By Jay Solomon and Marcus Walker
The U.S. and Europe made good this week on their threats to
start penalizing broader sections of Russia's economy in a bid to
force President Vladimir Putin to end his support for separatist
rebels in Ukraine.
But recent history of the use of financial sanctions by
Washington and Brussels--including against Iran, North Korea and
Syria--suggests that significantly more pervasive penalties,
particularly against Moscow's energy sector, would be needed to
change the Kremlin's calculations, said current and former U.S.
officials and sanctions experts.
Even then, it is uncertain whether Mr. Putin values Russia's
economy more than his influence over Ukraine.
The Obama administration has viewed the ongoing financial
squeeze on Iran as a model: The country's oil exports have been cut
in half over the past three years and its banks largely hived off
from the global financial system. This prompted Tehran, the White
House argues, to engage for the first time in serious negotiations
aimed at capping its nuclear program.
American and European officials who crafted this strategy,
however, stress that it took more than a decade of steadily
increasing sanctions to achieve those results.
The U.S. and European Union also had to be prepared to weather
potential economic blowback, in the form of oil price spikes. Such
risks could be even bigger in an economic campaign against
Russia.
"Russia is a very different animal than the places where we've
had sanctions before," said Victor Comras, who led U.S. sanctions
efforts under U.S. Secretary of State Madeline Albright in the late
1990s.
Russia's economy is more integrated into Europe's through energy
infrastructure, trade and finance channels. It also has a much
larger share of the global economy: nearly 3% versus Iran's
0.5%.
With nearly $500 billion in foreign exchange reserves--roughly
23% of its gross domestic product--Russia also has a bigger cushion
than Iran, whose $68 billion represents around 19% of the country's
GDP.
But the two countries pose similar foreign policy challenges,
said backers of the Iran sanctions policy.
"The situation with Russia is similar to the situation with Iran
in that you've got a foreign policy and national security problem
in which just talking with them is not going to work...so diplomacy
without leverage is not going to work," said Stuart Levey, who
spearheaded the Treasury Department's Iran sanction efforts for
seven years, and now serves as chief legal officer for HSBC
Holdings PLC.
The corporate world is watching warily, with auto makers and
energy giants already moving to limit Russian risks to their
businesses. French oil giant Total SA said it has stopped
increasing its stake in Russian natural gas producer OAO
Novatek.
Mass-volume car makers such as Volkswagen AG, Ford Motor Co. and
General Motors Co.'s Opel unit are expected to suffer most from the
sanctions, said Ferdinand Dudenhoeffer, director of the Center for
Automotive Research at the University of Duisburg-Essen.
"The more this looks like the administration is using pages from
the Iranian financial sanctions playbook, the greater the
likelihood that market players will voluntarily cut their business
ties to stay ahead of potential penalties," said Mark Dubowitz of
the Foundation for Defense of Democracies, who advises
Congress.
Russia reacted with defiance. Mr. Putin didn't publicly respond
to the EU and U.S. moves Wednesday, but his Foreign Ministry
denounced the sanctions as "crazy and irresponsible" and warned
that the U.S. and Europe would suffer as well.
The penalties included a ban on medium- and long-term financing
for three of Russia's largest state-owned banks-- VTB Bank, Bank of
Moscow and Russian Agricultural Bank. They also included measures
to ban the sale of military items to Moscow and to deny the Russian
oil industry access to Western technologies needed for deep-sea
drilling and the extraction of shale oil.
For the first time, the EU this week also hit members of Mr.
Putin's inner circle with visa bans and asset freezes. The U.S. has
done so in its previous rounds of sanctions.
"Russia has not changed course" in Ukraine and has continued to
escalate the conflict there, in defiance of international demands
and its own commitments, the Group of Seven leading countries said
in a separate statement Wednesday.
The immediate economic impact of the new sanctions is expected
to be limited. The Russian stock market and the ruble gained a bit
Wednesday, optimism that masks deeper risks, officials and analysts
say. It isn't clear whether those risks are enough to change the
Kremlin's calculus.
"The sanctions rolled out by the EU/U.S. this week do not really
threaten an immediate and brutal hit to the Russian economy, but
rather offer the prospect of further isolation, stagnation and
decline for Russia," said Standard Bank economist Timothy Ash. "The
question is whether Putin understands or really cares about
this."
Restrictions on Russian banks' access to EU financial markets is
expected to be the main source of near-term economic pain. But the
measures leave out Russia's main business with the West: the sale
of natural gas and oil to EU countries.
EU leaders including German Chancellor Angela Merkel have said
the sanctions can be scaled back if Moscow becomes more
cooperative--or scaled up if it continues to support pro-Russia
rebels in Ukraine's east.
But few in Europe can imagine steps such as a boycott of Russian
gas, which flowed to the West continuously even at the height of
Cold War enmity. Many countries across the Continent have no way of
replacing Russian gas quickly or affordably.
"If you really restrict Russian energy exports, then you hurt
the EU as much as Russia," said Stefan Lehne, a scholar at Carnegie
Europe, a nonpartisan Brussels think tank.
A sanctions regime limited to secondary economic ties such as
banking, specialized engineering and arms highlights the
constraints facing the West. Still, U.S. Treasury officials said
they're plotting new measures against the Kremlin. "We have made it
very clear that we can and will continue to increase pressure if
Russia does not change course," said a senior U.S. official.
Current and former U.S. officials cited two actions against Iran
that had the most crippling impact in recent years.
The first was the passage of legislation in 2009 that sanctioned
any firm, foreign or American, that continued doing business with
sanctioned Iranian banks and companies. The law gave the U.S.
Treasury extraterritorial reach and essentially forced foreign
firms to choose between doing business with the U.S. or with
Iran.
The second action was the White House's sanctioning in 2012 of
Iran's central bank, through which virtually all of Tehran's oil
exports are conducted. The blacklisting served as a de facto oil
embargo on Tehran and was followed by the EU's formal banning of
any Iranian oil imports.
U.S. and European officials said it remains unclear how far the
Obama administration and EU are willing to go. But officials
involved in the debate said Washington and Brussels needed to make
clear to the Kremlin that further pain is coming.
Mr. Dubowitz said Treasury should be considering steps to target
Russian banks for their suspected money-laundering activities and
ban them from global banking systems, which are vital to routine
business. Congress and the White House should also consider
legislation blacklisting companies that deal with blacklisted
Russian entities.
"Sanctions are as much about psychology as legalities," he
said.
Ian Talley,
Gregory L. White
, Laurence Norman, Géraldine Amiel and Matthew Dalton
contributed to this article.
Write to Jay Solomon at jay.solomon@wsj.com and Marcus Walker at
marcus.walker@wsj.com