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Saturday 20 September 2014

Russia counting cost of sanctions

Published 30/07/2014 | 07:59

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Barack Obama has insisted the move does not amount to "a new cold war" (AP)

Russia is counting the potential cost of Western sanctions targeting its key energy and finance sectors, with its central bank promising to support lenders hit with penalties.

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The US and European Union announced a raft of new penalties that would limit the trade of arms and technology that can be used in the oil industry and for military purposes. The EU also put its capital markets off limits for Russian state-owned banks.

The hope is to make the penalties, which had until recently mainly targeted Russian individuals, more biting economically for Russia.

Amid concerns about the potential impact on Russia's financial stability, the central bank announced it would "take adequate measures" to support the targeted banks. It did not give further details.

The reaction in the stock markets in Moscow was mixed, as investors had sold off shares in Russian companies for the past two weeks after Malaysia Airlines Flight 17 was downed over east Ukraine, killing all 298 people on board. Western officials accuse Russia-backed separatists of bringing down the plane with a missile supplied by Moscow.

Reports last week that the new, tougher sanctions were due had also caused markets to tumble for days ahead of their formal announcement.

On Wednesday, the MICEX benchmark index was up 2%, mainly thanks to a rise in shares in companies that were spared sanctions. Shares in VTB Bank, Russia's second largest and one of the sanctions targets, were down 0.9%.

Analysts warn that with most large state-owned banks cut off from Western funding, the long-term impact of sanctions on Russia's growth could be severe. US officials said that roughly 30% of Russia's banking sector assets would now be constrained by sanctions.

The International Monetary Fund already slashed Russia's growth forecast for this year to nearly zero, down from 1.3% last year, and the US says more than 100 billion US dollars in capital is expected to flow out of the country.

"Russia's actions in Ukraine and the sanctions that we've already imposed have made a weak Russian economy even weaker," US president Barack Obama said.

It remained uncertain whether the tougher penalties will have any impact on Russia's actions in Ukraine and it is not clear what further actions the US and Europe were willing to take if the situation remains unchanged. In the nearly two weeks since the Malaysia Airlines plane was felled in eastern Ukraine, Russia appears to have deepened its engagement in the conflict, with the US and its potallies saying that Russia was building up troops and weaponry along its border with Ukraine.

Europe has a far stronger economic relationship with Russia than the US does, and until this week European Union leaders had been reluctant to impose harsh penalties - in part out of fear of harming their own economies.

EU President Herman Van Rompuy and the president of the European Commission, Jose Manuel Barroso, said the sanctions sent a "strong warning" that Russia's destabilisation of Ukraine could not be tolerated.

"When the violence created spirals out of control and leads to the killing of almost 300 innocent civilians in their flight from the Netherlands to Malaysia, the situation requires urgent and determined response," the two top EU officials said in a statement.

The new EU sanctions put the 28-nation bloc on par with earlier sector sanctions announced by the US and in some cases may even exceed the American penalties.

Obama said coordinating the actions will ensure that the sanctions "will have an even bigger bite".

Despite the West's escalation of its actions against Russia, Obama said the US and Europe are not entering into Soviet-era stand-off with Russia.

"It's not a new Cold War," he said in response to a reporter's question.

German foreign minister Frank-Walter Steinmeier pressed for a diplomatic effort to calm the situation in Ukraine, saying "sanctions alone are not a policy, so we must continue to seek opportunities to defuse the conflict politically".

A meeting planned in Minsk this week between the contact group and representatives from eastern Ukraine "must agree steps on the road to a cease-fire," Steinmeier said in a statement.

He renewed a call on all sides to allow unrestricted access to the Malaysia Airlines crash site. "It is intolerable that, two weeks after the crash, it is still not possible to bury with dignity the dead who remain at the crash site," he said.

Australia's Prime Minister Tony Abbott said he was focused on the Malaysia Airlines disaster and was not considering ratcheting up sanctions against Russia.

"I'm not saying that we might not at some point in the future move further. But at the moment, our focus is not on sanctions; our focus is on bringing home our dead as quickly as we humanly can," Abbott told reporters.

The United States and European leaders said they are prepared to intensify sanctions against Russia unless it moves to de-escalate the crisis in Ukraine.

The Group of Seven world leaders said in a statement that Russia has not changed course despite the downing of a Malaysia Airlines jet. They are calling the downing a watershed and say it should have led Russia to stop the flow of weapons and militants from Russia into Ukraine.

The leaders say they have "grave concern" about Russia's actions. They say if Russia chooses de-escalation, the sanctions will be removed, but will otherwise be stepped up.

An official European Union document shows three long-time Putin cronies are among eight people who have been hit with new EU sanctions.

The European Union measures announced yesterday were the first to target members of the Russian president's inner circle.

Among those sanctioned are Arkady Rotenberg, Mr Putin's former judo sparring partner and a major shareholder of Giprotransmost, which received a public contract to conduct a study on building a bridge from Russia to Crimea, which Russia annexed unilaterally in April.

Also targeted by the EU is Yuri Kovalchuk, a long-time Putin acquaintance identified by the EU as co-founder of a cooperative society bringing together influential individuals around Russia's president. He is the chairman of Bank Rossiya, which has opened branches in Crimea since its annexation.

Press Association

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