The European Union curbed Russia's access to bank financing and advanced technology in its widest-ranging sanctions yet over President Vladimir Putin's backing of the rebellion in eastern Ukraine.
EU governments agreed on Tuesday in Brussels to bar Russian state-owned banks from selling shares or bonds in Europe and restricted the export of equipment to modernise the oil industry, a key prop for Russia's economy, two EU officials told reporters. New contracts to sell arms to Russia and the export of machinery, electronics and other civilian products with military uses will also be banned.
"The political implications of the escalation in tensions are likely to cast a further chill over relations between Russia and the West," Citigroup Inc analysts including Eric Lee and Tina Fordham said in a note to clients before the EU decision. "Economic costs are starting to bite, but it could be a while before the economic consequences bear domestic political costs for Russia."
Due to the reliance of many European countries on Russian oil and natural gas, the bloc stopped short of the full-scale commercial warfare that could damage its own economy, which is still shaking off the euro debt crisis. The calibrated blockade buried the notion of Russia as a "strategic partner" for the EU and risked retaliation by the Putin against European and US companies active in the $2-trillion Russian economy.
US stocks erased earlier gains. The Standard & Poor's 500 Index was little changed at 1,977.49 at 11:09 am in New York after rising 0.3 per cent earlier. The Dow Jones Industrial Average lost 8.05 points, or 0.1 per cent, to 16,973.54.
Cold war
The EU measures, endorsed on Tuesday by representatives of national leaders, will take effect when the legal texts are published on July 31.
Constrained by the need for consensus among the 28 governments, the EU had lagged behind the US - with fewer business links to its former Cold War enemy - in upping the pressure on Putin. Rival interests among Europe's leading powers prevented the EU from going further on Tuesday, with France resisting a retroactive embargo that would scrap the sale of two warships to Russia.
Until now, the EU had blacklisted 87 people and 20 companies and groups accused of engineering Russia's annexation of Crimea in March and the subsequent infiltration of eastern Ukraine. On Monday, the EU extended the blacklist to cover business associates of Putin. Those names will be released on Wednesday.
Malaysian jet
EU attitudes were hardened by the downing of a Malaysian passenger jet over eastern Ukraine on July 17 and evidence that rebels equipped with Russian anti-aircraft artillery were responsible. All 298 people aboard were killed, the bulk from the Netherlands.
For the first time, the EU sought to hobble broad swathes of Russian industry, with the goal of accelerating the flight of capital from the country. Russian economic growth will slow to 0.2 per cent in 2014 from 1.3 per cent last year, the International Monetary Fund said last week.
"Russia needs the opposite, Russia needs internationalisation, globalisation to make Russia a better place to do business," Tim Ash, chief economist at Standard Bank Group Ltd. in London, told Bloomberg Television earlier today. "In the short term, the impact of sanctions could be to push Russia into recession."
Russian Finance
Taking aim at the Russian financial system, the EU prohibited state-owned banks from selling securities with more than 90 days maturity to European investors. The result will be "sharply increased costs of issuance," the European Commission predicted in a background paper last week.
Russian companies have drawn increasingly upon state-controlled lenders OAO Sberbank and VTB Group since the Ukraine crisis deterred outside banks. Dollar loans from international banks slumped to $7.9 billion in the first half of 2014 from $25 billion a year earlier.
Financial curbs "could be very important for Russia," Yannick Naud, who helps manage $190 million at Sturgeon Capital Ltd. in London, told Bloomberg Television earlier today. "Both the banks as well as companies are relying a lot on foreign capital."
Seeking to starve Russia's oil industry of capital for expansion and modernization, the EU restricted the export of technology for deep-sea drilling, shale oil production and Arctic exploration. Natural gas projects weren't affected. The EU also barred the export of "dual-use" technologies for military purposes.
High-Tech Machinery
Curbs on the sale of high-tech machinery reflected a stiffening of attitudes in Germany, the bloc's largest economy. Germany supplies 30 percent of EU exports to Russia and buys more than a third of its oil and gas from there, leading industry to fear the cost of an embargo on Russia.
German public opinion shifted after the shooting-down of the plane over Ukraine, with 52 percent now in favor of tougher measures toward Russia, up from 25 percent in March, according to a TNS-Infratest poll commissioned by Spiegel magazine. German industry has fallen into line.
The EU arms curbs won't stop France from selling two Mistral helicopter carrier warships to Russia, under a contract signed in 2011. The newspaper Le Monde has valued the contract at 1.2 billion euros ($1.6 billion). While Russian sailors are already in France to take delivery of the first ship, French President Francois Hollande on July 21 held out the prospect of canceling the second sale.
