U.S. and EU hit Russia with a second round of ‘targeted’ sanctions

US Capitol Building
Source: DollarPhotoClub

The U.S. has imposed a second package of sanctions on Russia hitting the country’s largest oil producer Rosneft and other energy, financial and defence firms, with what it called significant but targeted penalties – Reuters reported today.

President Obama accused Russia of supporting pro-Russian separatists in Ukraine and failing to take steps to resolve the conflict diplomatically. “We have emphasised our preference to resolve this issue diplomatically, but that we have to see concrete actions and not just words that Russia, in fact, is committed to trying to end this conflict along the Russia- Ukraine border,” he said.

The U.S. Treasury Department said the measures effectively closed medium- and long-term dollar funding to the two banks and energy companies

President Obama described the new sanctions as ‘targeted’ and designed to have the maximum impact on Russia while avoiding any adverse effect on global oil markets or U.S. and EU companies.

The targeted companies include Russia’s largest oil producer Rosneft and its second-largest gas producer, Novatek. The sanctions stopped short of targeting Russia’s Gazprom, however Gazprombank – which has been targeted – is 36 percent-owned by Gazprom. Another company hit by sanctions is Vnesheconombank, or VEB, a state-owned bank that acts as payment agent for the Russian government. Eight arms firms were targeted along with Feodosiya Enterprises, a shipping facility in Crimea.

Speaking in Brasilia, Vladimir Putin said the sanctions would damage U.S. energy companies, and bring relations with Russia to a “dead end.”

It is unclear how the sanctions will impact Russia’s economy – if at all. The sanctions did not freeze the targeted companies’ assets, or otherwise prohibit U.S. firms from doing business with them.

When it comes to Rosneft, which had sales of $40 billion in the first quarter, about 8.6 percent of Russia’s gross domestic product, its chief executive, Igor Sechin, said the sanctions would not affect the company’s current project with ExxonMobil, but would damage the shareholders of U.S. companies cooperating with Rosneft.

The new sanctions would not appear to prevent Rosneft from selling its oil, but may raise questions about the company’s more than $15 billion worth of oil-related finance arrangements with companies including BP, which now owns almost a fifth of Rosneft, and Glencore.

The new measures could potentially hinder the development of unconventional oil and gas reserves in Russia, as it depends greatly on foreign expertise and technology to access the deposits. On the other hand as the recent St.Petersburg International Economic Forum demonstrated, oil and gas majors are keen to establish working relationships with Russian companies despite the fraught political climate.

Speaking in May, BP’s chief executive Bob Dudley when asked about the impact of previously imposed sanctions on Russia explained: “We work in a world today where politicians all too often only can look 18 months out before the next election, and there are countries like Russia in agreements with China that are looking out 25, 40, or even 50 years.”

“That’s what we have to do as companies. These kinds of relationships that we have with Russia and Rosneft are not transactional, they are strategic partnerships based on mutual benefit and trust,” he said.

This may be why one analysis interviewed by Reuters, believed the sanctions were likely to prompt a “war of words” more than anything else.

“I think that the impact on oil sales will be negligible,” said sanctions expert Douglas Jacobson, attorney at Jacobson Burton in Washington. “It is another classic shot across the bow and a message from the United States that sanctions can be ramped up.”

Meanwhile, the EU has opted for cutting off large-scale financing to Russia.

According to the UK daily, The Guardian, the financing of new public-sector projects in Russia by the EU’s lending institution, the European Investment Bank, and the European Bank for Reconstruction and Development is likely to be suspended. This alone would result in a loss of funding to the amount of 2.8 billion EUR.

Moreover, the EU will ask the commission to consider suspending bilateral and regional cooperation programmes of the union set up to provide 450 millon EUR to Russia between 2014 and 2020.

Just like the U.S., the EU stopped short of more drastic actions such as sanctions on sectors of the Russian economy. This measure would require unanimity in the 28-member organisation. It has been blocked by countries including France, which has gone ahead with a 1.2 billion EUR deal to sell two state-of-the-art Mistral warships to Russia.

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