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Russia counts cost of new economic sanctions

MOSCOW (AP) — Russia blasted the West’s new economic sanctions on Wednesday, accusing the U.S. of being “prosecutorial” in its drive to impose penalties on the country’s key energy and finance sectors.

The U.S. and European Union on Tuesday announced a raft of new sanctions that would limit the trade of arms and technology that can be used in the oil industry and for military purposes. The EU also put its capital markets off limits for Russian state-owned banks.

The U.S. and EU say Russia is helping the separatist rebels in eastern Ukraine who are accused of downing the Malaysian Airlines jet this month.

Russian President Vladimir Putin heads the Cabinet meeting in the Novo-Ogaryovo residence, outside Moscow, Russia, Wednesday, July 30, 2014. (AP Photo/RIA Novosti, Alexei Nikolsky, Presidential Press Service)

Russia’s foreign ministry said Washington was “advancing baseless claims.” In a statement, it accused the U.S. of conducting itself in a “pretentious, prosecutorial manner.”

Experts say the penalties, which had until recently mainly targeted individuals, will have more bite to them this time, rippling through the economy and causing deeper damage.

The biggest immediate impact is likely to come from the financial sanctions. In a first sign of concern, Russia’s central bank said Wednesday it would support banks targeted by the penalties.

“State-owned banks are the core of the Russian banking system. Together they count for half of assets, half of credits — they perform a very significant role,” said Vladimir Tikhomirov, chief economist at BCS. “Given their current difficulties in raising new debts… that would mean their ability to lend to other banks, smaller banks, is going to be more restricted also.”

U.S. officials said Tuesday that roughly 30 percent of Russia’s banking sector assets would now be constrained by sanctions. EU officials said Russia’s majority state-owned banks last year issued long-term debt worth 7.5 billion euros ($10 billion) on the EU market, as well as 15.8 billion euros in debt on the Russian market.

The measures against Russian banks are meant to inflict just enough pain without causing them to collapse. Only debts with a maturity of over 90 days will be targeted by the measures.

“The aim is not to destroy these banks,” said a senior EU official, who was briefing reporters on condition of anonymity prior to the sanctions’ official announcement. “We do not want them to get into a liquidity crisis.”

But analysts say the sanctions will inflict economic pain, not least because the resulting uncertainty will ensure investors stay clear from the dealings with those banks for fear of running afoul of sanctions.

The EU also moved to prohibit key technology exports that could be used for oil exploration and development in Russia, which relies heavily on Western expertise. EU officials noted that the prohibition would target just one tenth of overall energy tech exports to Russia, and some analysts say that such projects would only be impacted in the next year.

“It’s more of a long-term development and to some extent that’s symbolic,” Chris Weafer, an analyst at the investment firm Macro Advisory, told the AP by phone.

The reaction in the stock markets in Moscow was mixed, as investors had sold off shares in Russian companies for the past two weeks after Malaysia Airlines Flight 17 was downed. Reports last week that the new, tougher sanctions were due had also caused markets to tumble for days ahead of their formal announcement Tuesday.

On Wednesday, the MICEX benchmark index was up 2 percent, mainly thanks to a rise in shares in companies that were spared sanctions. Shares in VTB Bank, Russia’s second largest and one of the sanctions targets, were down 0.9 percent.

The latest sanctions could accelerate an economic downturn that was already hitting Russia. The International Monetary Fund slashed its growth forecast for this year to nearly zero, from 1.3 percent last year. Meanwhile, the U.S. says investors are expected to pull more than $100 billion out of the country this year.

“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.

Europe has a far stronger economic relationship with Russia than the U.S. does, and until this week European Union leaders had been reluctant to impose harsh penalties — in part out of fear of harming 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.

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

“It’s not a new Cold War,” he said.

How long the sanctions stay in place is a key factor for how much impact they will have on Russia. EU officials emphasized that while the latest measures have a duration of one year, they could be annulled at any time. That offers an incentive to cancel or scale them back.

Russia has the money to shore up its banks in the short term, meaning the sanctions would have to remain in place for more than just a few months to have a big impact on the economy.

“Banks have accumulated a cushion of hard currency reserves,” said Yaroslav Lissovik, head of company research in Russia at Deustche Bank. “Russia also has very low levels of public debt and large fiscal reserves. In our view, this could be employed in the case of difficulties with refinancing.

It remains uncertain whether the tougher penalties will have any impact on Russia’s actions in Ukraine — nor was it clear what further actions the U.S. and Europe were willing to take if the situation remains unchanged. In the nearly two weeks since the Malaysia Airlines plane was downed in eastern Ukraine, Russia appears to have deepened its engagement in the conflict, with the U.S. and its allies saying Russia was building up troops and weaponry along its border with Ukraine.

German Foreign Minister Frank-Walter Steinmeier pressed for a diplomatic effort to calm the situation in Ukraine, saying Wednesday that “sanctions alone are not a policy, so we must continue to seek opportunities to defuse the conflict politically.”

Associated Press

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