Obama twists, EU sticks

March 21, 2014

Washington has seriously upped the ante on Vladimir Putin by slapping sanctions on some of his most powerful allies.

Now on the U.S. blacklist are Kremlin banker Yuri Kovalchuk and his Bank Rossiya, major oil and commodities trader Gennady Timchenko and the brothers Arkady and Boris Rotenberg, linked to big contracts on gas pipelines and at the Sochi Olympics, as well as Putin’s chief of staff and his deputy, the head of military intelligence and a railways chief. Most have deep ties with Putin and have grown rich during his time in power.

The EU has predictably acted more cautiously, adding a further 12 names to the list of Russian and Crimean officials already hit with travel bans and asset freezes, cancelling an EU-Russia summit and starting preparatory work on broader financial and trade sanctions – “stage 3” which Angela Merkel said would be triggered if Putin escalated the crisis any further.

The dozen new names will be published today.

Russia’s retaliatory sanctions so far look thin – banning senior U.S. politicians from travelling there, which was greeted with derision by the likes of John Boehner and John McCain. But there could be more to follow which will hurt Europe, with its deep economic and trade ties with Russia.

The working assumption remains that it would cost Moscow too much to curb or cut off its gas supplies to the EU. It supplies a third of Europe’s gas and more than a fifth of its oil but the EU has hefty reserves after a mild winter.

The other presumption is that while Europe will not go to the wall over Crimea, any Russian intervention in the east of Ukraine would demand a more robust, though not military, response from there and Washington. But no one really knows how Putin will react next.

If any reminder of the cost was needed, Russian stocks have fallen nearly three percent this morning and last night Standard & Poor’s lowered its outlook on Russia’s credit rating to negative from stable. It expects further sanctions to be imposed.

Bank Rossiya has said it is working as normal today though Visa and MasterCard have stopped providing payment transactions services for its clients.

The EU plans to sign an “association agreement” with Ukraine today, promising closer political and trade ties that will help draw it more closely into Europe and boost its economic growth. This is another way of hurting Russia.

By luring the rump of Ukraine towards the west and priming it with funds, it could be lost to Russia forever, dealing a fatal blow to Putin’s plan for a Eurasian trading bloc. For Kiev’s part, it may have to adopt an ostensibly neutral stance between east and west to avoid provoking Moscow further.

Brussels is giving Ukraine unfettered access to the 28-nation bloc’s 500 million consumers even before a proposed bilateral free-trade accord comes into force later this year. And it has also brought forward plans to finalise agreements with Moldova and Georgia, signing them by June at the latest.

An IMF team in Kiev has extended its work on an aid package until Tuesday, saying good progress had been made.
The U.S. and EU would row in behind an IMF package, helping Ukraine meet its debt obligations and begin the process of rebuilding. A meeting of G7 leaders in the Hague on Monday could be pivotal in that regard.

EU minds have also been focused on reducing their dependence on Russian energy which would eventually leave Moscow nowhere to look but east. Longer-term, that means boosting “indigenous supplies”, which include renewable energy and shale gas, exploring how much U.S. gas could be shipped to Europe and before that looking to the Gulf for LNG.

EU sources said the leaders agreed to accelerate work to upgrade cross-border energy networks to reduce individual member states’ vulnerability to supply cuts, and speed up building new liquefied natural gas import terminals to diversify suppliers.
Elsewhere, Rome is poised to announce a new issue of its popular BTP Italia bond. The retail bond aimed at ordinary Italians set a

European record by raising 22.3 billion euros at the last sale in November. It has also attracted institutional buyers.
S&P has affirmed Greece’s rating at B-, deep in junk territory, with a stable outlook, saying its economy is gradually rebalancing. It said it could raise the rating if growth were to pick up more substantially. The agency is also due to run the rule over Nigeria.

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