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Obama Joins Europe in Expanding Sanctions on Russia Coordinated Sanctions Aim at Russia’s Ability to Tap Its Oil Reserves
(about 4 hours later)
WASHINGTON — President Obama announced expanded sanctions against Russia on Tuesday, just hours after the European Union imposed its most sweeping measures yet penalizing Moscow for its role in supporting separatists in neighboring Ukraine. WASHINGTON — The United States and Europe kicked off a joint effort on Tuesday intended to curb Russia’s long-term ability to develop new oil resources, taking aim at the Kremlin’s premier source of wealth and power in retaliation for its intervention in Ukraine.
The latest American actions took aim at more Russian banks and a large defense firm, but they also went further than past moves by blocking future technology sales to Russia’s lucrative oil industry in an effort to inhibit its ability to develop future resources. The measures were meant to largely match those unveiled earlier in the day in Europe. In announcing coordinated sanctions, American and European leaders went beyond previous moves against banking and defense industries in an effort to curtail Russia’s access to Western technology as it seeks to tap new Arctic, deep sea and shale oil reserves. The goal was not to inhibit current oil production but to cloud Russia’s energy future.
“Today is a reminder that the United States means what it says and we will rally the international community in standing up for the rights and freedom of people around the world,” Mr. Obama said on the South Lawn of the White House. The new strategy took direct aim at the economic foundation of Russia, which holds the largest combined oil and gas reserves in the world. The growth of the oil industry in the last two decades has powered Russia’s economic and geopolitical resurgence since the collapse of the Soviet Union and enriched allies of President Vladimir V. Putin. Russia pumps about 10.5 million barrels of oil a day, making it among the largest producers.
Mr. Obama said the government of President Vladimir V. Putin had gone beyond past support for pro-Russian separatists fighting the central Ukrainian government in Kiev and was now directly participating in the civil war by firing artillery across the border, transporting more military equipment to the rebels and massing its own troops. “The biggest edge that western energy companies still have is their technological edge — that’s why these sanctions have the potential to have significant impact,” said Michael A. Levi, an energy expert at the Council on Foreign Relations. “Chinese companies can’t step in and provide shale technology where U.S. companies are blocked. They can provide capital; they can provide people. They can’t fill in on the technology front.”
“In other words, today Russia is once again isolating itself from the international community setting back decades of genuine progress,” he said. “And it doesn’t have to come to this. It didn’t have to come to this. It doesn’t have to be this way. This is a choice that Russia and President Putin in particular has made.” The technology cutoff could be important because Russia is only now at the early stages of developing new Arctic, deep sea and shale resources. Most of its current production comes from depleted Siberian deposits that will eventually run out. And several Western oil companies have been working with Russia to expand their resources.
Still, in response to questions from reporters, Mr. Obama said “no, it’s not a new cold war” and made clear he was not considering providing arms to Ukraine’s government, as some Republicans have urged. “They are better armed than the separatists,” he said. “The issue is how do we prevent bloodshed in eastern Ukraine. We’re trying to avoid that. And the main tool that we have to influence Russian behavior at this point is the impact that it’s having on its economy.” ExxonMobil has a joint venture with Rosneft, the state-owned oil giant, to develop Arctic oil, and is scheduled to drill it’s first well in the Kara Sea within weeks. BP, which owns 19.75 percent of Rosneft, just signed a joint venture with the Russian firm in May to search for shale oil in the Volga-Urals region. Even though BP announced higher quarterly profits on Tuesday, its stock was hammered by the sanctions news, falling 3 percent. BP warned investors bluntly that further sanctions “could adversely impact our business and strategic objectives in Russia.”
The carefully orchestrated actions on both sides of the Atlantic were designed to demonstrate solidarity in the face of what American and European officials say has been a stark escalation by Russia in the insurgency in eastern Ukraine. Until now, European leaders have resisted the broader sorts of actions they agreed to on Tuesday and their decision to do so reflected increasing alarm that Russia is not only helping separatists in Ukraine but directly involving itself in the fighting. Dan Yergin, chairman of Cambridge Energy Research Associates, said the new energy measures underscored how much ties have deteriorated. “A year ago, Western collaboration with Russia’s energy sector was one of the bright spots in what had become a dour relationship,” he said. “No longer.”
They are “meant as a strong warning,” said Herman Van Rompuy, the president of the European Council, in a statement on Tuesday that was joined by José Manuel Barroso, the president of the European Commission. “Destabilizing Ukraine, or any other Eastern European neighboring state, will bring heavy costs,” the statement said. The carefully orchestrated actions on both sides of the Atlantic were intended to demonstrate solidarity in the face of what American and European officials say has been a stark escalation by Russia in the insurgency in eastern Ukraine. Until now, European leaders had resisted the broader sorts of actions they agreed to on Tuesday and their decision to do so reflected increasing alarm that Russia was not only helping separatists in Ukraine but directly involving itself in the fighting.
