Third-Level Sanctions

It is possible that the U.S. has already made an agreement with Europe to implement new sanctions against Russia. However, many American business leaders are against putting the screws to relations with Russia, as it will lead to financial losses. Introducing third-level sanctions will postpone the decision of the Federation Council, which, at the request of Vladimir Putin, has withdrawn its right to use the Russian army in Ukraine.

The West is planning to introduce new sanctions against Russia already this week, the Associated Press reported on Wednesday, citing a source in the U.S. government.

The United States and its European allies are completing work on a package of punitive measures targeted at key branches of the Russian economy, says the AP. Yesterday, German Chancellor Angela Merkel announced that new anti-Russian sanctions are possible, if the stabilization process in Ukraine isn’t expedited.

The so-called “third-level” sanctions could affect the energy sector and Russian access to the world financial market. The first stage of the packet stipulates the introduction of limitations on Russian luxury exports. The second ought to impact production of the Russian auto industry and oil technology. The third would be lowering the amount of Russian oil and gas imports by 50 percent.

Conversations about possible extensive economic sanctions by the West in relation to Russia had recently died down in response to Moscow’s recent actions in Ukraine: agreeing with Kiev’s plans, obviously not interfering in Ukraine’s internal affairs, and, on the request of Vladimir Putin, cancelling the Federation Council’s right to use the Russian Armed Forces in its neighbor’s territory.

However, the Americans are sticking to their story: The only thing restraining them is the apprehension that the West wouldn’t come out against Moscow as a united force because of concerns that European countries have strong economic ties with Russia, noted the AP. Now, as one of the agency’s interviewees reports, the U.S. and Europe have rallied around a “common vision on sanctions.”

Professor of World Economy and World Politics at Moscow’s Higher School of Economics Victor Supyan explains Washington’s official position: Russia, albeit indirectly, is interfering in the conflict in Ukraine. Moreover, Russia could stop the active separatism in Ukraine if it wanted to, but it hasn’t. Consequently, the process of preparing the packet of sanctions has continued uninterrupted.

It is true that many big businesses in America are clearly not elated about the prospects of this packet of “third-level” sanctions. Bloomberg reports that two of the largest organizations in the American business world — the Chamber of Commerce and the National Association of Manufacturers — are planning on publishing advertisements about the extent of damage that new sanctions would cause to U.S. companies in the June 26 editions of the Wall Street Journal, the New York Times and the Washington Post. The ad only mentions the second stage of the sanctions — loss of access to foreign markets and the competitive edge that other companies would get.

American drilling equipment is the best in the world — there is no comparison — and considering the inaccessibility of many oil and gas fields in Russia, there simply are no alternatives; an export ban would impact the situation very quickly, says Sulyan. The termination of foreign money to Russian financial markets and putting a stop on international accounts which are centered in America would, for a time, paralyze the entire financial system — threatening significant losses in the military sector as well. However, American businesses will suffer from these sanctions, possibly as much as their European counterparts.

“Western companies are already counting up their losses due to stock depreciation in Russia. The French bank group Société Générale claims that their Russian shares have depreciated by €525 million,” notes MFX Broker analyst Sergei Nekrasov. “But those who could be hurt most of all by these new sanctions are the American energy companies like ExxonMobil and Halliburton, who have big plans to work with Russia.”*

“American companies will suffer from the sanctions because decreasing the value of the ruble will cause the cost of goods being supplied to Russia to be more expensive. Moreover, it is worth mentioning that energy companies with extensive cooperation contracts, like Rosneft and ExxonMobil, could be threatened,” recaps Aleksander Belyakov, president of Lionstone Investment Services. “Tightening up these sanctions will provoke the growth of expenditures on financial deals, because banks will start factoring in this risk to insurance service fees. Insurance arrangements between Russian companies and Western banks are also threatened.”*

Income of big businesses will take a hit if major sanctions go into effect, as will the bull market trends.

From a formal point of view, the Obama administration and the U.S. Congress have the power to cause any problems they want in the business sector. However, the influence of business on politics is great, so what could happen as a result of these sanctions is hard to say, notes Supyan.

A lot depends on the personal ties and interests of politicians and businessmen, so right now we are seeing more of a “hidden struggle,”* adds the expert. As the Associated Press underscores, a whole line of large American businesses “are concerned with the possible introduction of sector-wide sanctions.” “In the last 10 days, [these companies] have been meeting with high-ranking officials”* of the administration in Washington.

The determination of the “bulls” in the fight against the “vultures” might just work. “Serious sanctions are unlikely to be implemented,” says Vitaly Lakeev, the lead analyst at Loko-Bank. “Russia has given a clear signal about the desire to peacefully regulate the conflict and the continuation of de-escalation. In that light, tightening the screws again will make the U.S. look ridiculous.”*

It is highly likely that U.S. sanctions, if they’re implemented, will be selective and affect the companies with whom American businesses have major projects.

Politicians could also be affected by the Federation Council’s decision to reverse the law about using the Russian Army in Ukraine. This could delay the imposition of third level sanctions, says the Assistant Director of the Center for Political Technologies, Aleksei Makarkin. “A significant amount of countries in the EU do not want to implement these sanctions. The fact that Russia has not sent troops to Ukraine only adds to their argument. The decision about third level of the sanctions can be set aside, but they could escalate to the second level, focusing on specific companies,” he thinks. “I don’t see the possibility of the West agreeing on the implementation of third-level sanctions.”*

*Editor’s note: The original quotation, accurately translated, could not be verified.