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European Union Sanctions Target Putin’s Economic Efforts European Union Sanctions Target Putin’s Economic Efforts
(34 minutes later)
BRUSSELS — Expanding sanctions intended to deter Russia from stoking the conflict in eastern Ukraine, the European Union on Friday took aim at the heart of a project by Vladimir V. Putin, the Russian president, to reshape and revive Russia’s flagging economy through the development of Chinese-style state capitalism. WASHINGTON — The United States and the European Union moved on Friday to shut down Western aid to Russian deepwater, Arctic offshore and shale oil exploration, broadening and deepening the range of sanctions imposed on Moscow in retaliation for its intervention in Ukraine despite the potential cost to Western firms like Exxon Mobil and BP.
The measures, announced after nearly two weeks of divisive quarreling among the bloc’s 28 member states, target a raft of financial, defense and industrial companies in the vanguard of a push by Mr. Putin to replace the wild free-market capitalism of the 1990s with state-led development. With twin announcements in Washington and Brussels, the new measures targeting Russia’s energy development came in addition to further limits on access to American and European capital markets, making it harder for Russian banks to obtain any credit in foreign capitals beyond short-term loans. The United States specifically targeted Russia’s largest bank, Sberbank, for the first time.
The sanctions sharply curtail access to European capital by Rosneft, the state oil company, which took over most of the assets of Yukos, a private company disbanded by the state after the arrest in 2003 of Mikhail B. Khodorkovsky, one of a small group of oligarchs who acquired great wealth and power when Boris N. Yeltsin was president. They also target Gazprom Neft, the petroleum affiliate of the state-controlled natural gas giant, Gazprom, and Transneft, the state pipeline monopoly. The Europeans also banned travel by and froze assets of 24 more individuals, including Russian lawmakers and others deemed close to President Vladimir V. Putin, while the Americans blocked the assets of five Russian state-owned defense technology firms. Also targeted was the Russian defense conglomerate Rostec and its leadership, even as its subsidiary plans to build energy plants in Crimea, the autonomous Ukrainian region that was annexed by Moscow this year in an action still rejected by the outside world.
In a notice detailing the measure in its Official Journal published Friday, the European Union also expanded moves intended to curb Russia’s search for new sources of oil in the Arctic, a pet project of Mr. Putin and a close associate, Igor Sechin, chief of Rosneft. It prohibits European companies from providing drilling and other services for “deepwater exploration, Arctic oil exploration and production, or shale oil project in Russia,” the notice says. This adds to pressure on Exxon Mobil, the United States energy giant, to curtail its own partnership with Rosneft for oil exploration in the Arctic, a joint project that the Kremlin hailed as the most significant fruit of Russo-American cooperation since the end of the Cold War. The measures were enacted despite a fragile cease-fire between pro-Russia rebels and Ukrainian government forces that took effect last week in eastern Ukraine, and officials on both sides of the Atlantic emphasized that they could be rolled back if Russia took more significant moves to settle the violent dispute there. European Union officials specifically plan to review their sanctions before the end of the month and could revise them if the peace holds.
But, in a significant concession to European energy and oil services companies that will blunt the impact of the new sanctions, Friday’s notice specified that they would not apply to existing projects in the Arctic and elsewhere in Russia. European leaders agreed last month to impose new sanctions on Russia, but held off putting them into place amid calls by some countries to wait to see how the cease-fire played out. But the European Council, a body representing E.U. members, cited the “gravity of the situation” in a notice in its Official Journal announcing the measures on Friday, and said it “considers it appropriate to take further restrictive measures in response to Russia’s action destabilizing the situation in Ukraine.”
The new European sanctions also limit the capital-raising prospects of the United Aircraft Corporation, another of Mr. Putin’s favorite economic ventures. He set it up in 2006 to corral a diverse group of struggling defense and civilian aeronautics enterprises created during the Soviet period into a new market-oriented but state-led conglomerate. The cumulative impact of the measures was to take aim at the heart of Mr. Putin’s project to reshape and revive Russia’s flagging economy through the development of Chinese-style state capitalism. The sanctions targeted a raft of financial, defense and industrial companies in the vanguard of Mr. Putin’s push to replace the wild free-market capitalism of the 1990s with state-led development.
The company’s best-known venture in recent years has been the development of a new midrange commercial airliner called the Superjet, designed to compete with Bombardier of Canada and Embraer of Brazil. But the project has been dogged by financial, technical and other problems, including a crash in 2012 during a demonstration flight in Indonesia. Various state companies involved in military production, including Kalashnikov, the weapons manufacturer, and Oboronprom, which makes helicopters, were also targeted. In Moscow on Friday, the main stock market index, the Micex, rose 1.25 percent as details of the latest round of sanctions became public, as the European measures, at least, were less severe than expected, allowing the grandfathering in of technology transfers under existing oil contracts.
Russia’s once-booming economy has slowed to a standstill under the weight of uncertainty of the Ukraine crisis and stagnant oil revenues. As such, the market perceived the sanctions, again, as more a warning than a blow to the oil industry, economic analysts said.
