U.S. Sanctions Russian Banks and Energy Companies

Obama issues his strongest sanctions yet to pressure Moscow out of the Ukraine conflict.

Barack Obama's administration on Wednesday made good on threats to sanction Moscow for continuing to support pro-Russian separatists in Ukraine, imposing tough new restrictions on major Russian energy companies, banks, and weapons-makers.

Charting a middle course between full-scale sanctions that would go after whole sectors of the Russian economy and the surgical sanctions used so far, the Obama administration's latest steps are its strongest effort to date to dissuade Russia from continuing to back armed separatists who are trying to undermine the new Ukrainian government.

On Monday, July 14, the U.S. State Department released a list of evidence it says proves Moscow is still supplying Ukrainian militants with weapons, financing, and Russian fighters. On Tuesday, Russian-backed rebels destroyed a Ukrainian apartment building close to the border with Russia. Videos released Wednesday appeared to show Russian-made rockets being fired at Ukrainian targets from inside Russian territory.

However, in the absence of full-throated cooperation with key European countries, it is unclear just how effective the latest U.S. measures will be. Capital markets in Europe, for example, remain open for Russian firms. And Gazprom, the main source of Russian energy exports to Europe via Ukraine, has yet to be targeted directly by any U.S. sanctions. What's more, Russia and China, among other developing economies, announced the creation this week of a new international development bank precisely to allow them to start sidestepping Western dominance of the international financial system.

Speaking at the White House, President Obama said he had repeatedly told Russian President Vladimir Putin to stop sending weapons and fighters into Ukraine and pursue internationally mediated talks with Kiev. At least so far, Obama said, "Russia has failed to take any of the steps that I mentioned."

"Russia's support for the separatists and violations of Ukraine's sovereignty have continued," Obama said, adding that the United States and its allies would continue to pursue measures designed to further weaken Russia's economy and increase its isolation on the world stage unless Putin relented.

Despite the tough talk, the United States didn't cut off whole sectors of the Russian economy, but it went after four big energy and finance firms. The Treasury Department banned a pair of big Russian banks -- Gazprombank and VEB, Russia's state-owned development bank -- from issuing any new debt or equity in U.S. markets. It also banned two energy giants, Novatek and Rosneft, from tapping U.S. debt markets. But the United States did not target Gazprom, Russia's mammoth oil and gas firm, directly.

The United States also blacklisted eight Russian arms firms and a list of senior Russian officials.

The sanctions announced Wednesday will essentially close U.S. capital markets to those big firms. That limits those big firms' abilities to roll over or refinance their debts, making it more expensive for them to borrow new money. Officials said those firms would likely have to turn to Russia's Central Bank to try to fill their financing needs.

The Obama administration left the door open to further sanctions if Russia continues its destabilization activities in eastern Ukraine. The administration can "expand the scope of the prohibitions and the list of the entities affected if the situation warrants," a senior administration official said.

The new U.S. sanctions come as European leaders are considering going after Russian companies too, but the European Union's measures are not expected to go as far as Washington's new prohibitions.

The United States coordinated the latest sanctions with top European leaders, including British Prime Minister David Cameron, German Chancellor Angela Merkel, and French President François Hollande, officials said. Even though the European Union has not embraced sanctions as tough as what the United States has urged, the importance of the dollar as the principal global reserve currency means the closure of the U.S. capital markets will have an outsized impact on the Russian companies, officials said.

Before the announcement Wednesday, many U.S. businesses were leery of the prospect of unilateral sanctions on Russia. The Obama administration had floated the idea of barring trade in advanced energy technology between U.S. and Russian firms, for example. Many U.S. firms feared that they would pay the price for unilateral actions because European firms would be able to step into the breach.

In recent weeks, major trade groups have publicly opposed the idea of imposing economic restrictions without broad participation from the rest of the world. The U.S. Chamber of Commerce and the National Association of Manufacturers have been campaigning, in newspaper ads and blog posts, against U.S.-only sanctions against Russia.

"U.S. unilateral economic sanctions have been shown to impose little, if any, cost on the targeted country, while disproportionately harming U.S. industry and workers," Linda Dempsey, the National Association of Manufacturers' vice president for international economic affairs, wrote in a blog post last week.

Even top administration officials warned Congress in recent days that such unilateral sanctions could be ineffective in the absence of full cooperation from Europe. By targeting Russian firms' ability to tap U.S. capital markets rather than U.S. exporters, the administration has sidestepped for now that potential boomerang.

Additionally, the latest U.S. steps take aim at key individuals involved in the annexation of the Crimean peninsula, the Russian military, and the Russian defense establishment.

