U.S., EU Tighten Russia Sanctions in Ukraine Conflict
Comment of the Day

September 12 2014

Commentary by David Fuller

U.S., EU Tighten Russia Sanctions in Ukraine Conflict

Here is the opening for this article on the latest developments regarding sanctions, reported by Bloomberg:

The U.S. expanded sanctions againstRussia to include the country’s largest bank, OAO Sberbank, energy companies as well as five state-owned defense and technology companies, joining the European Union in tightening restrictions.

President Vladimir Putin, talking to reporters in the Tajik capital of Dushanbe, said Russia will hold off on retaliation for now and has no plans to “close itself off.”

Russia is locked in a standoff with its former Cold War adversaries over the fighting in eastern Ukraine that has claimed more than 3,000 lives. Putin has denied supporting pro-Russian rebels in the battle-torn region.

“Russia’s economic and diplomatic isolation will continue to grow as long as its actions do not live up to its words,” U.S. Treasury Secretary Jacob J. Lew said in a statement today. “Russia’s economy is already paying a heavy price for its unlawful behavior.”

The Treasury Department imposed sanctions that prohibit transactions in, provision of financing for, or other dealings in new debt of greater than 90 days maturity issued by OAO Gazprom (OGZD) Neft and OAO Transneft. For banks, the debt financing restriction now covers maturities greater than 30 days, instead of 90 days previously.

David Fuller's view

Russia’s economy is weak and problems are compounded by the recent decline in oil prices.  Therefore, Putin may have decided on a quieter strategy over the next few months, knowing that European countries were already talking about lifting the latest sanctions as they reluctantly imposed them, if there were no further obvious invasions of Ukraine.  A rally in the price of Brent crude oil and / or the approach of winter will strengthen Putin’s hand and could embolden him, provided there is no real resistance to his policies within Russia.

It may be prudent for investors to assume that the problems of Russian aggression are more likely than not to remain a headwind for the European region.  Meanwhile, the sanctions imposed have a cost, although this would be cheap at the price if it deters Putin’s territorial expansion in Eastern Europe.  It is a question of which side will hold its nerve, the EU or Russia?  The European Union is weak but has the support of the USA, UK, Australia, Japan and other Western European countries that are not members of the EU.  Russia is somewhat isolated but Putin’s power to call the shots has yet to be unchallenged.   

(These Bloomberg interviews with Ryan Chilcote and Hans Nichols: What’s Putin’s Next Move?, and Sanctions Against Russia, What's Different This Time, are informative.)

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