U.S., European Union target Russian energy sector with new sanctions

Reporting from Washington —  In a marked escalation of their sanctions campaign against Russia, the United States and the European Union hit the Kremlin on Friday with new penalties for its actions in Ukraine, targeting favored financial, energy and defense businesses.

The Western governments took steps to cut the flow of capital to these enterprises and to deprive the Russian energy sector, the foundation of the country’s economy, of Western know-how and technology it needs to develop new energy fields. The measures will also sting for U.S. energy companies that have been dealing with Russian firms.

The West sharpened sanctions because of Russia’s “direct military intervention and blatant efforts to destabilize Ukraine,” Treasury Secretary Jack Lew said in a statement.

But officials said the U.S. and Europe could roll back those penalties if Russia observed all the points of a proposed peace plan and respects the week-old cease-fire in Ukraine’s embattled eastern region.

The Obama administration hit Russia’s largest bank, Sherbank, for the first time and also sanctioned 10 government defense and energy firms. The European Union sanctions, in addition to its penalties on defense, energy and financial firms, extended asset freezes and travel bans on 24 individuals believed to be connected to Russia’s aggression in Ukraine.

To dry up Western financing, both the U.S. and the EU have made it illegal for their companies to buy debt with maturity of more than 30 days from key Russian banks.

The U.S. sanctions bar American companies from providing goods or services for the deepwater, Arctic and offshore and shale energy projects of five Russian companies: Rosneft, Gazprom, Gazprom Neft, Lukoil and Surgutneftegas.

The goal is to “effectively shut down this type of oil exploration and production activity,” said an official who declined to be identified under ground rules set by the administration.

Among the U.S. firms that could suffer from the move is ExxonMobil, which has been working on a joint venture with Rosneft in the Arctic.

Analysts said this round of sanctions is likely to be especially painful to the Kremlin because it hits energy projects that are key to replacing fast-depleting Russian energy fields and also goes after state-run defense firms the government has been aiming to expand.

The new penalties are a “big step” that would affect both the Russian leadership and the American energy companies, said Elizabeth Rosenberg, who worked on sanctions at the Treasury Department.

For Russian President Vladimir Putin, “this really raises the stakes,” said Rosenberg, who is now with the Center for a New American Security in Washington. She speculated that it was more likely to bring further Russian economic retaliation than to persuade Putin to reduce his military support for Ukrainian separatists, as the West has been demanding.

Putin, on a trip to Tajikistan, described the sanctions as “somewhat strange,” since Russia and Ukraine agreed to a cease-fire Sept. 5 and are trying to work out a peace deal.

“What is this done for?” he asked, according to the Itar-Tass news agency.

The EU sanctions, though stiff, were less harsh than expected in allowing energy companies to continue technology transfers under already-signed oil contracts. As a result, Moscow’s main stock index, the Micex, rose 1.25% Friday as details became public.

European countries, more vulnerable than the United States to economic pressure from Moscow, had been battling for two weeks about how tough to make their sanctions. Some officials argued that the toughest steps should be postponed in light of the peace negotiations.

Moscow already has imposed a one-year ban on imports of some food products from some Western countries. It is threatening to limit car and clothing imports and to halt energy sales to Europe, although some experts doubt it would take the latter step.

U.S. officials said the sanctions have “taken a serious toll on the Russian economy” and may have tipped it again into recession. Analysts say it is unclear how much of the damage has been done by the sanctions as opposed to the flight of Western business or Putin’s retaliatory moves.

A senior administration official said that to have sanctions removed, Russia would have to withdraw all its arms and military personnel from Ukraine, release hostages and agree to implementation of controls on the Ukraine-Russia border. It would also have to allow the creation of a secure buffer zone with international monitoring on both sides of the border to ensure that Russia can no longer bombard Ukraine with artillery, the official said.

paul.richter@latimes.com

Special correspondent Kim Willsher in Paris contributed to this report.