Jetliner Downing Weakens Business Case Against Russia Sanctions

Jul 19, 2014 12:00 am ET

(For more news on the downing of flight MH17, see EXT2 <GO>.)

July 19 (Bloomberg) -- The deadly crash of a Malaysia Airlines passenger jet in Ukraine is making it harder for business groups to block additional sanctions on Russia as calls to get tough increase, analysts studying the conflict said.

President Barack Obama said that a surface-to-air missile fired from territory held by Russian-backed Ukrainian rebels brought down the airliner on July 17, killing 298 people including at least one American citizen. The rebels have blamed government forces.

“I think it makes it hard for the business community to lobby against sanctions, that’s for sure,” Timothy Ash, chief of emerging markets research at Standard Bank Plc in London, said in an an e-mail yesterday. “If Russian involvement is proven, it will be hard for EU countries not to respond and follow the U.S. lead.”

The Malaysia Airlines disaster came a day after the U.S. and 28-nation European Union announced tougher sanctions on Russia, including limits on lending to OAO Rosneft and OAO Gazprombank. The penalties were unveiled after top business groups, including the U.S. Chamber of Commerce and National Association of Manufacturers, had raised objections to further sanctions.

Officials from the Washington-based groups didn’t respond to a request for comment on the latest developments.

McCain’s Call

The U.S. should impose additional sanctions on Russia, as well as provide Ukraine with military support, in the wake of the plane crash, Senator John McCain, an Arizona Republican, said yesterday.

“We need to impose true sectoral sanctions on key Russian industries, and our European allies should join us in that effort in order to make those sanctions as effective as possible,” he said in a statement.

State Department spokeswoman Jen Psaki said talks with Europe on increasing sanctions against Russia were continuing.

“We can’t make a full prediction of that for obvious reasons,” Psaki said. “But certainly seeing the horrific events that happened yesterday, the families mourning, all of the information available should be a wake-up call for everybody.”

Germany, Poland

Germany yesterday called for an impartial probe of the downing of the Malaysian plane, Italy signaled no shift from its opposition to more biting sanctions and Poland demanded a harder line on the Kremlin.

“It’s very important that the result of this tragedy should be unmitigated, tough and consistent pressure on the separatists and Russia to stop these actions,” Polish Prime Minister Donald Tusk told reporters in Warsaw.

U.S. business groups in 2012 successfully lobbied Congress to end Cold War-era trade restrictions with Russia, the world’s eighth-largest economy. The U.S. last year exported about $11 billion worth of goods -- less than 1 percent of all U.S. exports -- to the former Soviet nation, according to U.S. Commerce Department data.

“I don’t think any business or business lobby wants to be in the position right now of trying to prevent the implementation of policies that end the conflict,” Jeffrey Mankoff, deputy director of the Russia and Eurasia Program at the Center for Strategic and International Studies in Washington, said in a phone interview.

Cease Fire

Obama yesterday called for a cease-fire in Ukraine, where the government is fighting Russian-backed rebels after Russia annexed the Crimea region in March. Obama said Russian President Vladimir Putin’s government has supplied separatists in Ukraine with arms, training and anti-aircraft weapons, though he said the U.S. isn’t yet certain who downed the Malaysian airliner.

“I think that this certainly will be a wake-up call for Europe and the world that there are consequences to an escalating conflict in eastern Ukraine, that it is not going to be localized, it is not going to be contained,” Obama told reporters at the White House.

Obama said sanctions, designed to weaken the Russian economy and force an end to the flow of arms to Ukraine, are imposing a cost on Russia.

Russian Markets

The Micex Index yesterday slid 1.3 percent to close at 1,422.53 in Moscow, resulting in a 1.5 percent loss since Feb. 28, the day before Putin’s intervention. The yield on local- currency bonds due February 2027 was unchanged at 9.04 percent for a gain in the period of 68 basis points.

The ruble, which has advanced 2.2 percent since February, strengthened 0.2 percent to 35.111 per dollar.

Business groups are watching the developments closely.

A statement by the Chamber of Commerce issued July 16, after Obama unveiled stricter sanctions but before the plane crash, blamed Russia’s “aggressions” for the measures though questioned the effectiveness of unilateral measures.

“As we carefully analyze the impact of these sanctions on the U.S. economy, we hope multilateral efforts will follow to support a diplomatic solution to this conflict,” Myron Brilliant, the Chamber’s executive vice president, said in the statement.

Gas Pipeline

A proposed Russian natural gas pipeline into Europe being considered by the EU “should immediately be scrapped,” Representative Jim Gerlach, a Pennsylvania Republican and co- chairman of the Congressional Ukrainian Caucus, said in a July 17 statement. The U.S. and EU should “renew discussions with Poland and the Czech Republic about deploying anti-missile defense systems in those countries to deter and contain Russian hegemony,” he said.

Exxon Mobil Corp., which works on oilfield development projects with Rosneft in Russia, is evaluating the impact of the sanctions, Alan Jeffers, a spokesman for the Irving, Texas-based company, said in an e-mail.

Should the U.S. and EU add to their sanctions, it “may weigh further on Russian equities and could revive fears of a tit-for-tat exchange of trade measures that could undermine the increasingly fragile economic recovery in the euro-zone,” according to a research note from Capital Economics Ltd in London. It said there could be a negative impact on supplies from Russia of commodities like nickel, palladium and grains.

“If the U.S. government deems it’s in our national security interest to impose sanctions against the Putin regime then we should not be stopped in that by corporate interests that don’t seem to have any moral compunctions,” said David Kramer, a former U.S. assistant secretary of state and now president of Freedom House, a Washington-based non-profit that advocates for democracy and civil liberties.

“There are other places in which to do business,” he said by phone.

--With assistance from Alan Katz, Derek Wallbank and Nicole Gaouette in Washington and James G. Neuger in Brussels.