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Forcing Russia out of global financial markets is the strongest tool at U.S. President Barack Obama’s disposal if he wants to stop Vladimir Putin’s territorial ambitions, according to former government officials and sanctions specialists.
Secretary of State John Kerry is meeting with Russian, Ukrainian and European Union officials in Geneva today to discuss the situation in eastern Ukraine.
An
administration official warned yesterday that if the talks fail, the
U.S. is ready to take further steps, targeting people in the Russian
president’s inner circle and entities they oversee. Industry-specific
sanctions are also an option, according to the official, who spoke about
private talks on condition of anonymity. Experts say these may produce
more significant results.
“The biggest weapon in terms of sanctions would be similar sanctions to what we did in Iran
and basically try to exclude Russia from international financial
markets,” said William Pomeranz, deputy director of the Kennan Institute
for Advanced Russian Studies of the Woodrow Wilson Center in
Washington. “The Russians fear that, and that is what the Russians want
to avoid.”
Obama avoided specifics in an interview yesterday with CBS News
while vowing new punishment if Putin doesn’t halt support for Ukraine’s
separatist militias and pull back troops from the border.
Photographer: Andrey Rudakov/Bloomberg
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“Putin’s decisions are not just bad for Ukraine, over the long term they’re going to be bad for Russia,” Obama said.
Treasury’s Powers
The U.S. Treasury
Department has powers to freeze Russia’s access to bank loans, credit
cards, clearing and settlements of transactions. That would basically
force Russia out of the global markets, said Robert Kahn, a senior
fellow for international economics at the Council on Foreign Relations in Washington.
Treasury
could develop a list of specific transactions that it is prepared to
block, communicate that to the Russians, and then follow up with
specific guidance, said Kahn, a former official at the International Monetary Fund, Treasury and Federal Reserve.
So
far, the Treasury has designated two companies -- OAO Bank Rossiya and
Crimean natural gas company Chernomorneftegaz - - and a group comprised
mostly of Crimean separatist leaders and oligarchs connected to Putin,
such as Gennady Timchenko, who partly owns natural-gas producer OAO Novatek. (NVTK)
Targeting Banks
Going
after a single bank has a larger “ripple effect” than blocking an
individual or a company in any other industry, said Douglas N. Jacobson,
a sanctions lawyer at Jacobson Burton PLLC in Washington.
“It
does have a secondary effect,” Jacobson said, “because the large
European banks and the large Japanese and the other, more Western banks,
will be much more reluctant to engage” with banks that would be blocked
by the U.S.
The reach of sanctions used so far on the financial
industry was demonstrated when the U.S. designated Bank Rossiya,
leading Visa Inc. and MasterCard Inc. to cut services for the St.
Petersburg-based lender.
The U.S. Treasury has used
financial-industry sanctions extensively with Iran. It worked together
with European counterparts to exclude the regime from banking services
and to ensure lenders observe the sanctions.
Penalties Paid
ING Groep NV (INGA)
in June 2012 agreed to pay $619 million to settle U.S. charges it
falsified financial records to bypass sanctions on countries including
Cuba and Iran. HSBC Holdings Plc (HSBA) in December 2012 agreed to pay $1.92 billion to settle U.S. probes of laundering funds of sanctioned nations.
Under
the threat of significant fines for violating sanctions, JPMorgan Chase
& Co. temporarily suspended a payment of less than $5,000 to a
Russian firm that isn’t even on the blacklist. It let the payment go
through earlier this month, following consultation with the U.S.
regulators.
“Because such financial sanctions rely on the
judgment of banks, which are easily scared into doing even fewer
financial transactions that they were permitted to do, those sanctions
can easily become even more serious than originally intended,” said
former Central Intelligence Agency official Paul Pillar. “That’s exactly what we’ve seen happening in Iran.”
In the case of Iran, allies in Europe
joined the sanctions. Anders Aslund, a senior fellow at the Peterson
Institute for International Economics in Washington, said that in
Russia’s case, cooperation with other global players isn’t as necessary.
“The U.S. has massive impact in the world of finance since the
world is so interconnected,” he said. “Do sanctions on the four big
Russian state banks and that will have a big negative impact and
continue to sanction Putin’s cronies.”
To contact the reporter on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net
To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Brendan Murray, Steven Komarow
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