The Obama administration’s sanctions were intended to largely, though not precisely, match the Europeans. In addition to the oil technology limits, the American decision adds three more banks to the list of those cut off from medium- and long-term capital financing, including VTB Bank, one of the largest in Russia. They are “meant as a strong warning,” Herman Van Rompuy, the president of the European Council, said in a statement on Tuesday that was joined by José Manuel Barroso, the president of the European Commission. “Destabilizing Ukraine, or any other Eastern European neighboring state, will bring heavy costs,” the statement said.
The administration added United Shipbuilding Corp., a state-owned firm created by Mr. Putin in 2007, to its list of military companies banned from doing business with Americans. Although the United States did not impose an arms embargo as the European Union decided to do, American officials argued that the series of sanctions they have imposed over the last few months on defense firms comes close to achieving the same result. President Obama said Russia’s economy would continue to suffer until it reversed course. “Today is a reminder that the United States means what it says and we will rally the international community in standing up for the rights and freedom of people around the world,” he told reporters on the South Lawn of the White House.
European governments moved ahead despite concerns that Europe would also pay an economic price for confronting the Kremlin more aggressively. The new sanctions, which are meant to hit significant parts of the Russian economy including its banks and its energy industry, could take effect as soon as Aug. 1, though the necessary legal formalities were likely to take longer to complete, officials said. Mr. Obama said the fact that Europe was now joining the United States in broader measures means they “will have an even bigger bite” but in response to reporters’ questions, he said “it’s not a new Cold War” between the two countries and made clear he was not considering providing arms to Ukraine’s government — as some Republicans have suggested — as it tries to put down the pro-Russian insurgency.
Full details of the new European sanctions were not expected to be published until later in the week, but the European Union issued a fact sheet Tuesday afternoon outlining the main points. “They are better armed than the separatists,” he said. “The issue is, ‘How do we prevent bloodshed in eastern Ukraine?’ We’re trying to avoid that. And the main tool that we have to influence Russian behavior at this point is the impact that it’s having on its economy.”
Russia’s state-owned banks and development banks, which often raise money in Western financial markets, are a principal target. The sanctions bar European banks or individual investors from buying or trading in new bonds or securities issued by those banks with a maturity longer than 90 days. The American and European actions were intended to largely, though not precisely, match each other. The United States cut off three more Russian banks, including the giant VTB Bank, from medium- and long-term capital markets and barred Americans from doing business with the United Shipbuilding Corporation, a large state-owned firm created by Mr. Putin. The Obama administration also formally suspended export credit and development finance to Russia.
The sanctions also impose an embargo on new sales of arms to Russia, or dual-use goods — those with both civilian and military uses — to Russian military buyers. Existing deals, like the French contract to supply Russia with warships, would not be affected, according to diplomats, who spoke on the condition of anonymity Tuesday because the agreement had not yet been formally announced. The European Union adopted similar restrictions on capital markets and applied them to Russian state-owned banks. It imposed an embargo on new arms sales to Russia and limited sales of equipment with both civilian and military uses to Russian military buyers. Europe also approved new sanctions against at least three close Putin associates, but did not identify them publicly.
Moreover, sales of certain kinds of technology for oil production and exploration in deep water, in shale deposits and in the Arctic would be barred. The sanctions do not affect equipment and technology for natural gas, a sensitive sector because several European nations depend heavily on gas supplies from Russia. European governments moved ahead despite concerns that Europe would pay an economic price for confronting the Kremlin more aggressively. While their actions went far beyond any previously taken against Russia over the Ukraine crisis, they were tailored to minimize their own costs. The arms embargo, for instance, applies only to future sales, not to the much-debated delivery by France of Mistral-class helicopter carriers that resemble bigger aircraft carriers. And the energy technology restrictions do not apply to Russian natural gas, which Europe heavily relies on.
The European Union also approved new sanctions against at least three close Putin associates, diplomats said. The individuals’ names were not immediately available. The new sanctions could take effect as soon as Friday, though the necessary legal formalities would most likely to take longer to complete, officials said.
The president of Lithuania, Dalia Grybauskaite, welcomed the decision “on a wide range of sanctions on Russia” using her Twitter account. But she expressed unease that France would be able to maintain its naval deal with Moscow. “Unfortunately, nothing to stop the deal of Mistral yet,” she wrote, referring to the class of assault ships involved. Lithuania is one of five European Union states that directly border on Russian territory. The president of Lithuania, Dalia Grybauskaite, welcomed the decision “on a wide range of sanctions on Russia” using her Twitter account. But she expressed unease that France would be able to maintain its naval deal with Moscow. “Unfortunately, nothing to stop the deal of Mistral yet,” she wrote. Lithuania is one of five European Union states that are close to or border Russia.
The new sanctions seemed likely to escalate a diplomatic confrontation with Russia that is seen as the most serious of the post-Cold War era, and posed a test of the European Union’s ability to act decisively in a foreign policy crisis, especially when its own economic interests are at risk. Mr. Van Rompuy departed from the usual cautious language of Europe’s declarations by condemning Russia for actions that “cannot be accepted in 21st century Europe,” including “illegal annexation of territory” — a reference to Crimea — “and deliberate destabilization of a neighboring sovereign country.” He also cited the “anger and frustration” over the downing of Malaysia Airlines Flight 17 over rebel-held territory July 17 and “the delays in providing international access to the site of the air crash, the tampering with the remains of the plane, and the disrespectful handling of the deceased.”
