By William Mauldin and Paul Sonne
The Obama administration escalated its sanctions Wednesday
against Russia over the fighting in Ukraine, marking a return to
confrontation with President Vladimir Putin after determining that
his hints at cooperation were leading nowhere.
The U.S. moves to impose restrictions on the Russian
state-controlled oil giant OAO Rosneft and other top firms are
aimed at squeezing Russia's already struggling economy and
financial system. They followed weeks of U.S. threats that Russia
would face repercussions unless it helped defuse the crisis in
eastern Ukraine, where pro-Russia separatists have been fighting
the Ukrainian government for months.
The sanctions stop well short of crimping international business
ties or blocking deals with entire sectors of the Russian
economy.
The U.S. and Europe say separatists in Ukraine are getting
significant support from Russia, an accusation Moscow has denied.
Some U.S. lawmakers had questioned whether the Obama administration
was ready to up the ante on sanctions.
Mr. Putin bristled at the new sanctions. "They tend to have a
boomerang effect, and without a doubt, in this case they have
driven Russian-American relations to a dead end, causing very
serious damage," he said. "I am convinced that is to the detriment
of the long-term national interests of the American government and
its people."
Mr. Putin said all parties must urge the Ukrainian government
and the separatists to sit down at the negotiating table.
The new measures mark a return to conflict after Mr. Putin had
made some overtures toward cooperating with European nations.
"We have emphasized our preference to resolve this issue
diplomatically, but that we have to see concrete actions and not
just words that Russia in fact is committed to trying to end this
conflict," President Barack Obama said in announcing the sanctions
from the White House.
"I've repeatedly made it clear that Russia must halt the flow of
weapons and fighters across the border into Ukraine, that Russia
must urge separatists to release their hostages and support a
cease-fire, that Russia needs to pursue internationally mediated
talks and agree to meaningful monitors on the border," he said.
The latest round of sanctions signals increasing frustration
among the U.S. and its European allies about the separatist
conflict in eastern Ukraine, where a brief cease-fire has fallen
apart, fighting has spiked and the death toll has grown by the
day.
In recent weeks, Ukrainian forces have gained ground as rebels
retreated to the regional capitals of Donetsk and Luhansk. But the
military has suffered losses as well and failed to take full
control of the east.
Mr. Putin revoked his authorization to deploy Russian troops in
Ukraine in late June and supported the short-lived truce, actions
that American and European officials had interpreted as positive
signs. He also vowed to help secure the Russian border with
southern Ukraine, the key source of reinforcements and weapons for
the separatists.
But since then the U.S. has accused Russia of publicly calling
for peace while covertly fueling the separatist revolt. Washington
has also attacked Moscow for refusing to call on the separatists to
lay down their arms, and pointed out that many of the separatist
leaders hail from Russia and have ties to the Russian
government.
Russia, meanwhile, has denied allegations of its support for the
rebels and has called for the Ukrainian government to hold talks
with the separatists and reach a truce. Moscow has also invited
international observers to monitor the situation on the Russian
side of the border.
As he announced the sanctions, Mr. Obama weighed in on three
other global trouble spots: Israel, Iran and Afghanistan. The new
U.S. move risks diminishing cooperation with Russia on other
fronts, such as negotiations over Iran's nuclear program.
The president called the new sanctions "significant" but
"targeted." They're designed to inflict economic pain on Russia
while limiting spillover on companies in the U.S. or allied
nations.
The largest firms sanctioned are the state-controlled Rosneft,
Russia's biggest oil producer; OAO Novatek, the second-biggest gas
company; OAO Gazprombank, the bank connected with the country's
gas-export monopoly; and Vneshekonombank, or VEB, a state-owned
development lender that provided much of the backing for the Sochi
Olympics construction project.
For the four major Russian firms, the Treasury Department will
now limit their access to equity financing and medium- and
long-term debt coming from investors and lenders with ties to the
U.S. The Treasury didn't block the assets of these companies or
prevent U.S. citizens and U.S.-related firms from doing ordinary
business with them.
U.S. business groups worry American companies are vulnerable to
Russian reprisals if Washington puts tougher sanctions on Moscow
than the European Union.
An executive at the U.S. Chamber of Commerce, the business lobby
that has warned against broader sanctions, said it appreciated the
Obama administration taking a "deliberate and narrow" approach in
its latest move.
European leaders meeting in Brussels agreed to further sanctions
against Russia on Wednesday. The decision should allow for Europe
to cast its sanctions net wider, although the specific names to be
added their list have yet to be decided. The leaders called for a
decision on that by the end of July.
Their decision followed a determination that Russia hasn't met
conditions they laid out at their last summit in June.
The new U.S. sanctions aren't aimed at disrupting the day-to-day
business of the companies or their international joint projects,
including the Arctic venture oil giant Rosneft is working on with
Exxon Mobil Corp.
Rosneft Chief Executive Igor Sechin said the decision to
sanction his company was baseless because it isn't involved in the
crisis in Ukraine, according to the Interfax news agency. Speaking
to reporters in Brasilia, he said Rosneft was financially able to
carry out its projects without the need for bridge loans.
Though Mr. Sechin said the sanctions would harm Rosneft's
American shareholders and U.S. banking partners, he vowed to
continue cooperating with Exxon Mobil. "We are now in consultation
with Exxon's lawyers and tentatively believe that this decision
does not affect the implementation of our current projects," he
said, according to Interfax.
VEB, Gazprombank and Novatek didn't immediately respond to
requests for comment overnight in Moscow.
Besides the major firms, the U.S. also targeted additional
Kremlin officials and the two main Ukrainian separatist entities:
the self-declared Donetsk People's Republic and Luhansk People's
Republic. A number of smaller defense-related companies, including
the iconic Kalashnikov Concern and munitions producer Bazalt, also
were hit with the type of sanctions leveled against other firms
such as Bank Rossiya earlier this year.
Those effectively prevent U.S. entities and individuals from
doing businesses with the Russian companies. The U.S. Treasury, for
example, said Americans who already own Kalashnikovs can keep them
or trade them on the secondary market but cannot buy new ones
directly or indirectly from the Russian firm.
A U.S. official told reporters the new measures, over time,
would hurt the ability of the firms to get dollar financing, likely
pushing them to Russia's central bank. The Bank of Russia has
already sold dollars this year to prop up the ruble, and its gold
and foreign-exchange reserves fell to $478.3 billion in early July,
from $509.6 billion in January
"These are tailored but meaningful: clearly intended to create
market and capital complications for Russia and perhaps reignite a
chill in business and capital investment in Russia," said Juan
Zarate, a former White House and Treasury official who led efforts
in the George W. Bush administration to cooperate with Moscow in
the financial sphere.
Wednesday's sanctions follow a series of smaller steps, mostly
targeting individuals, that the U.S. has taken in an effort to
change Russia's behavior with respect to Ukraine.
The U.S. believes up to 12,000 Russian troops are stationed
along the border, indicating a steady buildup over the last several
weeks, said Col. Steve Warren, a Pentagon spokesman.
The assessment jibes with one made Monday by a military official
at the North Atlantic Treaty Organization, who said Russia has
deployed 10,000 to 12,000 troops along its border with Ukraine,
just a month after it had withdrawn those troops to less than
1,000. As many as 40,000 Russian troops were estimated to be in the
area earlier this year.
Matthew Dalton, Jeffrey Sparshott, Alexander Kolyandr and
Felicia Schwartz contributed to this article.
Write to William Mauldin at william.mauldin@wsj.com