But economists are reluctant to blame Western sanctions in this general slowdown, other than their effect of piling onto the wider negative sentiment in the markets about Russia these days. Addressing the new sanctions for the first time on Friday, Mr. Putin called them “illogical” and accused Western leaders of trying to derail the peace process in eastern Ukraine, according to Russian news agencies.
In Moscow on Friday, the main stock market index, the Micex, rose 1.25 percent as details of the latest round of sanctions became public, as they were less severe than expected, allowing, for example, the grandfathering in of technology transfers under existing oil contracts. “I don’t even understand what these present sanctions are related to,” Mr. Putin told reporters after a meeting in Dushanbe, Tajikistan, of the Shanghai Cooperation Organization, a regional political and security group that includes Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. “Maybe someone does not like that the process has moved toward a peaceful scenario.”
As such, the market perceived the sanctions, again, as more a warning than a blow to the oil industry, analysts said. In trying to shut down energy development in the Arctic, the United States and the European Union went after a pet project of Mr. Putin and a close associate, Igor Sechin, chief of Rosneft, the largest Russian oil company. It grew into a global giant in part by taking over most of the assets of Yukos, a private company whose billionaire chief, Mikhail B. Khodorkovsky, was arrested in 2003 and held in prison until last year. Exxon Mobil, in partnership with Rosneft, began drilling just last month in the Kara Sea off Russia, a joint project that the Kremlin hailed as the most significant fruit of Russian-American cooperation since the end of the Cold War.
The European Union added 24 names to a list of people, mostly Russians, subject to an asset freeze and travel ban, including Sergei V. Chemezov, a central figure in Mr. Putin’s drive to mimic China’s success with state-run industrial conglomerates. Mr. Chemezov is a director of the United Aircraft Corporation and head of Rostec, a sprawling state company that includes an arms exporter, Rosoboronexport, and Technopromexport, a company that plans to build energy plants in Crimea, the Ukrainian region annexed by Russia in March. Previous sanctions banned Western companies from providing high technology for Russian deepwater, Arctic and shale exploration, but the new measures announced by the United States on Friday also prohibit the export of goods and services in support of exploration or production in those areas. The American measures apply not just to future contracts but to existing interactions, and the Treasury Department gave American firms until Sept. 26 to wind down any current activities. The European Union, by contrast, did not apply the new restrictions to existing projects in the Arctic and elsewhere in Russia.
Unlike most other additions to the list — like Vladimir Zhirinovsky, an outspoken ultranationalist politician, and Aleksandr Zakharchenko, a separatist leader in the Donetsk region of Ukraine — Mr. Chemezov is an important figure in an inner Kremlin circle dominated by former security service officers. Exxon Mobil executives said their lawyers were looking to see if their current oil and gas production in Russia would be affected. Aside from Arctic drilling and other exploration for future production, Exxon Mobil participates in a consortium on Sakhalin Island to produce oil and gas.
The Official Journal notice described him as a “close associate” of Mr. Putin who, like the president, served with the K.G.B. in Dresden, East Germany, before the collapse of communism. “We have to look at what was issued today by the U.S. and E.U. and determine how it affects us,” said Alan Jeffers, a company spokesman.
With the latest additions, there are now 119 individuals on the list of those subject to travel bans and asset freezes by the European Union. Russia is heavily dependent on American and European assistance in developing new energy sources. American officials said the new measures were not intended to curtail current production of oil but to make clear to Moscow that its energy future would be severely curtailed unless it changed course. The officials acknowledged that the moves might harm American firms as well, but said they fashioned them to minimize that.
Also hit by the new sanctions, which expand on less severe restrictions announced in July, are state-controlled banks at the center of Mr. Putin’s faltering drive to modernize the economy through targeted investment to favored state enterprises. A thicket of new restrictions sharply limit Russian banks’ access to European funds and expertise, barring them from taking out loans or issuing bonds or other debt instruments in Europe with a maturity of more than 30 days. “As in all of the sanctions steps we have taken,” Jacob J. Lew, the Treasury secretary, said in a statement, “we have designed the actions announced today to deliver significant pressure on the targets of our sanctions while safeguarding, to the extent possible, global financial markets and the global economy.”
Friday’s announcement did not specifically name any Russian banks, but it expanded modest restrictions on five state-controlled financial institutions — Sberbank, VTB Bank, Gazprombank, Vnesheconombank and Rosselkhozbank — that were named in an earlier sanctions notice on July 31. Those sanctions prohibited European institutions from buying bank debt from the five named banks with a maturity of more than 90 days, but allowed them to issue to them. The new round of sanctions significantly ratcheted up restrictions on the Russian financial sector and prohibited American and European entities from issuing new debt with a maturity of more than 30 days to targeted Russian banks, energy companies and defense firms. That tightened the debt-financing limit, which was originally set at 90 days over the summer.
Limiting big Russian banks and oil and military companies to 30-day loans risks causing a credit crunch as early as December, when $25.1 billion in Russian foreign corporate debt matures, Ivan Tchakarov, the chief economist for Citigroup in Russia, said in a telephone interview. The banks targeted by the European measures are the same as those subjected to an earlier round of less severe restrictions in July, including Gazprombank and Sberbank. The oil companies include Rosneft, Transneft and Gazprom Neft, and the defense groups were identified as Oboronprom, the United Aircraft Corporation and Uralvagonzavod.
