Report

Too Big to Nail

Energy sanctions against Russia are incremental for a reason.

Calling the deadly attack on a Malaysia Airlines flight an "outrage of unspeakable proportions," President Barack Obama said Friday that the United States will dial up the pressure on Russia if it continues to support armed groups in eastern Ukraine. But when it comes to the energy sector -- a key chunk of Russia's economy and the major focus of the current American sanctions -- that won't be a quick or easy job to do so.

The tools available to the United States, such as export bans on key energy-sector technology, will be of limited use if the European Union continues to shy away from putting tougher measures in place against Russia. Fresh sanctions looked unlikely Friday, July 18, despite the airliner disaster; EU officials said they hope to finalize the latest list of sanctioned individuals and firms by the end of the month, but had not yet decided whether to take any further steps in the wake of the latest escalation.

Even if Europe gets on board, more-ambitious sanctions, including a full Iran-style embargo of Russia's energy exports, seem far-fetched, as Obama himself said in May. Russia is the world's third-largest oil producer and a major exporter of natural gas. Russia, in other words, may be too big to nail.

In any event, Russian strongman Vladimir Putin has been working to reduce his reliance on the West for energy revenues and is finding fresh allies in Asia. Moscow just inked a landmark natural gas deal with China; Beijing will invest more than $20 billion to help develop energy infrastructure in Russia's Far East, and it has exchanged billions of dollars in bank loans for long-term supplies of crude oil.

The Obama administration has mulled targeted export bans on important energy-sector technology, such as advanced drilling equipment and software needed for the toughest oil exploration and production jobs. Those would only impact Russia's future development of its energy sector, not its current production. They wouldn't inflict the kind of immediate pain needed to change Putin's calculus in the short term.

Indeed, big Russian energy firms that have already been hit with sanctions, such as Rosneft and Novatek, said this week that they will continue business as usual for now; even their deals with big Western oil companies such as Exxon Mobil and BP are going full speed ahead despite the latest anti-Russian measures.

In part, the big energy firms are gambling that the administration's bark is worse than its bite. So far, at least, they're right: Even as it rolled out this week a new slate of sanctions on Russian firms -- including two big banks and two large energy companies -- the Obama administration has underscored its willingness to keep raising the temperature if Putin doesn't respond.

"We will continue to make clear that as Russia engages in efforts that are supporting the separatists, that we have the capacity to increase the costs that we impose on them -- and we will do so," Obama said in his remarks Friday.

That echoed promises of tougher future steps laid out by officials this week. A senior administration official, unveiling the latest restrictions on Russian businesses Wednesday, vowed that the United States could expand both the reach of the latest sanctions and the number of companies targeted.

The steps outlined Wednesday were the toughest yet: They bar four Russian firms from tapping U.S. capital markets, prohibiting them from issuing new stocks or bonds. That will certainly sow uncertainty in energy and financial markets and increase those companies' cost of doing business, but alone it will not strangle them. The administration's threats to tighten its grip reflect how incremental the steps to date have been.

"Right now, the noose is very loose. The market's not worried about it, and all it's doing to these companies is making life a little more difficult," said Elizabeth Rosenberg, a former Treasury official and now an energy analyst at the Center for a New American Security. She said the new steps outlined this week open the door for a whole array of creative sanctions to steadily increase the pain.

"You can take such small, incremental steps many times over -- there's no limit to the ways in which Treasury can slowly tighten that noose."

Any talk of sanctions immediately raises comparisons to Iran, another energy state that has been getting hammered by Western economic measures for years. Taking a page from the Iran playbook to fully block Russia's energy exports, which account for just over half of Moscow's revenues, seems exceedingly unlikely, however.

The use of tough energy sanctions in the Iran case has set an unhelpful precedent for other international hot spots, such as Russia. For years, the United States had sought to put severe pressure on Iran in order to force Tehran to scale back its nuclear development. And for years, Iranian energy exports were off-limits to sanctions: In a global oil market, removing more than 1 million barrels a day of oil would have had severe economic repercussions for everyone, especially the oil-dependent United States.

But after the U.S. energy boom, which increased U.S. oil production by about 3.5 million barrels per day, targeting Iranian exports suddenly became feasible. Beginning in 2012, export restrictions passed by the United States and several other countries managed to slash Iran's oil exports almost in half. That helped to poleax its economy (without killing the global economy) and helped bring Iran to the nuclear negotiating table. Its negotiators are currently in Vienna for last-ditch talks with U.S. diplomats designed to strike a deal before a self-imposed July 20 deadline.

Russia is a different kettle of caviar. It produces about 10 million barrels of oil per day and exports more than 7 million, compared with Iranian pre-sanctions numbers of about 3.5 million and 2.5 million barrels a day, respectively. Russia's exports of crude, and especially natural gas, are crucial to the global economy in a way that Iran's never were.

Obama administration officials acknowledged as much this spring. In an April event at the Atlantic Council, Amos Hochstein, a top energy official in the State Department, dismissed the notion of removing Russian oil exports from the global market.

Obama himself on Friday hinted at the limits of applying Iran-style energy diplomacy to Russia even in the present crisis.

"We have consistently tried to tailor these sanctions in ways that would have an impact on Russia, on their economy," he said, "while minimizing the impacts on not only the U.S. economy but the global economy." Russia, he noted, "is a large economy" with numerous links to the rest of the world -- another difference with pre-sanctions Iran.

Jamila Trindle contributed to this article.

Photo by Evaristo Sa - AFP - Getty

Report

Calling a Spade a Shovel

There's little doubt that pro-Russian rebels, using Russian weapons, shot down MH17. Why won't the White House say so?

