US, EU levy sanctions on Russia despite cease-fire

The restrictions on Russia's energy sector were carefully crafted to avoid impacting the country's current production of oil and gas, a move that would raise global energy prices at time of weak economic growth. Photo / AP

Unsatisfied with a fragile cease-fire in Ukraine, the United States and the European Union levied new sanctions Friday against major Russian banks and defense companies, as well as penalties aimed at curtailing Russia's ability to develop oil and gas projects.

But the restrictions on Russia's energy sector were carefully crafted to avoid impacting the country's current production of oil and gas, a move that would raise global energy prices at time of weak economic growth. Russia is the largest oil exporter outside of OPEC and the most important supplier of natural gas to Europe.

The Western sanctions came one week after Ukraine and Russian-backed separatists signed a cease-fire aimed at ending a monthslong conflict. The agreement has been routinely violated, and U.S. officials say they are yet to see signs that Russia is implementing the deal in good faith.

If Russia and the separatists do follow through on the accord, U.S. and European officials say they could roll back this current round of penalties. But officials said that because Russia moved troops and weaponry into Ukraine in recent weeks, it was necessary to levy penalties now rather than wait to see what comes of the cease-fire. Russia denies having a role in the conflict.

"Today's actions demonstrate our determination to increase the costs on Russia as long as it continues to violate Ukraine's territorial integrity and sovereignty," said David Cohen, Treasury undersecretary for terrorism and financial intelligence.

The West has levied multiple rounds of sanctions on Russia, contributing to slower economic growth there. But the penalties have had little impact on Russian President Vladimir Putin's calculus and U.S. officials privately acknowledge that there's no guarantee more sanctions will get him to stop his provocations in Ukraine.

The energy sanctions aim to move beyond inflicting immediate economic pain on Russia and instead focus on clouding its energy future. But there are also concerns that those penalties could ricochet and hurt Western businesses that are working with Russia on development projects, including U.S.-based Exxon Mobil and Britain's BP.

Both Western companies have ties to Rosneft, the Russian oil giant that was subjected to U.S. and European sanctions Friday. BP owns nearly 20 percent of Rosneft. Exxon's partnership with Rosneft is for exploring for oil in the technically difficult places that the sanctions target, including deep offshore, the Arctic offshore and shale deposits onshore.

Under the terms of the U.S. sanctions, Exxon will likely have to remove its engineers from those projects by a Sept. 26 deadline, which could slow or stop work on the projects. Exxon spokesman Scott Silvestri said Friday that the company is "assessing the sanctions" and that "it's our policy to comply with all laws."

Exxon, like all oil giants, is struggling to find and develop enough new oil to replace what it produces every day. Russia represents a huge opportunity for Exxon because it is one of the few places in the world that has enormous reserves of oil and gas that are open to Western oil companies.

Potential production, both for Russia and Exxon, is still many years off even without the sanctions. For now, that means the financial impact on Russia, Exxon and on oil prices is limited, according to Fadel Gheit, an analyst at Oppenheimer & Co.

"This is a future play," Gheit says of Exxon's Russian exploration plan. "It's like drafting a 16-year-old kid for the Yankees. You have no idea if he's going to be a big league player."

The global price of oil fell slightly Friday, reflecting little concern in the market that oil supplies would be disrupted. Exxon shares fell $1.25 Friday to close at $95.78.

Beyond the energy sanctions, the U.S. and Europe moved to tighten restrictions on access to foreign capital for Russia's top banks. For the first time, the U.S. targeted Russia's largest financial institution, Sberbank of Russia, the country's largest financial institution, which the Obama administration said accounts for approximately a quarter of Russian banking assets and a third of its banking capital.

The U.S. also sanctioned Rostec, the Russian state-owned defense conglomerate that manufactures weapons and military equipment. The EU levied a travel ban and asset freezes on the head of Rostec, Sergei Chemezov, who was hit with similar penalties by the U.S. earlier this year.

The EU sanctions list included travel bans and asset freezes on 23 other officials, including four deputy Parliament speakers and leaders of the separatists in eastern Ukraine.

- AP