The United Aircraft Corporation is another of Mr. Putin’s economic favorites, set up in 2006 to corral a diverse group of struggling defense and civilian aeronautic enterprises into a new market-oriented but state-led conglomerate. The company’s best-known venture in recent years has been the development of a new midrange commercial airliner called the Superjet. But the project has been dogged by financial, technical and other problems, including a crash during a 2012 demonstration flight in Indonesia.
The United States targeted Gazprombank, Bank of Moscow, the Russian Agricultural Bank, Vnesheconombank and VTB Bank, while adding Sberbank to the sanctions list. The United States also banned new debt of greater than 90 days’ maturity for Gazprom Neft and Transneft.
Limiting big Russian banks and other firms to 30-day loans could cause a credit crunch as early as December, when $25.1 billion in Russian foreign corporate debt matures, Ivan Tchakarov, the chief economist for Citigroup in Russia, said in a telephone interview.
The Kremlin would then need to dip into windfall oil funds to bail out companies. Russia has about $470 billion in foreign reserves, which would cover all foreign debt maturing over the next two years, Mr. Tchakarov has estimated.The Kremlin would then need to dip into windfall oil funds to bail out companies. Russia has about $470 billion in foreign reserves, which would cover all foreign debt maturing over the next two years, Mr. Tchakarov has estimated.
European leaders agreed last month to impose new sanctions on Russia, but their implementation had been slowed by calls from some countries to back off following last Friday’s announcement of a cease-fire between pro-Russia rebels fighting Ukrainian government forces in eastern Ukraine. But the European Council, a body representing European Union members, cited the “gravity of the situation” and said it “considers it appropriate to take further restrictive measures in response to Russia’s action destabilizing the situation in Ukraine.” The European sanctions unveiled Friday included asset freezes and travel bans on Igor V. Lebedev, a lawmaker in the Russian Parliament, for supporting the annexation of Crimea; on Vladimir Zhirinovsky, a belligerent, ultranationalist member of Parliament, for supporting the use of armed forces in Ukraine and for calling for the division of that country; and on Aleksandr Zakharchenko, a separatist leader in the Donetsk region of Ukraine.
Officials have emphasized that the measures will be reviewed by diplomats before the end of the month and could be revised swiftly or even scrapped if the cease-fire holds. The United States is expected to announce details of its own, tougher sanctions on Russia later on Friday. Also included on the list was Rostec’s director general, Sergei V. Chemezov, described in the Official Journal as a “known close associate” of Mr. Putin who, like the president, served with the K.G.B. in East Germany before the collapse of communism. The United States had previously sanctioned Mr. Chemezov, but on Friday went after his company, cutting off Rostec’s access to medium- and long-term debt in the United States.
President Petro O. Poroshenko of Ukraine said from the capital, Kiev, that the new European sanctions were an endorsement of his country, particularly given the economic problems that Europe faces. At his news conference, Mr. Putin responded to the travel bans with characteristic bravado, saying he was pleased that more Russians would be unable to travel in the West because they should spend more time at home. “The less our officials and corporate executives travel abroad, the better,” he said.
With the latest additions, there are now 119 individuals on the list of those subject to travel bans and asset freezes by the European Union.
President Petro O. Poroshenko of Ukraine said from the capital, Kiev, that the new sanctions were an endorsement of his country, particularly given the economic problems that Europe faces.
Despite strong vocal support from Europe and the United States, and the high profile of the crisis at a NATO summit meeting in Wales last week, Ukraine has not received much tangible economic or military aid.Despite strong vocal support from Europe and the United States, and the high profile of the crisis at a NATO summit meeting in Wales last week, Ukraine has not received much tangible economic or military aid.
Ukraine’s Parliament is expected to ratify an association agreement with the European Union on Tuesday. Given that the country’s efforts to extract itself from Moscow’s orbit led to a separatist conflict, Mr. Poroshenko said it would be impolite for the European Union not to move to the next step, known as “accession partnership” and intended to steer Ukraine toward membership in the bloc. Ukraine is expected to ratify an association agreement with the European Union on Tuesday. Given that the country’s efforts to extract itself from Moscow’s orbit led to a separatist conflict, Mr. Poroshenko said it would be impolite for the European Union not to move to the next step, known as “accession partnership” and designed as a possible path to membership in the E.U.
The Ukrainian president is scheduled to meet with President Obama in Washington on Dec. 18, and has said he will be seeking a security alliance with the United States outside the framework of the Atlantic alliance. Although the United States has pledged $70 million in aid, and has dispatched military advisers to the country, the aid has been slow to arrive. The Ukrainian president is scheduled to meet with President Obama in Washington on Sept. 18, and has said he will seek a security alliance with the United States outside the framework of the Atlantic alliance. Although the United States has pledged $70 million in aid, and has dispatched military advisers to the country, the aid has been slow to arrive.
The United States has yet to take a public stance on such an alliance.The United States has yet to take a public stance on such an alliance.