Businesses face blow­back from Rus­sia sanc­tions

The Washington Times Weekly - - Geopolitics - BY GUY TAY­LOR

The Obama ad­min­is­tra­tion claims it can use eco­nomic sanc­tions to pun­ish Rus­sian ag­gres­sion in East­ern Europe, but the strat­egy has quickly run into prob­lems, say an­a­lysts, who note that too ag­gres­sive a move by the White House could re­sult in blow­back on ma­jor Amer­i­can com­pa­nies with close ties to the Rus­sian econ­omy.

The White House is walk­ing a tightrope be­tween Amer­ica’s cor­po­rate and na­tional in­ter­ests by sanc­tion­ing Rus­sian in­di­vid­u­als who head com­pa­nies with ties to such U.S. cor­po­rate gi­ants as Boe­ing Co., Exxon Mo­bil Corp., In­tel Corp., Gen­eral Mo­tors Co. and Gen­eral Elec­tric Co.

If the ad­min­is­tra­tion tar­gets en­tire sec­tors of the Rus­sian econ­omy, those com­pa­nies may be forced to swal­low sud­den and se­ri­ous losses. An­a­lysts say that prospect ex­poses the para­dox­i­cal lim­its of re­ly­ing on sanc­tions to project Amer­i­can power.

Moscow un­der­scored that de­pen­dence Tues­day by an­nounc­ing plans to bar U.S. use of the In­ter­na­tional Space Sta­tion be­yond 2020 and block the ex­port of crit­i­cal rocket en­gines to the U.S. mil­i­tary in re­sponse to the sanc­tions al­ready levied.

The tense sit­u­a­tion is be­ing watched closely by Amer­i­can ex­ec­u­tives, in­clud­ing those at J.P. Mor­ganChase & Co., which earned $56 mil­lion in in­vest­ment bank­ing fees in Rus­sia last year, and Pep­siCo Inc., which has been the largest food and bev­er­age com­pany op­er­at­ing in Rus­sia since 2011.

“I’m talk­ing to enough folks in the pri­vate sec­tor to know that folks are wor­ried, or at least try­ing to fig­ure it out,” said Juan Zarate, a for­mer top Trea­sury Depart­ment of­fi­cial now with the Cen­ter for Strate­gic In­ter­na­tional Stud­ies.

“There is a wide swath of U.S. com­pa­nies that have sig­nif­i­cant in­vest­ment in Rus­sia,” he said, and the pur­suit of more bit­ing sanc­tions will re­quire Wash­ing­ton to strike a “dif­fi­cult bal­ance.”

“The re­al­ity is we can use sanc­tions to im­pose se­ri­ous costs on the Rus­sian econ­omy,” said Mr. Zarate. “But of­fi­cials are still try­ing to fig­ure out how to nuance those mea­sures so that we’re not cut­ting off our nose to spite our face.”

It’s not just U.S. com­pa­nies fac­ing crossfire. The Pen­tagon is en­gaged in a deal to pay more than $1 bil­lion to Rus­sia’s main govern­ment-owned weapons ex­port firm, Rosoboronex­port, to pro­vide a fleet of he­li­copters to the U.S.-trained mil­i­tary of Afghanistan.

The Obama ad­min­is­tra­tion has sanc­tioned more than a dozen Rus­sian en­ti­ties, sev­eral of them in Rus­sia’s en­ergy and con­struc­tion sec­tors. But the White House has been ret­i­cent to go af­ter key play­ers such as Rosoboronex­port’s par­ent com­pany, Rostec, whose other sub­sidiaries have close ties to sev­eral ma­jor U.S. com­pa­nies.

The White House also has steered clear of di­rectly tar­get­ing Ros­neft, which has ex­ten­sive deal­ings with Exxon. In­stead, the ad­min­is­tra­tion has tar­geted Rus­sian busi­ness ex­ec­u­tives such as Rostec’s Sergei Che­me­zov and Ros­neft’s Igor Sechin — a strat­egy that has al­lowed U.S. com­pa­nies to con­tinue do­ing busi­ness with the Rus­sian firms.

Deep cor­po­rate ties

Rus­sia ap­pears to have am­ple con­fi­dence that Wash­ing­ton is un­will­ing to se­ri­ously jeop­ar­dize busi­ness re­la­tion­ships cre­ated af­ter the Cold War.

Af­ter sanc­tions were an­nounced last month, a spokesman for Mr. Che­me­zov told The Wash­ing­ton Times that, de­spite dis­agree­ments, “all pre­vi­ously reached agree­ments with for­eign part­ners will be suc­cess­fully im­ple­mented.”

