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Last updated: Sat. Apr. 12, 2014 - 09:09 am EDT

US faces reluctant partners in sanctioning Russia

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WASHINGTON — As it warns Russia to step back from Ukraine or suffer another financial hit, the U.S. is simultaneously trying to coax along a reluctant Europe, which is trying to balance its desire to punish Moscow against its fear of economic turmoil from the effects of a new, harsher round of Western trade sanctions.

Economists say the U.S. risks appearing weak without support from Europe, which is Russia's largest trading partner and therefore has huge sway over Russia's already shaky economy. But Europe is far from ready to issue sanctions on Moscow that would undercut its own financial stability while risking its main source of energy.

The fate of new sanctions — and how tough they might be — depends on Moscow's next moves, and whether Russia deepens or pulls back its meddling in Ukraine.

President Barack Obama already has signed orders that would allow the U.S. to sanction key Russian industries, and European Union foreign ministers will meet Monday to decide what new penalties should be issued if Moscow continues to ignore the West's warnings.

Assistant Secretary of State Victoria Nuland told a Senate panel this week that current U.S. and EU sanctions are "biting" and "pinching" the Russian economy, "and we're now considering further measures."

Nuland said Moscow has spent an estimated $25 billion to bolster the value of the ruble over the last five to six weeks since sanctions were introduced. Russia suffered more capital outflow in the first three months of 2014 than the $62.7 billon it lost for all of last year, she said.

"Russia is paying a very high price already for its actions, and that cost will go up if its pressure on Ukraine does not abate," Nuland said.

The next round of sanctions will likely merely expand the list of high-ranking Russians whose Western assets have been frozen and are barred from traveling to the EU or U.S.

Last month, the EU sanctioned 33 individuals and the U.S. sanctioned 31. The U.S. also has barred American companies or individuals from doing business with Bank Rossiya, which has about $10 billion in assets and is owned by members of Russian President Vladimir Putin's inner circle.

On Friday, the Treasury Department issued sanctions against seven Crimean separatists and a Crimea-based gas company for undermining the government in Kiev. Additional U.S. sanctions targeting Russia's energy, metals and mining sectors also have been prepared in what Treasury Undersecretary David Cohen has called "a very powerful yet flexible tool that will allow us to respond quickly and meaningfully as events develop in Ukraine."

"We recognize that these measures will have the greatest impact when harmonized with the actions of our international partners, in particular Europe and Asia, because of their extensive economic ties to Russia," Cohen told a Senate Financial Services subcommittee this month.

The EU treads more carefully than the U.S. in sanctioning Russia. The bloc's leverage is greater because of its close commercial and financial links with Moscow, including energy pipelines that pass directly through Ukraine.

Europe is Russia's largest trading partner, buying up more than three-quarters of Russia's crude oil and natural gas exports which, in turn, fund about half of the government budget. Any new sanctions by the EU must be approved by unanimous vote among its 28 member nations.

Putin has mocked the current sanctions and on Thursday warned 18 European leaders that their gas supplies were in danger. Yet apparently wary of antagonizing the EU too much, Russia has chosen to retaliate against the sanctions imposed by Washington but not by those issued in Brussels. EU officials had left little doubt that any retaliatory sanctions would prompt countermeasures.

Although the sanctions have given Russia little pause so far, Europe could find other avenues to use their trade leverage against Moscow.

Konstanty Gebert, an analyst with the European Council on Foreign Relations, said Europe could issue trade embargoes against Crimea, similar to ones targeting Israeli companies that do business in the West Bank. Or, he said, Europe could help give court access to Ukrainians who are looking to sue Russia for lost or damaged property as a result of its annexation to the Black Sea peninsula.

"The situation calls for slightly more creative thinking and looking at sanctions which instead of looking like a sledgehammer can be more modest but more aggravating," Gebert said.

The Obama administration has sought to present a unified front with Europe against Moscow and does not want to sanction Russian trade alone. But tougher sanctions face opposition from within the U.S. as well.

Barring American firms from dealing with Russia could clear the way for global competitors to grab a larger market share — especially if Europe does not impose its own sanctions against Moscow. It could take years for U.S. businesses to regain a foothold in Russia trade once the crisis has passed and sanctions are lifted.

The Obama administration is all too aware of the financial pain that tougher sanctions would bring to the global economy and not just Russia. Still, pulling back would amount to a geopolitical admission that there is only so much the West can do to pressure Putin against deeper incursions into Ukraine — especially since few if any nations now are willing to stop Russia with a military strike.

"The notion of imposing additional sanctions on Russia is symbolically very important to the U.S.," said economist Eswar Prasad, a professor at Cornell University, who formerly worked for the International Monetary Fund. "The reality is that a military response is not viable at this stage."

However, "unless the European Union plays along, the reality is that anything the U.S. does will have a very limited impact," Prasad said. "The sense that such limited actions could reveal the limited potency of U.S. actions, rather than strength, is certainly an important concern."


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