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Obama Just Hit Russia With New Sanctions. Here's What It Means.


The conflict between Ukraine and Russia has been dragging on for months, the Groundhog Day of frozen regional conflicts, so you'd be forgiven for no longer paying attention or caring. Today, however, the Treasury Department rolled out a fresh round of sanctions. What's more, these ones, according to Treasury, were the dreaded "sectoral" kind. But you'd also be forgiven if you weren't blown away by their magnitude. 

For one thing, there are tons of loops and caveats in this round, which breaks down into two parts.

The first is an additional round of names of people who are sanctioned, including the head of the Donetsk People's Republic, Putin's assistant, and the head of the FSB's Fifth Division, responsible for information and strategy. Defense companies were also slammed, most notably Kalashnikov. These companies and individuals are sanctioned in the traditional sense of the word: frozen assets, can't do business with them.

The second subset is companies from the Russian financial and energy sectors: two massive banks (Gazprom Bank and VEB, which financed much of the Sochi Olympics) and Novatek (Russia's largest independent gas producer) and Rosneft, the state oil giant that has a major deal with Exxon to develop the Arctic as well as some U.S. oilfields. This subset of sanctions doesn't freeze assets, but it allows for no new deals and no new debt longer than 90 days. This is particularly problematic for the two banks. "This hurts them," said an administration official involved in the sanctions' development. "If it doesn’t cripple them, it bleeds them pretty hard." According to Alexander Kliment, head of Russia research for the Eurasia Group, "The lack of long term domestic capital is a huge problem for Russian companies, that's why the US started there. Russian companies are almost entirely dependent on the outside world for long term money, and that outside world just got smaller."

"It's a complex package," the official said, explaining that the point was to show that the U.S. was not scared of hitting the Russian defense, financial, and energy sectors, especially after what the U.S. says was a Russian escalation over the weekend. More military materiel moved from Russia into Ukraine and a Ukrainian military cargo plane was shot down by what Kiev alleges was a powerful missile fired from Russian territory. NATO also reported that Russian troops were again massing on the border.

This was the immediate trigger for the new round of sanctions, according to the official. "Putin is trying to create a frozen conflict while he plays rope-a-dope on the diplomacy," the official explained. "It seemed that the Russians were writing us off and this was a chance to demonstrate that we hadn't washed our hands of this. It also seemed to us that the Russians were reacting to the fall of Slovyansk and Kramatorsk by increasing military pressure. That’s not cost-free. We said so and we meant it."

"They're surgical sectoral sanctions," the official explained, chuckling when I asked if that weren't an oxymoron. 

In sum, it's a gradual ratcheting up, as slow-motion as the conflict on the ground. But it's definitely a powerful crank of the handle. Take, for instance, ExxonMobil: The sanctions don't kill its multi-billion-dollar deal with Rosneft outright, but they might eventually. The official said that these sanctions "don't provide an exemption for Exxon." Under this latest order, certain types of transactions and refinancing could easily be blocked, throwing the whole deal into jeopardy. (Apparently, these plans weren't shared with Exxon in advance and the sanctions team seems pretty indifferent to the oil giant's coming travails. "What they do now I cannot say," the official said.)

"It's as much a signal to Wall Street as it is to the Kremlin," says Kliment. "While the measures are limited in certain ways, the U.S. is making clear that it's not scared to go after major Russian companies. It's a pretty wide noose at the moment, but it's one the U.S. is prepared to tighten."