Despite economic fears, EU sanctions Russia again

AP News
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Posted: Sep 11, 2014 1:47 PM
Despite economic fears, EU sanctions Russia again

BRUSSELS (AP) — The European Union on Thursday slapped more sanctions on Russia for helping separatists destabilize Ukraine, limiting Russia's access to its financial market, hitting the country's vital oil industry, curbing high-tech exports and targeting more officials with travel bans and asset freezes.

Many EU members had been loath to increase the sanctions against Russia for fear of jeopardizing their close trade relationships with Moscow. But a compromise struck in a video conference call with top EU leaders broke a deadlock that had paralyzed the 28-nation bloc from taking tougher action over the past ten days.

Under the compromise hashed out by leaders including Britain's Prime Minister David Cameron, Germany's Angela Merkel and France's Francois Hollande, the sanctions could be reversed within weeks if the cease-fire in eastern Ukraine holds.

In Washington, President Barack Obama announced the U.S. is also moving ahead with tougher economic sanctions on Russia that will affect the country's financial, energy and defense sectors.

If Russia follows through with its commitments to help end the crisis in Ukraine, the sanctions can be rolled back, Obama said. Otherwise, both the U.S. and the EU said the sanctions would be increased further.

The EU sanctions will take effect Friday following their publication in the EU's official journal, the bloc said in a statement.

The Russian stock market sank at the news of sanctions, with benchmark MICEX down 1.3 percent after rising in the morning. The Russian ruble fell to an all-time low of 37.53 against the U.S. dollar.

In a sharp rebuke, Russia's Foreign Ministry said by adopting further sanctions the EU "has effectively made a choice against a peaceful settlement of the crisis in Ukraine."

"Such steps look particularly improper and short-sighted now when a fragile peace process in Ukraine has gotten under way, a prisoner exchange has started," the ministry said, adding that Russia will respond to the new sanctions.

Russia has consistently denied what the U.S. and Europe call Moscow's actions to destabilize Ukraine — sending arms or soldiers to help pro-Russian separatists fight government troops in eastern Ukraine.

The cease-fire between the separatists and the Ukrainian military took effect Friday but has been riddled by violations. On Thursday, two volleys of Grad rocket fire rang out in the rebel-held eastern city of Donetsk.

A spokesman for Ukraine's National Security and Defense Council, Col. Andriy Lysenko, told journalists that a large swath of Ukraine near the Sea of Azov had come under full rebel control. While that likely happened before the cease-fire, it was an unusual admission by Ukraine of the scale of a coastal rebel offensive that Kiev and NATO say was backed by Russian arms and soldiers.

Ukrainian President Petro Poroshenko has sought to portray the cease-fire deal — reached as the rebels waged a major offensive that pushed back Ukraine's troops — as a victory rather than a defeat, saying Wednesday that about 70 percent of the Russian troops in eastern Ukraine had since withdrawn.

NATO, however, said Thursday that its intelligence still shows about 1,000 Russian troops with sophisticated weaponry like heavy artillery on Ukrainian soil. An estimated 20,000 other Russian troops are amassed just east of the border, the alliance said.

The new sanctions cut the EU's current ban on credits and loans to Russian entities from a maturity of more than 90 days now to those over 30 days. Curbing access to western capital markets could weigh down Russia's already-flagging economic growth.

In addition to hitting five of Russia's biggest banks, the EU said the capital market restrictions will now also hit three major Russian defense firms and three major oil companies. The names of the targeted entities will be released Friday.

The export of high-tech items that can be used for both military and civilian purposes — so-called dual-use goods — will also face further restrictions. In addition, 24 more individuals, including Russian decision-makers and oligarchs as well as rebel leaders from eastern Ukraine, will be banned from traveling to the 28-nation bloc and their assets will be frozen, the EU said.

That brings the total number of people subject to EU sanctions to 119.

Overall, Brussels has been more reluctant than Washington to sanction Russia because of its broad economic ties. Moscow is an important gas supplier for many EU nations and it is the bloc's third-largest trading partner overall. The EU's sanctions, however, have more impact than those imposed by the U.S. since the EU is by far Russia's largest trading partner.

Matteo Napolitano, a director in Fitch Ratings' sovereign division, warned that the sanctions and the risk of further measures could see international banks further reduce their exposure to Russia, sparking renewed capital flight, slamming investment and depleting Moscow's foreign exchange reserves.

"The sanctions are really having a meaningful impact," he said at a conference in London.

In retaliation for earlier sanctions, Moscow banned food imports from the West, closing a market worth 10 billion euros ($13 billion) a year for European producers.

Russia has also issued a veiled threat that it could ban Western airlines from using Russian airspace — a move that would lead to higher fuel costs and delays for flights to Asia by European airlines.

In Ukraine's capital of Kiev on Thursday, people held posters and laid flowers to commemorate terror victims killed in the Sept. 11 attacks in the United States and in the July 17 downing of Malaysia Airlines Flight 17 over eastern Ukraine this year.

Ukraine has accused the separatists of shooting down Flight 17.

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Nataliya Vasilyeva in Moscow; Peter Leonard in Donetsk, Ukraine; Laura Mills in Kiev, Ukraine; Carlo Piovano and Pan Pylas in London; Vladimir Isachenkov in Moscow and Julie Pace in Washington, D.C., contributed reporting.

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Follow Juergen Baetz on Twitter at http://www.twitter.com/jbaetz