Secretary of State John Kerry said at a news conference earlier Tuesday in Washington that the West would continue to impose sanctions “if that is what we must do,” though he called once again for the separatists in Ukraine to agree to a cease-fire “now, not in the future” and reach a peace agreement that would make sanctions unnecessary. “If Russia continues to go down this path, however, Russia will leave the international community with no choice,” Mr. Kerry said. Although European commerce with Russia will probably decline because of the sanctions, where the measures are expected to more severely affect Russia are the restrictions on the ability of Russian banks to raise money in Europe and the United States. “These sanctions can have quite a substantial chilling effect on the Russian economy,” said Adam Slater, a senior economist at Oxford Economics in London. “That is probably a quite effective way to put pressure on Russia.”
Mr. Van Rompuy departed from the usual cautious language of European Union declarations, condemning Russia for actions that “cannot be accepted in 21st century Europe,” including “illegal annexation of territory” — a reference to Crimea — “and deliberate destabilization of a neighboring sovereign country.” He also cited “anger and frustration” over the downing of Malaysia Airlines Flight 17 over rebel-held territory last week, “the delays in providing international access to the site of the air crash, the tampering with the remains of the plane, and the disrespectful handling of the deceased.”
Though Europe’s commerce with Russia will probably slump because of the sanctions, the measures are expected to hit Russia more severely, especially the restrictions on Russian banks’ ability to raise money in Europe and the United States. “These sanctions can have quite a substantial chilling effect on the Russian economy,” said Adam Slater, a senior economist at Oxford Economics in London. “That is probably a quite effective way to put pressure on Russia.”
Still, it could take time for the effects to be felt by ordinary Russians, and some analysts expected the Kremlin to shrug them off, at least publicly. “Although the latest sanctions increase the costs for Russia, Russia’s perceived national security interest calculus should not change meaningfully as a result,” analysts at Citigroup said in a note to clients on Tuesday. “If anything, official Russian government statements have emphasized Russia’s capacity for self-reliance.”Still, it could take time for the effects to be felt by ordinary Russians, and some analysts expected the Kremlin to shrug them off, at least publicly. “Although the latest sanctions increase the costs for Russia, Russia’s perceived national security interest calculus should not change meaningfully as a result,” analysts at Citigroup said in a note to clients on Tuesday. “If anything, official Russian government statements have emphasized Russia’s capacity for self-reliance.”
Mr. Kerry reiterated on Tuesday that there was “clear evidence” of artillery and rocket fire into Ukraine from Russia, and that Russia and its “so-called volunteers” were continuing to supply the rebels in Ukraine with fighters and munitions. By contrast, he said, there was “not a shred of evidence” that Russia was making any serious effort to rein in the rebels and resolve the conflict.
Similarly, Mr. Van Rompuy said in his statement that “Russia will find itself increasingly isolated by its own actions,” but that “the European Union remains ready to reverse its decisions and re-engage with Russia when it starts contributing actively and without ambiguities to finding a solution to the Ukrainian crisis.”
Even so, Mr. Putin, backed by public opinion at home, has shown no signs of backing down. On Tuesday, before the European sanctions were approved, Moscow reacted tartly to a Japanese announcement of sanctions on individuals deemed to be contributing to instability in eastern Ukraine, calling the measures “unfriendly” and threatening countermeasures, Reuters reported.
“The imposition by Tokyo of new sanctions on Russia inevitably threaten a whole range of bilateral relations, and set them back,” the Foreign Ministry in Moscow said in a statement.
Though the Western allies appeared united over the necessity of confronting Mr. Putin more directly, there were immediate signs of concern that new sanctions could boomerang on Europe, whose economies have closer ties to Russia than the United States does.
In London, the oil giant BP, which owns 19.75 percent of the Russian state oil company Rosneft, warned investors bluntly before the approval of the sanctions on Tuesday that “any future erosion of our relationship with Rosneft, or the impact of further economic sanctions, could adversely impact our business and strategic objectives in Russia, the level of our income, production and reserves, our investment in Rosneft and our reputation.” BP is the largest foreign investor in Russia.
European companies have been warning for some time that their earnings could suffer because of the conflict in Ukraine, sanctions against Russia and the sputtering of the Russian economy. Deutsche Bank, based in Frankfurt, said that “emerging geopolitical events in Ukraine and the Middle East may impact financial markets and our clients.”
The European sanctions are also bound to affect a wide range of European companies, including banks in Vienna, industrial equipment makers in Germany and automakers and parts suppliers across the continent. The German Engineering Federation, which represents makers of machine tools and other equipment, said on Tuesday that sales to Russia were down 20 percent in the first five months of 2014, compared with the same period in 2013.
“Merely the threat of sanctions has led to German machinery makers missing out on contracts,” the organization said in a statement that spoke of “longtime supplier relationships and mutual trust” being destroyed.