“Co­op­er­a­tion be­tween the world’s largest com­pa­nies is very com­plex and deep,” a spokesman for Lon­don-based pub­lic re­la­tions firm Bell Pot­tinger said, adding that “the lives of mil­lions of people world­wide de­pend on it.” The spokesman said a 20132018 con­tract with Boe­ing would bring Rostec sub­sidiary VSMPO-AVISMA Corp. $1.5 bil­lion to $2 bil­lion.

Rostec’s web­site de­tails a host of other part­ner­ships, in­clud­ing ties be­tween Gen­eral Mo­tors and Rostec sub­sidiary Av­toVaz Co., In­tel with Rostec sub­sidiary Kamaz Co., and Gen­eral Elec­tric with Rostec sub­sidiary RT-Biotech­prom.

Un­charted ter­ri­tory

Be­sides the po­ten­tial do­mes­tic costs, U.S. of­fi­cials are fac­ing re­sis­tance from Euro­pean al­lies. Many ma­jor Euro­pean Union economies are far more en­tan­gled with Rus­sia and far less likely to back harsh sanc­tions.

To­tal U.S. im­port and ex­port trade with Rus­sia is roughly $40 bil­lion a year, but the EU’s is more than $400 bil­lion, said Steven Pifer, a for­mer U.S. am­bas­sador to Ukraine, who notes that bring­ing the 28 EU na­tions “to­gether on the is­sue is a dif­fi­cult con­sen­sus to achieve.”

Oil and gas rep­re­sent Rus­sia’s top ex­port to the EU, with Ger­many the big­gest cus­tomer from the Rus­sian govern­ment-own en­ergy gi­ant Gazprom. But Rus­sian ex­ports are far out­weighed by the flow of goods from the EU, specif­i­cally ma­chin­ery and trans­porta­tion-re­lated prod­ucts.

“The is­sue is just the po­ten­tial blow­back on the global econ­omy,” Mr. Pifer said. He noted that the ef­fort to sanc­tion Rus­sia is dif­fer­ent from U.S. sanc­tions that have tar­geted North Korea, Iran and Iraq be­cause of how vast and glob­ally con­nected the Rus­sian econ­omy has be­come.

“Be­fore Rus­sia, the largest econ­omy tar­geted by col­lec­tive U.S. and EU sanc­tions was Iran, with a GDP of $100 to $125 bil­lion,” he said. “The Rus­sian GDP is in ex­cess of $2 tril­lion.”

“The Rus­sian case study may be re­veal­ing the in­her­ent lim­i­ta­tions in the use of fi­nan­cial and commercial isolation tools that have been so ef­fec­tive against oth­ers over the last 12 years,” said Mr. Zarate, whose 2013 book, “Trea­sury’s War: The Un­leash­ing of a New Era of Fi­nan­cial War­fare,” ex­am­ined the record of past U.S. sanc­tions regimes.

Trea­sury’s dance

Of­fi­cials at the Trea­sury Depart­ment’s of­fice of for­eign as­sets con­trol, which over­sees the im­ple­men­ta­tion of sanc­tions, are all too aware of the chal­lenges.

Trea­sury Un­der­sec­re­tary David S. Co­hen has led an Obama ad­min­is­tra­tion charm of­fen­sive aimed at con­vinc­ing Euro­peans that the Rus­sian sanc­tions can be crafted to pun­ish Moscow while keep­ing blow­back to a min­i­mum.

“We are mov­ing in a strong and sys­tem­atic way to max­i­mize the cost on Rus­sia,” Mr. Co­hen said dur­ing a dis­cus­sion with re­porters in Paris last week. At the same time, he told the group, U.S. of­fi­cials are “min­i­miz­ing to the ex­tent pos­si­ble the spillover on other economies, in­clud­ing those here in Europe.”

But Trea­sury Sec­re­tary Jack Lew has ac­knowl­edged that the ad­min­is­tra­tion thinks some de­gree of blow­back is a price Wash­ing­ton must be will­ing to pay to makes its views known about Rus­sian pol­icy in Ukraine.

“We are go­ing to do our best to man­age the im­pact so that we do the least amount of harm we can to the global econ­omy and to the U.S. econ­omy,” Mr. Lew told MSNBC on April 29. “But we do have to be braced for there be­ing some spillover.”

Obama ad­min­is­tra­tion of­fi­cials re­port­edly have been scram­bling be­hind the scenes to as­suage fears among U.S. com­pa­nies with in­vest­ments in Rus­sia.


Two Rus­sian banks, in­clud­ing Bank Ros­siya, the lender that was put on the U.S. Trea­sury’s sanc­tions list, said Visa and MasterCard have stopped pro­vid­ing ser­vices to them. Bank Ros­siya is a pri­vate bank owned by Yuri Kovalchuk, con­sid­ered to be Rus­sian Pres­i­dent Vladimir Putin’s long­time friend and banker. Ros­siya main­tains nu­mer­ous ties to banks in the United States, Europe and else­where.

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