U.S. Escalates Sanctions on Russia Over Ukraine -- Update

Date : 07/17/2014 @ 2:13AM
Source : Dow Jones News
Stock : Exxon Mobil Corp. (XOM)
Quote : 87.52  0.0 (0.00%) @ 6:08AM

U.S. Escalates Sanctions on Russia Over Ukraine -- Update

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By William Mauldin and Paul Sonne 

The Obama administration escalated its sanctions Wednesday against Russia over the fighting in Ukraine, marking a return to confrontation with President Vladimir Putin after determining that his hints at cooperation were leading nowhere.

The U.S. moves to impose restrictions on the Russian state-controlled oil giant OAO Rosneft and other top firms are aimed at squeezing Russia's already struggling economy and financial system. They followed weeks of U.S. threats that Russia would face repercussions unless it helped defuse the crisis in eastern Ukraine, where pro-Russia separatists have been fighting the Ukrainian government for months.

The sanctions stop well short of crimping international business ties or blocking deals with entire sectors of the Russian economy.

The U.S. and Europe say separatists in Ukraine are getting significant support from Russia, an accusation Moscow has denied. Some U.S. lawmakers had questioned whether the Obama administration was ready to up the ante on sanctions.

Mr. Putin bristled at the new sanctions. "They tend to have a boomerang effect, and without a doubt, in this case they have driven Russian-American relations to a dead end, causing very serious damage," he said. "I am convinced that is to the detriment of the long-term national interests of the American government and its people."

Mr. Putin said all parties must urge the Ukrainian government and the separatists to sit down at the negotiating table.

The new measures mark a return to conflict after Mr. Putin had made some overtures toward cooperating with European nations.

"We have emphasized our preference to resolve this issue diplomatically, but that we have to see concrete actions and not just words that Russia in fact is committed to trying to end this conflict," President Barack Obama said in announcing the sanctions from the White House.

"I've repeatedly made it clear that Russia must halt the flow of weapons and fighters across the border into Ukraine, that Russia must urge separatists to release their hostages and support a cease-fire, that Russia needs to pursue internationally mediated talks and agree to meaningful monitors on the border," he said.

The latest round of sanctions signals increasing frustration among the U.S. and its European allies about the separatist conflict in eastern Ukraine, where a brief cease-fire has fallen apart, fighting has spiked and the death toll has grown by the day.

In recent weeks, Ukrainian forces have gained ground as rebels retreated to the regional capitals of Donetsk and Luhansk. But the military has suffered losses as well and failed to take full control of the east.

Mr. Putin revoked his authorization to deploy Russian troops in Ukraine in late June and supported the short-lived truce, actions that American and European officials had interpreted as positive signs. He also vowed to help secure the Russian border with southern Ukraine, the key source of reinforcements and weapons for the separatists.

But since then the U.S. has accused Russia of publicly calling for peace while covertly fueling the separatist revolt. Washington has also attacked Moscow for refusing to call on the separatists to lay down their arms, and pointed out that many of the separatist leaders hail from Russia and have ties to the Russian government.

Russia, meanwhile, has denied allegations of its support for the rebels and has called for the Ukrainian government to hold talks with the separatists and reach a truce. Moscow has also invited international observers to monitor the situation on the Russian side of the border.

As he announced the sanctions, Mr. Obama weighed in on three other global trouble spots: Israel, Iran and Afghanistan. The new U.S. move risks diminishing cooperation with Russia on other fronts, such as negotiations over Iran's nuclear program.

The president called the new sanctions "significant" but "targeted." They're designed to inflict economic pain on Russia while limiting spillover on companies in the U.S. or allied nations.

The largest firms sanctioned are the state-controlled Rosneft, Russia's biggest oil producer; OAO Novatek, the second-biggest gas company; OAO Gazprombank, the bank connected with the country's gas-export monopoly; and Vneshekonombank, or VEB, a state-owned development lender that provided much of the backing for the Sochi Olympics construction project.

For the four major Russian firms, the Treasury Department will now limit their access to equity financing and medium- and long-term debt coming from investors and lenders with ties to the U.S. The Treasury didn't block the assets of these companies or prevent U.S. citizens and U.S.-related firms from doing ordinary business with them.

U.S. business groups worry American companies are vulnerable to Russian reprisals if Washington puts tougher sanctions on Moscow than the European Union.

An executive at the U.S. Chamber of Commerce, the business lobby that has warned against broader sanctions, said it appreciated the Obama administration taking a "deliberate and narrow" approach in its latest move.

European leaders meeting in Brussels agreed to further sanctions against Russia on Wednesday. The decision should allow for Europe to cast its sanctions net wider, although the specific names to be added their list have yet to be decided. The leaders called for a decision on that by the end of July.

Their decision followed a determination that Russia hasn't met conditions they laid out at their last summit in June.

The new U.S. sanctions aren't aimed at disrupting the day-to-day business of the companies or their international joint projects, including the Arctic venture oil giant Rosneft is working on with Exxon Mobil Corp.

Rosneft Chief Executive Igor Sechin said the decision to sanction his company was baseless because it isn't involved in the crisis in Ukraine, according to the Interfax news agency. Speaking to reporters in Brasilia, he said Rosneft was financially able to carry out its projects without the need for bridge loans.

Though Mr. Sechin said the sanctions would harm Rosneft's American shareholders and U.S. banking partners, he vowed to continue cooperating with Exxon Mobil. "We are now in consultation with Exxon's lawyers and tentatively believe that this decision does not affect the implementation of our current projects," he said, according to Interfax.

VEB, Gazprombank and Novatek didn't immediately respond to requests for comment overnight in Moscow.

Besides the major firms, the U.S. also targeted additional Kremlin officials and the two main Ukrainian separatist entities: the self-declared Donetsk People's Republic and Luhansk People's Republic. A number of smaller defense-related companies, including the iconic Kalashnikov Concern and munitions producer Bazalt, also were hit with the type of sanctions leveled against other firms such as Bank Rossiya earlier this year.

Those effectively prevent U.S. entities and individuals from doing businesses with the Russian companies. The U.S. Treasury, for example, said Americans who already own Kalashnikovs can keep them or trade them on the secondary market but cannot buy new ones directly or indirectly from the Russian firm.

A U.S. official told reporters the new measures, over time, would hurt the ability of the firms to get dollar financing, likely pushing them to Russia's central bank. The Bank of Russia has already sold dollars this year to prop up the ruble, and its gold and foreign-exchange reserves fell to $478.3 billion in early July, from $509.6 billion in January

"These are tailored but meaningful: clearly intended to create market and capital complications for Russia and perhaps reignite a chill in business and capital investment in Russia," said Juan Zarate, a former White House and Treasury official who led efforts in the George W. Bush administration to cooperate with Moscow in the financial sphere.

Wednesday's sanctions follow a series of smaller steps, mostly targeting individuals, that the U.S. has taken in an effort to change Russia's behavior with respect to Ukraine.

The U.S. believes up to 12,000 Russian troops are stationed along the border, indicating a steady buildup over the last several weeks, said Col. Steve Warren, a Pentagon spokesman.

The assessment jibes with one made Monday by a military official at the North Atlantic Treaty Organization, who said Russia has deployed 10,000 to 12,000 troops along its border with Ukraine, just a month after it had withdrawn those troops to less than 1,000. As many as 40,000 Russian troops were estimated to be in the area earlier this year.

Matthew Dalton, Jeffrey Sparshott, Alexander Kolyandr and Felicia Schwartz contributed to this article.

Write to William Mauldin at william.mauldin@wsj.com

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