The defense sanctions include U.S. asset freezes on big Russian arms firms, including the country's largest, Kalashnikov Concern, as well as a tank manufacturer and companies that make missiles and other projectiles.

Americans are also banned from buying new guns from Kalashnikov, famous for producing ubiquitous, cheap automatic rifles like the AK-47. That could sting because the company, despite its reputation for making guns used in armed conflicts the world over, has come to rely more and more on the U.S. consumer market to make up for flagging demand in Russia. The company signed a five-year contract in January to sell up to 200,000 guns a year in North America, according to state-owned news company RT. And in 2012, demand from U.S. customers made up 40 percent of civilian sales from one factory, according to a New York Times report.

Individuals added to the sanctions list, which includes a U.S. asset freeze, are Alexander Borodai, the self-proclaimed prime minister of the Donetsk People's Republic and a prime mover behind the annexation of Crimea. Other individuals named include Sergey Beseda, a top official in the Russian security service FSB, and Russia's minister for Crimean affairs, Oleg Savelyev.




An American crypto-company is making a killing off German anger about U.S. spying.

The past year's revelations about U.S. spying on Germany have been disastrous for many American businesses. When documents provided by former National Security Agency contractor Edward Snowden showed the agency was monitoring German citizens' communications, Chancellor Angela Merkel proposed building a Europe-only Internet, which would cut out American Internet firms that cooperated with NSA spying. Then came word that the giant intelligence agency was monitoring Merkel's own cellphone. Berlin responded by canceling a government contract with Verizon Communications, one company that had cooperated with NSA surveillance efforts.

The latest news that the CIA was allegedly running a spy inside Germany's main intelligence agency presumably doesn't bode well for U.S. companies. But at least one firm that specializes in blocking the same type of spying that has so incensed the German public is seeing a boom in business.

Silent Circle, which sells encrypted mobile phone service that shields users' conversation from eavesdroppers, has seen a surge in sales to German customers since July 4, when Berlin announced the arrest of a 31-year-old intelligence service employee for allegedly passing secret documents to the United States. Sales to individual customers have increased 100 percent in the past week and a half, and sales to "enterprise" clients, which include corporations and government agencies that buy many calling plans at once, are up 70 percent, said Mike Janke, the co-founder and CEO of Silent Circle, which has its primary office in Washington, D.C., and counts U.S. intelligence and security agencies among its customers.

Silent Circle's sudden jump in sales suggests that German citizens, corporations, and government agencies are taking steps to keep their conversations away from the prying ears of American intelligence agencies. And, paradoxically, they're turning to an American firm to help them. The company was founded in 2012 by Janke, a former Navy SEAL, and Phil Zimmermann, who developed Pretty Good Privacy (PGP), one of the first widely available encryption programs to help average Internet users protect their personal information. Silent Circle has customers in more than 130 countries.

In the last month, sales to individuals in Germany accounted for 29 percent of all sales in Europe, "which is astounding," Janke said. And in just the past week, which saw U.S-German relations hit a low point after Berlin kicked out the top American intelligence official in the country to protest U.S. spying, Silent Circle's enterprise sales -- which include the German government -- surged 28 percent. "That's a spike" compared to the usual sales patterns, Janke said.

Silent Circle can't be certain that Germans are buying more encrypted phones in response to U.S. spying. But historically, Janke said, whenever stories about government surveillance or data privacy breaches appear in the press, regardless of where they happen, there's often an uptick in German sales. Among Silent Circle's customers, Germans are generally "the most privacy-conscious by far," he said, perhaps owing to the country's own history with intrusive government surveillance and monitoring of its citizens. The new sales "match up exactly with the revelations" about American spies in Berlin, Janke said, which have been leading news in many German newspapers, magazines, and television programs.

Rising concerns about personal privacy aren't unique to Germany. In April, StrikeForce Technologies, a cybersecurity company, reported a sudden 84 percent jump in first-quarter sales for products that encrypt data on computers, as stories about spying and data breaches at large retailers, such as Target, dominated the news. And last month, Google -- which was identified in documents released by Snowden as both participating in NSA spying and as a target of the agency -- reported that 65 percent of Gmail messages were being encrypted while they were delivered, up from 39 percent in December. Google, Yahoo, and Facebook all reported that the volume of encrypted email is rising, as companies and consumers try to protect their information from government spies. Comcast, a major Internet service provider, has announced that it plans to encrypt email, and Microsoft is putting stronger encryption in place for its web-based email service.

