sanctions on Russia as Putin Ignores Ultimatum

Jul 16, 2014 7:41 pm ET

(For more on the Ukraine crisis, see EXT2.)

July 16 (Bloomberg) -- The Obama administration, acting in concert with the European Union, imposed sanctions on Russian banks, energy companies and defense firms in the latest attempt to punish the country over Ukraine.

The U.S. and EU, which say Russia is supporting the rebels in Ukraine, sought to squeeze the country’s $2 trillion economy by limiting access to financing.

Among the companies hit by the U.S. penalties were OAO Rosneft, Russia’s largest oil company, natural gas producer OAO Novatek, OAO Gazprombank, the country’s third-largest lender, and state economic development lender Vnesheconombank, the U.S. Treasury Department said today.

The EU said it would halt lending for new public-sector projects in Russia by the European Investment Bank, the bloc’s in-house lender, and will use its influence to stop new lending by the European Bank for Reconstruction and Development.

“These sanctions are significant,” U.S. President Barack Obama said today at the White House. “But they are also targeted, designed to have maximum impact on Russia while limiting any spillover effects on American companies or those who are allies.”

At a news conference in Brasilia, Russian President Vladimir Putin called the U.S. sanctions “aggressive policy” and will only end up hurting American companies. The sanctions will lead U.S.-Russia relations to a dead end, he said.

The penalties go further than earlier rounds of sanctions that targeted individuals who are part of Putin’s inner circle, while stopping short of hitting entire sectors of the Russian economy. The U.S. and its allies warned that sanctions can be expanded if the situation warrants.

Debt Markets

The sanctions will prevent the Russian companies from accessing U.S. equity or debt markets for new financing with a maturity beyond 90 days. That will raise borrowing costs and effectively cut off medium- and long-term U.S. financing. They don’t otherwise prohibit U.S. companies or individuals from doing business with the Russian firms.

The moves were the latest response to what U.S. and European leaders say is Putin’s refusal to end support for Ukrainian rebels who have been battling government forces in the east. Russian forces again were massing at the Ukraine border, according to the Pentagon, with about 10,000 to 12,000 Russian combat troops in place, up from a low of about 1,000.

Russia has denied previous allegations that it’s responsible for fomenting turmoil in Ukraine.

“The situation in the Ukraine is unacceptable,” British Prime Minister David Cameron said. “The territorial integrity of that country is not being properly respected by Russia.”

Russia’s Economy

The U.S. and EU are seeking to raise the price for Russia’s actions. The Russian economy just skirted a recession last quarter, as capital markets seized up while the U.S. and EU clamped down on individuals and companies tied to Putin’s inner circle. The Finance Ministry warned last week that growth will slow to a crawl if stiffer sanctions are imposed. The ruble fell the most in two weeks in the offshore market after the U.S. and EU announcements.

“These sanctions get the Russians’ attention,” Steven Pifer, a former U.S. ambassador to Ukraine and senior fellow at the Brookings Institution’s Center for 21st Century Security and Intelligence in Washington, said in a phone interview. “You’re now targeting major companies -- Rosneft, Novatek and now the Gazprombank.”

OAO Gazprom, the Russian gas giant, wasn’t included in the sanctions. ‘

‘What they’re trying to do is find a way to ratchet up the sanctions while holding something in reserve,’’ Pifer said of the U.S. actions. “They’re trying to do this in a graduated way.”

Exxon Deal

Exxon Mobil Corp. and Rosneft had been set to start their first Arctic well this year, targeting a deposit that may hold more oil than Norway’s North Sea. In return, Rosneft has the option of buying into Exxon’s portfolio of exploratory projects in the U.S. Gulf of Mexico, west Texas and the Canadian province of Alberta.

Alan Jeffers, an Exxon spokesman, declined to comment on whether the new round of sanctions will disrupt the Texas-based oil producer’s exploration partnership with Moscow-based Rosneft, which produces 5 percent of the world’s oil.

Loans Unnecessary

Rosneft Chief Executive Officer Igor Sechin called the U.S. measures illegal and said they would hurt American banks that do business with his company. Speaking to reporters in Brasilia tonight, Sechin said that Rosneft can fund its long-term projects without loans and that the penalties wouldn’t affect its current projects with Exxon.

Morgan Stanley agreed in December to sell its oil- merchanting business to Rosneft. The sale received U.S. antitrust approval last month and Morgan Stanley Chief Executive Officer James Gorman said a week earlier that he expected the deal to be completed by the end of September.

Mark Lake, a spokesman for the New York-based bank, declined to comment today on the sanctions and how they might affect the deal.

Debt Squeeze

There will be a longer-term impact on Rosneft as it looks to roll over debt, said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington. Rosneft has $13.7 billion in loans coming due this year out of a total debt load of nearly $74 billion, Bloomberg data show.

“Rosneft is really on the limit with how much debt it has,” Aslund said. “I think they will be seriously squeezed in their development.”

The U.S. Chamber of Commerce and National Association of Manufacturers held a strategy session yesterday with representatives from about 20 U.S. companies. The Business Roundtable, an association of chief executive officers, will discuss the impact with its members tomorrow, according to people familiar with the sessions, who asked for anonymity because the discussions are private.

The U.S. action also blocks the assets of eight state-owned defense firms, including weapons-maker Kalashnikov Concern, which manufactures its namesake assault rifle. They also targeted four Russian officials, including a top aide to Putin and a commander in the security service.

Even with the threat of additional sanctions, Russia hasn’t backed down in Ukraine. U.S. Army Colonel Steve Warren, a Pentagon spokesman, said the Russian troop presence on the Ukraine border is “intimidating.”

“It’s been building steadily over the last several weeks,” he said. The Russian military “certainly has the capability to conduct operations on either side of the border.”

--With assistance from David Lerman, Angela Greiling Keane, Ian Katz and Brian Wingfield in Washington, Joe Carroll in Chicago, Michael J. Moore in New York and James G. Neuger in Brussels.