Tension with Ukraine Continues to Mount, Broader Sanctions Possible (with Turza Comment)

Any optimism produced by last week's Geneva agreement has dissipated, as hostilities grew and violence flared in eastern Ukraine following a brief Easter truce. Meanwhile, in the midst of the increasing instability in eastern Ukraine, Russia this week renewed military maneuvers across the border, and the country's foreign minister announced that Moscow would be forced to intervene in Ukraine if its "legitimate interests" were attacked. By late Friday, concerns of violence were mounting.

Turza Comment:To date, the United States and the European Union have largely limited their response to words, revealing that the next round of sanctions against Russia has been prepared and, absent a significant de-escalation from Moscow, will be rolled out. ("Monday at the latest," according to a report of comments made by U.S. Secretary of State John Kerry during a private meeting in Washington on Friday, the 25th.) If the status quo continues to hold, and Russia does not invade its neighbor, these sanctions can be expected to involve additional list-based measures targeted against designated individuals and entities, including those believed to be close to Russian President Vladimir Putin. Press reports this week indicated that certain Russian financial institutions were bracing themselves for possible designation under Western sanctions, and taking actions to limit their exposure. Should Russia move in force into eastern Ukraine, the United States and its European allies may be prepared to enact broader sector-based sanctions. Adoption of these sanctions would represent a significant escalation in U.S. and allied efforts to exact a cost on Russia for its perceived aggression, and the impact of such a move could be far-reaching. These measures could limit Western business dealings with certain segments of the Russian economy, including financial services, energy, minerals, engineering and defense, and could result in meaningful economic consequences, depending on which sectors, in fact, are targeted. (See Executive Order 13662, available here.) For members of the EU in particular, deep economic interdependence with Russia – in the energy sector and beyond – will make these measures even more painful to bear. Indeed, Europe's trade volume with Russia is over ten times that of the United States. Given Europe's economic ties with Russia, it remains to be seen whether future EU sanctions are in lockstep with or more measured than any new U.S. actions.Furthermore, Moscow can be expected to respond in kind, and may consider adopting its own sector-based sanctions, the repercussions of which would reverberate throughout the global economy. Notwithstanding the economic impact of additional sanctions, Moscow may also respond asymmetrically, withholding any further cooperation with the West in connection with Iran's nuclear program, the Syrian civil war, and other areas of mutual concern. James Treanor and Keith Gerver assisted in preparing this item.

See: Executive Order 13662. See also: Cabinet Sanctions Page (accessible to Cabinet subscribers only). For more information, please contact Dale Turza.