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Apr 29, 2014 | 07:08 GMT

Despite Weak U.S. Sanctions, Russia Plans for the Worst

Russian President Vladimir Putin with Rosneft CEO Igor Sechin
(ALEXEI NIKOLSKY/AFP/Getty Images)
Summary

The United States expanded sanctions on Russian officials and companies on April 28 in response to what Washington says is continued Russian aggression in Ukraine. Though the list of sanctions includes many of Russia's most important figures and entities, it remains fairly weak — particularly in light of recent U.S. government leaks indicating that Washington was considering imposing far more painful sanctions on Russia. The European Union is expected to release its expansion of sanctions on April 29, but these will likely be even weaker than those imposed by the United States. These moves will probably elicit a response from Moscow, but neither side appears to have the appetite to take more forceful action against the other. Nonetheless, efforts by Russian companies to protect themselves from tougher U.S. sanctions may shed light on what Moscow expects to come next.

The new round of U.S. sanctions slaps visa bans and asset freezes on seven Russian officials. It also freezes the assets of 17 companies in Russia and seeks to prevent them from receiving U.S.-made products and technologies. These restrictions also ban high-technology transfers that could contribute to Russian military capabilities.

U.S. Sanctions on Russia

U.S. Sanctions on Russia

The new sanctions target several of Russia's most important figures, including former Deputy Prime Minister Igor Sechin and Sergei Chemezov, the CEO of state-owned holding company Rostec. Also sanctioned are some of Russia's most important companies, including construction firm Stroytransgaz and the Volga Group, the investment vehicle of Putin ally Gennady Timchenko. Most of those on the list do not travel regularly to the United States or hold U.S. assets. The primary exception is Sechin, who currently runs Russian oil giant Rosneft. In 2012, the company struck a multibillion dollar deal with ExxonMobil to develop Russian territories in the Arctic and Far East, while possibly involving Rosneft in projects in Alaska, the Gulf of Mexico, West Texas and Canada. Rosneft has not been directly targeted by any of the sanctions, allowing ExxonMobil to continue its work in Russia (though Sechin himself can no longer meet with ExxonMobil in the United States — an irritation for the Russian).

Leaks Warned of Tougher Sanctions

Though the new sanctions list includes some high-profile names, a series of leaks over the past week indicate that Washington was considering far more painful measures, including sanctions on Gazprombank (the financial entity that handles many energy transactions for state-owned energy giant Gazprom) and Vnesheconombank (the Russian Development Bank, which handles several investments in Central Europe). Washington also apparently mulled banning Visa and MasterCard from conducting transactions in Russia. These sanctions — especially those targeting payment systems — would cripple Russia.

The sanctions on Gazprombank would have been critical, since it finances import contracts for energy and operates with many international insurers to facilitate payments for Russian natural gas. To protect its assets, the bank moved a reported $6.9 billion in foreign currency from its foreign bank deposits to the Central Bank in the past week. It also reportedly closed 80 percent of its foreign deposits. Measures targeting Vnesheconombank would have been similarly painful because the bank is Russia's primary foreign investment tool, particularly in Central Europe. It is unclear whether Vnesheconombank has begun shifting its assets like Gazprombank.

Visa and MasterCard dominate Russia's payment services market, processing some 95 percent of payments in the country. The two companies processed around $740 billion in transactions in 2013. Russian President Vladimir Putin said last week, "We have always believed that our partners, both Visa and MasterCard, are depoliticized economic entities and companies. However, as it turned out, they too are under strong political pressure and influence and give in to it right away."

On April 25, the Russian Duma passed a law requiring foreign payment systems companies to ensure uninterrupted services, and Visa and MasterCard will need to pay a combined deposit of around $3.8 billion — the volume of transactions over two days — to the Russian Central Bank as a guarantor of good behavior. Starting July 1, Visa and MasterCard will be required to advance quarterly installments of an unclear share of a single day's transaction volume. The companies will also be required to inform the bank immediately of any plans to stop payments.

Presidential adviser Sergei Glazyev is pushing for the creation of a single processing center for all payments made in the Commonwealth of Independent States and the Customs Union. This idea has been floated in Russia for years, but costs and logistics would make it difficult to fully replace Visa and MasterCard.

Washington likely decided against limiting the two companies' operations in Russia because of the high amount of Westerners using cards in Russia, for both business and personal use. Moreover, a growing number of Russians are using credit cards, as Soviet-era stigmas on credit have declined. The United States has sought to carefully target specific Kremlin members and their inner circles to avoid harming the broader Russian population.

The shifting of assets by Vnesheconombank and Gazprombank indicate that Moscow is actively preparing to soften the blow of harsh sanctions, even though Washington has not actually implemented any measures that would seriously harm Russia. The U.S. leaks about impending sanctions were likely an attempt by Washington to gauge possible Russian reactions.

Next Steps

How the European Union, the G-7 and Russia respond to the expanded U.S. sanctions will be telling. Though 15 additional people will be sanctioned by the European Union, past EU actions have been weaker than those imposed by the United States, since Europe does not have the appetite to damage relations with Russia — one of its largest trading partners. The new EU measures reportedly will not target any companies like Stroytransgaz, which is responsible for many pipelines into Europe.

Notably, the leaders of the G-7 (the United States, the United Kingdom, France, Italy, Germany, Canada and Japan) met April 25 to discuss sanctions. After the talks, the White House said all G-7 members would implement sanctions on Russia, but each country will determine which targeted measures it will impose. Thus, the sanctions will be "coordinated and complementary but not necessarily identical."

More than likely, European countries will continue with watered-down sanctions to avoid jeopardizing their economic ties with Russia. Canada and Japan could implement sanctions similar to those imposed by the United States, though Tokyo will likely hedge its course with an eye on future energy talks with Moscow. The United States may prefer coordinating sanctions through the G-7, where unified action is more likely than in the 28-member European Union. Still, the G-7 lacks enforcement mechanisms to ensure compliance (unlike in the European Union), which is why each member will have its own version of sanctions.

For its part, Russia will certainly respond to the U.S. expansion of sanctions. Moscow will likely ban several more U.S. officials from Russia while refraining from targeting any meaningful businessmen or companies such as ExxonMobil. In both Russia and the United States, inclusion on a sanctions list has become a badge of honor for many politicians. However, other moves by Russia will be worth observing. For example, Russia is holding energy talks with Iran on April 28, and Russian Foreign Minister Sergei Lavrov will leave for a tour of Latin America. Lavrov's trip is mostly symbolic, for now, but Russia is attempting to shore up support and identify pressure points abroad while tensions with the United States continue to rise.

Efforts by Russian businesses to protect their assets abroad from tougher U.S. sanctions will be important to monitor. In light of the moves by Gazprombank and Vnesheconombank, the Kremlin seems ahead of Western efforts to apply sanctions pressure. Russia is not yet prepared for crippling measures such as restrictions on Visa and MasterCard operations in Russia, though the Kremlin is working to address that vulnerability. In the meantime, behavioral changes by other Russian firms may provide a glimpse of Russian thinking about where the United States will attempt to strike next.

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