By PETER BAKER and ANDREW E. KRAMER
U.S. Paves Way for Sanctions Over Ukraine
As it tries to punish Moscow for its intervention in Ukraine, the White House asserts that the sanctions it has imposed have had a “significant impact” on Russia’s economy, but their real effect so far, according to economic specialists, appears to be more psychological than tangible.
White House officials have pointed to the fall of the Russian ruble and Moscow stock markets as evidence of the success they have had in pressuring the Kremlin. Yet the ruble and Russian markets fell before President Obama began imposing sanctions. Today, in fact, both the ruble and the markets are slightly stronger than they were before the first sanctions were announced.
Just this week, the International Monetary Fund lowered its growth projection for Russia for the year to 0.2 percent and declared that the country is in recession, citing the uncertainty of the confrontation with the West. But the fund’s top Moscow official attributed the slowdown as much to the fear of more sweeping sanctions that may be imposed in the future as to the impact of the limited measures taken to date.Russia’s economic downturn predated any action by the United States or Europe and, to some extent, predated the Ukraine crisis. Specialists said the volatility surrounding Ukraine has clearly aggravated Russia’s economic problems by sapping international confidence, punishing its credit standing and increasing investor wariness, but it is not clear how much of that stems specifically from the sanctions.
That uncertainty may represent the real impact of sanctions, according to experts and Obama administration officials. In addition to the shrinking growth projections, Russia recently had its credit rating downgraded to just above junk status, and investors are demanding higher interest rates to hold Russian bonds.
Russia's President Vladimir Putin (L) listens to the head of the Russian army's general during army drill
Administration officials said it would be a mistake to assume those negative developments are unconnected to sanctions simply because only a relative handful of Russians have been targeted by them. The president’s threat to escalate with sanctions against whole sectors of the Russian economy has been an important factor, too, the officials said.
“One of the purposes of sanctions is to create uncertainty and to create the expectation in the marketplace that worse could be coming,” said David S. Cohen, the Treasury Department under secretary who oversees sanctions. “That uncertainty has led the market to punish the Russian economy.”
Mr. Obama’s approach to sanctions has generated a fierce debate in Washington. The president argues that his measured strategy has sent a potent signal while preserving a united front with hesitant European allies and holding more powerful sanctions in reserve in case Mr. Putin orders a full-scale invasion of eastern Ukraine.
Some lawmakers and Russia specialists in both parties, however, argue that his approach has been too measured. “If they named two or three big financial institutions, that would have had a big impact,” said Steven Pifer, a former ambassador to Ukraine, who is now at the Brookings Institution. “They say they don’t want to shoot all the bullets at once. They could have shot some more bullets and still had plenty in reserve.”
The current American sanctions target 30 government officials and business leaders, as well as some of their companies. While some small Russian banks will have to stop taking Visa or MasterCard, the sanctions have not stopped major transactions or projects by those targeted. It is not clear whether the targets even have assets in the United States to freeze.
Beyond the targets themselves, large companies like Exxon Mobil, Boeing, Royal Dutch Shell, Siemens and BP have done nothing to curtail operations in Russia. The chief executives of Shell and Siemens even met separately with Mr. Putin in recent weeks, making clear business will continue, although Shell has since added that it will hold off starting new projects for now.
Moscow - President Vladimir Putin meeting with Royal Dutch Shell chief executive officer Ben van Beurden on April 18, 2014
Exxon Mobil and BP are partners with Rosneft, the Russian state oil company led by Igor I. Sechin, who is on the American sanctions list, but both companies can continue working with Rosneft because Rosneft itself was not targeted. Just this week, the Austrian energy company OMV made a pipeline deal with the Russian company Gazprom while Germany said it would not block the sale of RWE’s oil and gas unit to the Russian billionaire Mikhail Fridman.
“The sanctions news has had little additional impact,” said Christopher J. Weafer, a founding partner in Macro Advisory and a longtime financial analyst in Moscow. “But most investors are staying away from Russia for now. They are waiting until there is a clearer picture of the trend in the economy and the effect on earnings over this year and longer.”
At a meeting in Moscow this week that included American Embassy officials and business representatives, there was little clarity about what was allowed under the current sanctions, and some executives concluded that they would err on the side of caution, an attitude that could effectively enhance the impact of sanctions. One participant said American officials recommended that chief executives not attend an economic forum in St. Petersburg this month that is important to Mr. Putin.
Russia’s economy was already slowing last fall. The Moscow government shifted from a stimulus spending strategy to a money supply strategy to try to reduce borrowing rates as a way to increase business activity.
The ruble started to depreciate sharply in January, long before Russia intervened in Ukraine, but the annexation of Crimea accelerated the drop as well as capital flight. Russia’s central bank intervened by raising key rates to control the slide in the ruble.
By the time Mr. Obama imposed his first sanctions on March 17, the fall of the ruble and markets had stabilized. The ruble, trading at 36.57 to the dollar before the sanctions, improved to 35.64 to the dollar on Thursday. The Micex stock market index closed at 1,237.43 the Friday before the first sanctions and was up to 1,306.01 on Thursday. Goldman Sachs estimated capital flight out of Russia at $50 billion before Mr. Obama’s sanctions.
