US tightens sanctions on Russia

Making good on promises to further isolate Russia from the global financial system because of its conflict with neighboring Ukraine, the Obama administration on Friday issued tough new sanctions on top state-owned Russian banks, energy firms and the defense sector.

The administration’s latest sanctions come hours after the European Union imposed similar restrictions on Russia’s defense, banking and energy sectors. European leaders included sanctions on prominent Russian politicians too.

“Given Russia’s direct military intervention and blatant efforts to destabilize Ukraine, we have deepened our sanctions against Russia today, in concert with our European allies, Treasury Secretary Jacob Lew said in a statement. “These steps underscore the continued resolve of the international community against Russia’s aggression.”

Treasury added Sberbank, Russia’s largest state bank, to the growing list of blacklisted banks. It also prohibited American citizens, or American-based subsidiaries of foreign companies, from owning any bonds or debt from Sberbank and a handful of other large state banks that mature after 30 days. Before Friday, investors were allowed to own debt from Russian banks that matured in periods up to 90 days. By tightening the maturity dates, it makes it harder for Russia’s state banks to tap global markets for short-term capital. More broadly, it makes global investors think twice about doing any business with Russian banks, state or private.

The other banks already sanctioned but now facing tighter debt restrictions are Bank of Moscow, Gazprombank OAO, Russian Agricultural Bank, VEB and VTB Bank. The Treasury sanctions also restrict ownership of most debt issued by Rostec, a large Russian defense conglomerate closely associated with Russian leader Vladimir Putin and his inner circle.

Friday’s actions are designed to pressure Russia to implement the so-called Minsk Agreement, where Russia committed last week to 12 points, including backing off of support for rebels in the breakaway regions of Ukraine. The sanctions were designed, said senior White House officials, to be rolled back if Russia meets its obligations.

One of the new steps Friday came from the Commerce Department, which imposed new licensing restrictions for U.S.–origin exports to Russia of goods in 32 new product categories. Commerce also targeted five defense companies and five energy companies in Russia. This means the U.S. government must sign off on any technology going to these companies.

The Commerce Department actions seek to restrict Russian access to technology used to extract oil from beneath shale deposits deep below ground, and for drilling in the Arctic Ocean. The affected Russian energy firms are Gazprom, Gazpromneft, Rosneft, Surgutneftegas and Lukoil, which operates gasoline stations in the U.S. northeast.

The Obama administration left in place some “carve outs” designed to shield as much as possible existing operations in Russia for ExxonMobil and other U.S. oil companies.

Briefing reporters on the White House-imposed condition of anonymity, several senior officials insisted prior sanctions have raised the costs for Russia of its interfering in the affairs of neighboring Ukraine.

“The broadest measure, GDP (gross domestic product), has certainly taken a hit,” said one official, noting that projected modest economic growth might be a contraction by year’s end.

Additionally, Russia’s stock market is down 2.5 percent on the year while other emerging markets are up by more than 28 percent. The Russian ruble has lost more than 13 percent of its value against the dollar and Russia’s central bank has had to use more than $30 billion to prop up the ruble in international currency markets and launched numerous interest rate hikes to support the ruble and raise the cost of borrowing for Russian firms and consumers.

“We’re seeing unprecedented capital outflows from Russia,” said the official. “These economic impacts are certainly broadly felt and we are confident are felt by the Russian leadership. They are quite aware what is happening in their economy.”

The White House comments appear to reflect a change in thinking. In prior briefings, White House officials stressed they were targeting only Russia’s state banks because they didn’t want to hurt that average Russian consumer, which would allow Russia’s leaders to blame the United States and Europe for the economic woes felt by citizens.

Friday, the White House bragged how the sanctions have rippled through Russia’s economy.

“Russia’s economy is already paying a heavy price for its unlawful behavior,” Secretary Lew said in his statement. “Growth has fallen to near zero, inflation is well above target, and Russian financial markets continue to deteriorate.”

Russia responded to earlier sanctions by banning food imports from the United States and Europe, principally affecting U.S. poultry exports. Putin is widely expected to again symbolically retaliate. The likely target this time is the U.S. and European automotive sector. As is the case of food imports, Russia’s restrictions hurt its own consumers too.