- The Washington Times - Tuesday, May 13, 2014

The Obama administration claims it can use economic sanctions to punish Russian aggression in Eastern Europe, but the strategy has quickly run into problems, say analysts, who note that too aggressive a move by the White House could result in blowback on major American companies with close ties to the Russian economy.

The White House is walking a tightrope between America’s corporate and national interests by sanctioning Russian individuals who head companies with ties to such U.S. corporate giants as Boeing Co., Exxon Mobil Corp., Intel Corp., General Motors Co. and General Electric Co.

If the administration targets entire sectors of the Russian economy, those companies may be forced to swallow sudden and serious losses. Analysts say that prospect exposes the paradoxical limits of relying on sanctions to project American power.

Moscow underscored that dependence Tuesday by announcing plans to bar U.S. use of the International Space Station beyond 2020 and block the export of critical rocket engines to the U.S. military in response to the sanctions already levied.

The tense situation is being watched closely by American executives, including those at J.P. MorganChase & Co., which earned $56 million in investment banking fees in Russia last year, and PepsiCo Inc., which has been the largest food and beverage company operating in Russia since 2011.

“I’m talking to enough folks in the private sector to know that folks are worried, or at least trying to figure it out,” said Juan Zarate, a former top Treasury Department official now with the Center for Strategic International Studies.

“There is a wide swath of U.S. companies that have significant investment in Russia,” he said, and the pursuit of more biting sanctions will require Washington to strike a “difficult balance.”

“The reality is we can use sanctions to impose serious costs on the Russian economy,” said Mr. Zarate. “But officials are still trying to figure out how to nuance those measures so that we’re not cutting off our nose to spite our face.”

It’s not just U.S. companies facing crossfire. The Pentagon is engaged in a deal to pay more than $1 billion to Russia’s main government-owned weapons export firm, Rosoboronexport, to provide a fleet of helicopters to the U.S.-trained military of Afghanistan.

The Obama administration has sanctioned more than a dozen Russian entities, several of them in Russia’s energy and construction sectors. But the White House has been reticent to go after key players such as Rosoboronexport’s parent company, Rostec, whose other subsidiaries have close ties to several major U.S. companies.

The White House also has steered clear of directly targeting Rosneft, which has extensive dealings with Exxon. Instead, the administration has targeted Russian business executives such as Rostec’s Sergei Chemezov and Rosneft’s Igor Sechin — a strategy that has allowed U.S. companies to continue doing business with the Russian firms.

Deep corporate ties

Russia appears to have ample confidence that Washington is unwilling to seriously jeopardize business relationships created after the Cold War.

After sanctions were announced last month, a spokesman for Mr. Chemezov told The Washington Times that, despite disagreements, “all previously reached agreements with foreign partners will be successfully implemented.”

“Cooperation between the world’s largest companies is very complex and deep,” a spokesman for London-based public relations firm Bell Pottinger said, adding that “the lives of millions of people worldwide depend on it.” The spokesman said a 2013-2018 contract with Boeing would bring Rostec subsidiary VSMPO-AVISMA Corp. $1.5 billion to $2 billion.

Rostec’s website details a host of other partnerships, including ties between General Motors and Rostec subsidiary AvtoVaz Co., Intel with Rostec subsidiary Kamaz Co., and General Electric with Rostec subsidiary RT-Biotechprom.

Uncharted territory

Besides the potential domestic costs, U.S. officials are facing resistance from European allies. Many major EU economies are far more entangled with Russia and far less likely to back harsh sanctions.

Total U.S. import and export trade with Russia is roughly $40 billion a year, but the EU’s is more than $400 billion, said Steven Pifer, a former U.S. ambassador to Ukraine, who notes that bringing the 28 EU nations “together on the issue is a difficult consensus to achieve.”

Oil and gas represent Russia’s top export to the EU, with Germany the biggest customer from the Russian government-own energy giant Gazprom. But Russian exports are far outweighed by the flow of goods from the EU, specifically machinery and transportation-related products.

“The issue is just the potential blowback on the global economy,” Mr. Pifer said. He noted that the effort to sanction Russia is different from U.S. sanctions that have targeted North Korea, Iran and Iraq because of how vast and globally connected the Russian economy has become.

“Before Russia, the largest economy targeted by collective U.S. and EU sanctions was Iran, with a GDP of $100 to $125 billion,” he said. “The Russian GDP is in excess of $2 trillion.”

“The Russian case study may be revealing the inherent limitations in the use of financial and commercial isolation tools that have been so effective against others over the last 12 years,” said Mr. Zarate, whose 2013 book, “Treasury’s War: The Unleashing of a New Era of Financial Warfare,” examined the record of past U.S. sanctions regimes.

Treasury’s dance

Officials at the Treasury Department’s office of foreign assets control, which oversees the implementation of sanctions, are all too aware of the challenges.

Treasury Undersecretary David S. Cohen has led an Obama administration charm offensive aimed at convincing Europeans that the Russian sanctions can be crafted to punish Moscow while keeping blowback to a minimum.

“We are moving in a strong and systematic way to maximize the cost on Russia,” Mr. Cohen said during a discussion with reporters in Paris last week. At the same time, he told the group, U.S. officials are “minimizing to the extent possible the spillover on other economies, including those here in Europe.”

But Treasury Secretary Jack Lew has acknowledged that the administration thinks some degree of blowback is a price Washington must be willing to pay to makes its views known about Russian policy in Ukraine.

“We are going to do our best to manage the impact so that we do the least amount of harm we can to the global economy and to the U.S. economy,” Mr. Lew told MSNBC on April 29. “But we do have to be braced for there being some spillover.”

Obama administration officials reportedly have been scrambling behind the scenes to assuage fears among U.S. companies with investments in Russia.

• Guy Taylor can be reached at gtaylor@washingtontimes.com.

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