Moment of truth for EU sanctions

July 29, 2014

The logo of Russia's top crude producer Rosneft is seen in Moscow

President Barack Obama and the leaders of Germany, Britain, France and Italy agreed on a conference call last night to impose wider sanctions on Russia’s financial, defence and energy sectors.

EU ambassadors are meeting today and are expected to target state-owned Russian banks and their ability to finance Moscow’s faltering economy.

European Council President Herman Van Rompuy has written to EU leaders asking them to authorise their envoys to complete an agreement by the end of today. That would avoid the need for leaders to hold a special summit to approve the sanctions.

Under a blueprint produced last week, European investors would be banned from buying new debt or shares of banks owned 50 percent or more by the state.

This is a big deal and there are increasing signs of investors turning their back on Russia lock, stock and barrel. However, with its giant FX reserves, the central bank can provide dollars to fund external debt for a considerable period of time. It whacked up interest rates last week possibly to try and curb a new round of capital flight.

An embargo on arms sales to Moscow and restrictions on the supply of energy and dual-use technologies are also on the table but it looks like curbs on supplying technology to Russia will include oil but exclude the gas sector.

There remains the possibility that some of the proposed measures could be diluted or thrown out but that would amount to a pretty damning indictment of the EU’s resolve, which has been stiffened by the nearly 200 citizens of one of its founding members – the Netherlands – killed in the Malaysian airliner downed over Ukraine.

The measures have been carefully crafted and narrowed somewhat since they were first floated. For instance, sanctions on arms and hi-tech goods are likely to apply only to future contracts, leaving France free to go ahead with the delivery of Mistral helicopter carriers being built for Russia.

But there will be some economic impact for the EU at a time when many of its economies are barely growing.
As a first step, EU sources said diplomats reached preliminary agreement last night on a new list of companies and people, including associates of Vladimir Putin, to be targeted by asset freezes.

Russian shares have steadied having shed three percent on Monday after an international court ruled that Russia must pay $50 billion for expropriating the assets of Yukos, the former oil company whose ex-owner Mikhail Khodorkovsky fell foul of the Kremlin.

BP has just said that further sanctions on Russia could have a “material and adverse impact” on its relationship with Russian oil giant Rosneft.

The Ukrainian government said its troops had wrested more territory from the rebels and were moving towards the crash site of the Malaysian airliner which international investigators said they could not reach because of the fighting. The Dutch foreign and justice ministers have been called to parliament to debate the stalled mission and how the Netherlands plans to move the investigation forward.

The site has yet to be secured or thoroughly investigated more than 10 days on. A Ukrainian official said analysis of black box flight recorders from the airliner showed it was destroyed by shrapnel from a missile blast which caused a “massive explosive decompression”. Investigators in Britain, who downloaded the data, had no comment.

Israeli aircraft fired a missile at the house of Hamas Gaza leader Ismail Haniyeh and flattened it before dawn on Tuesday, causing damage but no casualties, Gaza’s interior ministry said. Israel’s military continues to pound targets in the Gaza Strip after Prime Minister Benjamin Netanyahu said his country should prepare for a long conflict, dousing hopes of a swift end to 22 days of fighting.

Despite the bloodletting in Gaza, Iraq and Libya there is no upward pressure on oil prices. Brent crude edged down towards $107 a barrel on Tuesday due to excess global supply, down from highs above $114 in June.
Relations between the Washington and Jerusalem are straining. Obama administration officials rallied to the defence of U.S. Secretary of State John Kerry after withering criticism in Israel of Kerry’s failed attempt to secure a ceasefire between Israelis and Palestinians.

Israel is also concerned about U.S.-led attempts to strike a deal with Tehran over its nuclear programme. Iran’s supreme leader Ayatollah Ali Khamenei is to lead prayer at a feast marking the end of Ramadan. The prayer is to be followed by a sermon which will probably focus on current Middle East affairs.

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