In his most expansive remarks so far about the downing of Malaysia Airlines Flight 17 on Thursday, U.S. President Barack Obama laid out compelling evidence that pro-Russian separatists probably fired the missile that destroyed the airliner and killed all 298 people aboard. But he stopped short of definitively laying the blame on Moscow-backed rebels, a decision that may leave the White House open to criticism that it isn't responding forcefully enough to an attack that the president himself called an "outrage of unspeakable proportions."

The president's remarks were more measured and cautious than the word coming from inside the U.S. intelligence community, where there is little doubt that the airliner was brought down by separatists firing a Russian-made, and Russian-provided, SA-11 missile launcher, more commonly known as a Buk. Two U.S. officials, who asked to remain anonymous, said that military intelligence had pinned the attack on the separatists, but that the Pentagon may have conveyed that assessment to reporters before the White House was ready to give a definitive public conclusion.

Military officials have been warning since before the downing of the Malaysia Airlines flight that Moscow-backed separatists in Ukraine have been building up an arsenal of the very kinds of weapons used to shoot down the plane. "What we see in training on the east side of the border [of Ukraine and Russia] is big equipment, tanks, [armored personnel carriers], anti-aircraft capability, and now we see those capabilities being used on the west side of the border," Gen. Philip Breedlove, the supreme commander of NATO in Europe, said at a Pentagon news conference on June 30, more than two weeks before the Malaysia Airlines shoot-down. Breedlove said that the U.S. military had seen Russians training the separatists to use "vehicle-borne" missile systems like the Buk missile, which is mounted on a truck along with a small radar system for tracking airborne targets.

But the Obama administration has been burned before by preliminary intelligence that turned out to be flawed -- most famously in the flubbed public explanation for the 2012 attack on the U.S. diplomatic compound in Benghazi, Libya. "I think it's very important for folks to sift through what is factually based and what is simply speculation," Obama said. He also refused to be dragged into a discussion about further punitive actions against Russia, and he didn't commit to a new round of sanctions when pressed on the question by reporters. As far as the White House is concerned, the onus is now on the Kremlin to "de-escalate the situation," as Obama put it. But avoiding a forceful response will be much harder if conclusive proof emerges that separatists using weapons given to them by Russia brought down the airliner.

The president came as close as he could to directly blaming Russia for the shoot-down, but stopped just short. "We know that [the separatists] are heavily armed and that they are trained. And we know that that's not an accident. That is happening because of Russian support," Obama said.

Still, with evidence mounting that the plane was brought down with a Russian weapon that Moscow knowingly provided to the separatists, Obama will soon have to decide how much longer to wait before pinning direct responsibility for the attack on Russian President Vladimir Putin. That could be a turning point in the long shadow war in eastern Ukraine because Obama would come under tremendous pressure to hit Putin hard enough that the Russian strongman brings his meddling in Ukraine to a stop.

Obama made clear that day might still be a ways off when he said that an investigation into the crash, which could prove definitively who shot down the plane, wouldn't be finished quickly. "The investigation is going to be ongoing, and I think what we'll see is additional information surfacing over the next 24 hours, 72 hours, the next week, the next month," Obama said. It wasn't a rallying cry, but it gave the president breathing room to consider a range of responses, which could include new economic sanctions or even military aid to Ukraine.

But in Obama's hesitation, some saw an opportunity to form a better strategy for countering Putin than anything the administration has devised to date.

Adrian Karatnycky, a senior fellow with the Transatlantic Relations Program at the Atlantic Council, said it "enhances the credibility of the United States" to say that the preliminary evidence points strongly to Russian involvement but then call for an international investigation to ascertain all the facts. (Obama said that he'd dispatched aviation crash scene experts from the FBI and the National Transportation Safety Board to Ukraine and that they were standing by to lend assistance at the Ukrainian government's request.)

"I don't think this is a concession or a walking back or a sign of weakness," Karatnycky said in a conference call Friday afternoon, July 18, shortly after Obama's speech.

John Herbst, who served as the U.S. ambassador to Ukraine during George W. Bush's administration, agreed that Obama shouldn't be held to a timetable or rush to make an accusation that he might have to amend later. He noted that Bush officials waited for days after the 9/11 attacks to conclusively identify al Qaeda as the culprit.

Obama may have also bought Putin some time to change course in eastern Ukraine. Obama made clear that he expects Putin to decide the fate of the conflict, but he posed no ultimatums or set any "red lines," as he did last year in Syria with arguably disastrous political consequences.

"If Mr. Putin makes a decision that we are not going to allow heavy armaments and the flow of fighters into Ukraine across the Ukrainian-Russian border, then it [the fighting] will stop," Obama said. "And if it stops, then the separatists will still have the capacity to enter into negotiations and try to arrive at the sort of political accommodations that Mr. Putin himself says he wants to see. He has the most control over that situation, and so far, at least, he has not exercised it."

Karatnycky said Putin has to make "a fateful choice" between continuing to supply the rebels with weapons and training and telling them to stand down while reducing his aid to the fighters. In recent weeks, new weapons have been spotted flowing into eastern Ukraine from Russia. But at the same time, Putin has been "preparing his people for a possible retreat," said Herbst, the former U.S. ambassador to Ukraine, who noted that leading public figures in Moscow are now calling on Russia to stop supporting the rebel forces, criticism that Putin hasn't tried to refute or silence.

Still, the analysts said that it would be dangerous for Europe and the United States to hold off on hammering Putin for what appears to be his clear responsibility, even if indirect, for the shoot-down. "A clear line needs to be drawn now so Putin realizes what he's doing in Ukraine is not acceptable. And if the Europeans won't do it, the United States can," said Herbst. "We don't want revisionist powers to think that they can take territories … without punishment."

Photo by Nicholas Kamm / AFP