Obama administration officials said the expectation of sanctions had already been factored into the market by that point, and they noted that even Mr. Putin had said the sanctions were causing damage, although he said the impact was “of no critical character.”
Pro-Russian protestant in Donetsk, eastern Ukraine
Timothy M. Frye, director of the Harriman Institute at Columbia University, said the Russian economy was declining even without sanctions. “But it’s wrong to say that sanctions are not having any impact in Russia and that the Russian government can easily ignore them,” he said.
Still, Mr. Frye said Mr. Putin can now shift blame. “The sanctions do give the Russian government an excuse, a scapegoat for the poor economic performance,” he said. Russian officials are already saying its tough economic times “are due to the West’s nefarious activities, when in reality the underlying problems are Russia’s bad governance.”
Peter Baker reported from Washington, and Andrew E. Kramer from Moscow. Danny Hakim contributed reporting from London, and Andrew W. Lehren and Natalia V. Osipova from New York.
Firms from across Europe, US operate in Russia
| Country | Company | Stakes |
| Britain | BP | Has roughly 20% stake in Russian state-owned Rosneft |
| Germany | BASF | Partnership with Gazprom - agreement in Dec. 13 to swap assets |
| France | Total | Partnership with Russia's Novatek; has 20% stake in LNG project |
| Italy | ENI | Partnerships with both Gazprom and Rosneft |
| Norway | Statoil | Has Barents Sea projects with Rosneft |
| United States | ExxonMobil | $500 billion joint venture with Rosneft in the Artic Sea |
The Bloomberg Bussinesweek: 30. April 2014
By Carol MatlackWhy Putin's Potential Retaliation Against Western Oil Giants Could Backfire
Sea of Ohotsk - Rosneft and Exxon Mobile Oil Platform
Big Oil could become the next victim of economic warfare between Russia and the West. At least that’s what Vladimir Putin seems to be threatening after the U.S. and European Union ratcheted up sanctions against Moscow. “If something like this continues,” the Russian president warned on Wednesday, “then of course we will have to consider who’s working and how in the Russian Federation, in the key sectors of the Russian economy, including energy.”
It’s true that U.S. and European oil majors look pretty vulnerable. Consider:
ExxonMobil, reportedly, recently started exploration drilling in the Karsk Sea. tideway. The Prirazlomnoye offshore platform in Russia's Arctic Pechora Sea.
• ExxonMobil (XOM) has drilling rights to some 46,000 square kilometers (almost 18,000 square miles) in Russia—its biggest such holdings outside the U.S. It also has pledged $3 billion to finance an Arctic drilling venture with state-controlled oil company Rosneft (ROSN:RM) that could contain some $900 billion worth of crude.
Offshore regions of the Russian Arctic where Exxon Mobil and Rosneft plan to explore - published February 2013
• BP (BP) owns 19.75 percent of Rosneft, making it the company’s second-largest shareholder after the Russian government, and its chief executive officer, Bob Dudley, sits on Rosneft’s board.
• Royal Dutch Shell (RDS.A) owns 27.5 percent of the Sakhalin-2 oil and gas project off Russia’s Pacific Coast that’s controlled by gas export monopoly Gazprom (GAZP:RM). Shell also has stakes in Siberian oilfields.
• Total (TOT) of France owns 40 percent of the Kharyaga oil field in the Russian Arctic. It also owns 17 percent of Novatek (NVTK:RM), an energy exploration company in which Gennady Timchenko, a close Putin ally, is a major shareholder. (Timchenko is on the U.S. sanctions list, but Novatek isn’t.)
Still, Russia stands to lose more than the Western companies if Putin lashes out with stiff sanctions, says James Henderson, a senior research fellow at Britain’s Oxford Institute for Energy Studies. Western oil majors are providing “technology, financing, levels of management expertise,” he points out, and Russia needs that help to develop its own vast energy reserves.
Under Soviet rule, Russia fell far behind the West in developing technology to tap new oil fields in remote locales or squeeze hard-to-get deposits from older sites. ExxonMobil, for example, is providing fracking technology to Rosneft in Western Siberia and furnishing the technical know-how and financing for the joint Arctic venture. Disrupting such ventures “is not in Russia’s interest,” Henderson says. “It would set an appalling precedent for future investment” in the country’s energy sector.
Russia really can’t afford to mess this up. Revenues from oil and gas exports generate about half the government’s income, and the economy is looking worse by the day.
BP may be in the most-delicate situation of any Western oil major because of its ownership stake in Rosneft. Igor Sechin, Rosneft’s chief executive, has been placed on the U.S. sanctions list, even though the company has not. But the sanctions could reduce the clout of a Rosneft board member: Dudley, as a U.S. citizen, is now barred from having direct dealings with Sechin.
Dudley told analysts and investors during a conference call Wednesday that he would continue to attend board meetings and declined further comment. A BP spokesman told Bloomberg News: “We will comply with all relevant sanctions. But we also want to make clear we remain committed to our investment in Russia.”
Rather than imposing sanctions on Big Oil, Henderson warns that Russia might retaliate by targeting individual executives, just as the U.S. did with Sechin. “They could make life difficult for them, without disenfranchising them,” he says.
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