E.U. ratchets up sanctions on Russia, awaits retaliation

September 11, 2014, 3:31 PM UTC
A picture shows a piece of debris of the fuselage at the crash site of the Malaysia Airlines Flight MH17 near the village of Hrabove (Grabovo), some 80km east of Donetsk, on July 25, 2014. Ukraine sought on July 25 to avoid a political crisis after the shock resignation of its prime minister, as fighting between the army and rebels close to the Malaysian airliner crash site claimed over a dozen more lives. The Netherlands and Australia, the two countries that lost the most citizens when the Malaysia Airlines Boeing 777 was shot down, are seeking a mandate to deploy troops on the ground, possibly through a United Nations Security Council resolution. AFP PHOTO/ BULENT KILIC (Photo credit should read BULENT KILIC/AFP/Getty Images)

After a week of dithering, the European Union went ahead with a new round of sanctions against Russia, tightening the screws on its state-owned energy companies and banks.

The move sent the Russian ruble to a new all-time low against the dollar, and is likely to trigger retaliation by Russia in a widening trade war running parallel to the actual war in eastern Ukraine. That threatens to weaken both the European and Russian economies still further.

It comes only a day after first signs that Russia may cut energy supplies to the E.U. to punish it for its support for Kyiv. A number of European companies said their supplies had been reduced, in an apparent effort to stop them re-exporting surplus gas to Ukraine.

Prime Minister Dmitry Medvedev had said in an interview earlier this week that counter-measures could include stopping European airlines from flying over Siberia on their Asian routes, forcing them into expensive diversions that will make them uncompetitive against Asian rivals.

However, it quoted Andrey Belousov, an economic adviser to President Vladimir Putin as saying that the measures could also include bans on imports of cars and clothing. Car sales in Russia are already collapsing due to the ruble’s weakness and a big hit to consumer and business confidence. They were down 26% on the year in August.

The E.U. had agreed its latest sanctions in principle last week but suspended them while it assessed the health of the ceasefire agreed by Kyiv and Russian-backed separatist rebels. That has largely held despite reports of repeated but mainly low-level violations on both sides.

As expected, the new measures include a complete ban on financing three major oil companies, three defense companies and five of Russia’s largest banks, including London-listed OAO Sberbank (RNFTF), which accounts for over 4% of global oil supply, pipeline operator OAO Transneft and the oil-producing unit of gas giant OAO Gazprom (OGZPY). An E.U. spokeswoman said the official list will be published Friday.

Rosneft and Gazprom will both be hit by another part of the measures, namely a new ban on providing services to develop offshore or shale oil projects. Russia needs to develop such projects to keep up its oil output in the long term, as production at many of its older Siberian fields is declining.

The Wall Street Journal had reported Wednesday that the U.S. is also preparing to match that measure, something that will likely freeze ExxonMobil Corp’s (XOM) partnership with Rosneft in drilling for oil in the Arctic Ocean.

In addition, the E.U. widened a ban on exports of so-called “dual-use” goods that have both civilian and military applications, and hit another 24 officials and “oligarchs” with asset freezes and visa bans for violating Ukraine’s territorial integrity.

The conflict, and the sanctions that have accompanied it, are already badly hitting both the Eurozone and Russian economies. The Eurozone’s economy stopped growing in the second quarter, while Russia’s Economic Ministry only expects 0.5% growth this year, and 1% next year. A year ago, it had expected 3% for 2014. President Vladimir Putin has said the country needs a rate of 5%, but Russia hasn’t achieved that since 2008.

Gazprom, which supplies nearly a quarter of E.U. gas consumption, reported earlier Thursday that its net profit fell 41% on the year in the first quarter of this year, as it wrote-down claims against the effectively bankrupt Ukrainian gas company Naftogaz.