German government officials and citizens have been particularly zealous about protecting their private information. For several months now, German officials have been looking for ways to limit their dependency on U.S. telecommunications companies and their data networks. That hasn't been easy, since the majority of the world's telecom infrastructure is located in the United States. Absent a complete decoupling, Berlin sought a so-called "no spy" deal with Washington, under which both sides would agree not to conduct espionage on the other. But the Germans were rebuffed, and that stung the central government. The Germans' decision to cancel the Verizon contract was based in part on the failure to seal the no-spy deal, and revealed a fundamental lack of trust in U.S. companies, which can be required by law to participate in official spying.

"[T]he ties revealed between foreign intelligence agencies and firms in the wake of the [NSA] affair show that the German government needs a very high level of security for its critical networks," the Interior Ministry said in a statement at the time, explaining why it had canceled Verizon's contract.

Now, following the arrest of the German intelligence employee, officials are taking even more unusual steps. Earlier this week, the head of the German government's inquiry into the Snowden revelations told a television interviewer that his panel may ditch electronic communications altogether and use manual typewriters for their correspondence. The intelligence employee spy is believed to have been passing the CIA documents about the committee's investigation.

"Unlike other inquiry committees, we are investigating an ongoing situation. Intelligence activities are still going on, they are happening," said Patrick Sensburg, a member of Merkel's party, the Christian Democratic Union, explaining why German officials would choose to use a primitive technology to keep their proceedings private.

Despite the sales successes of a few technology companies, the longer-term economic and political consequences to the U.S.-German relationship over spying are potentially disastrous, and they could ripple throughout Europe.

Across Berlin, there is a growing chorus, including in Merkel's own party, to stop negotiations with the United States over the Transatlantic Trade and Investment Partnership (TTIP). The fact that even moderate voices in Germany feel the spying scandal justifies such an extreme response "is really worrisome," Annette Heuser, the executive director of the Bertelsmann Foundation, said in a conference call organized by the Atlantic Council. Any hope that the deal could be finalized by the end of 2016, before President Barack Obama leaves office, has been dashed, she said.

"The [U.S.-German] relationship is getting out of sync," Heuser said. The perception in Germany among both the political class and many citizens is that "the United States, at the end of the day, doesn't care what the Germans think," Heuser said. "They just seem to be a world power that doesn't care about its core allies in Europe anymore."

Heuser traced the change back to the 9/11 terrorist attacks, when the United States began to more aggressively collect intelligence around the world and, with the help of telecommunications companies, zeroed in on the phone calls and emails of suspected terrorists in Germany. (Members of the cell that hijacked airliners on Sept. 11, 2001, were tied to Hamburg.) The United States has never fully trusted Germany as a security partner, even though both countries share strong economic and military ties, former U.S. intelligence officials say. That explains why the Americans rejected German overtures to form a no-spy agreement. "The idea that we wouldn't conduct espionage of any sort on German soil is unspeakably silly," said a former U.S. intelligence official.

Merkel has been under increasing pressure from politicians to her left and the German public to punish Washington. Her decision to expel the top U.S. intelligence official from the embassy in Berlin followed fruitless efforts by German lawmakers to get some explanation from Washington, and in particular the CIA, about why it was spying on an ally.

Robert Kimmitt, who served as U.S. ambassador to Germany in the early 1990s, said the Obama administration hadn't weighed the costs to its relationship with Germany against the potential benefit of any information it gleans from spying. "I think the intelligence agencies are doing what intelligence agencies do. But just because they can do it doesn't mean that they should do it," he said on the conference call Wednesday.

The White House hasn't officially acknowledged that the CIA was running a mole inside the German intelligence establishment. Since the intelligence employee's arrest, German officials have identified another suspected spy working in the Defense Ministry, and they are reportedly looking for more double agents in their ranks. The spying row recently threatened to overshadow tenuous negotiations over Iran's nuclear program. Secretary of State John Kerry met with his German counterpart, Frank-Walter Steinmeier, in Vienna on Sunday, taking a moment out of the nuclear talks to stress the importance of America's friendship with Germany.

"We have enormous political cooperation and we are great friends," Kerry said, while Steinmeier emphasized the work that has to be done to mend fences. "Ties between the United States and Germany are necessary and essential for both of us," he said. "We want to work on reviving this relationship, on a foundation of trust and mutual respect."

Heuser, of the Bertelsmann Foundation, said she fears the U.S.-German relationship might not withstand news of another spy, and that Washington should find a way to privately come clean about any more agents that it's running. "The relationship is much too unstable to witness all these storms that could come out of" another revelation, Heuser said. "I think [that] would be just another big catastrophe and another nail in the coffin, so to say, of the trans-Atlantic relationship."

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