Russia fights back after US, EU slap new sanctions

New EU and US sanctions unveiled on Tuesday restrict sales of arms and equipment for the oil industry, while Russian state banks are barred from raising money in Western capital markets. Banks said they would seek financing in Asia instead.

Moscow called the sanctions “destructive and myopic” and said Europe and the US would suffer.

On Wednesday, it banned imports of Polish fruit and vegetables and said it might expand the ban to the entire EU, but denied it was linked to the EU sanctions. The new Western sanctions mark the first time Washington and Brussels have adopted measures designed to hurt the overall Russian economy, after weeks of narrow steps targeting only specific individuals blamed for Russia’s Ukraine policy.

“Russia’s actions in Ukraine and the sanctions that we’ve already imposed have made a weak Russian economy even weaker,” US president Barack Obama said in Washington on Tuesday. “If Russia continues on this current path, the costs on Russia will continue to grow.”

German economy minister and vice chancellor Sigmar Gabriel said the measures would hurt the European economy but would hurt Russia more. The price was worth paying, he added: “At a time of war and peace, economic policy is not the main consideration.”

The Russian Central Bank said it could support banks that were hit by sanctions. Russia’s second-largest bank, VTB, said it would find funding outside of the EU and United States, using currencies other than euros and dollars.

But bankers said Russian firms had been effectively frozen out of global lending, and not just in the West, leaving the Russian state as their only source of funding.

The first European economic victims of the trade war were Polish apple growers, who sell more than half their exports to Russia. Moscow is by far the biggest importer of EU fruit and vegetables, buying more than 2 billion euros’ worth a year.

Denying a link to the EU sanctions, Russia said it was banning most Polish fruit and vegetables for sanitary reasons and would look into expanding the ban to the rest of the EU.

The Polish agriculture ministry said the embargo “amounts to political repression in response to the sanctions imposed by the European Union against Russia”, and said it would seek compensation from the EU.The sanctions are intended to persuade president Vladimir Putin to back down from a months-long campaign to seize territory and disrupt Ukraine, an ex-Soviet state of 45 million where a pro-Russian president was toppled in February.

But Mr Putin, whose popularity at home has surged since he annexed Ukraine’s Crimea peninsula in March, has shown no sign of backing down from support for the rebellion in parts of Ukraine that he has referred to as “new Russia”.

Before the Malaysian airliner was shot down, it seemed difficult to get EU countries to agree tighter sanctions – the European Union does 10 times as much trade with Russia as the United States does, and requires unanimity among its 28 members.

But the downing of the plane en route from Amsterdam to Kuala Lumpur changed the equation. Two-thirds of the victims were Dutch, turning the Netherlands – the biggest importer of Russian oil bound for the rest of the EU – into a strong supporter of tough measures against Moscow.

The EU sanctions have nevertheless been crafted so as to inflict the minimum hardship on Europe.

Russia’s oil industry has been targeted but not the natural gas that fuels European industry and lights its cities. Existing contracts are excluded from the arms embargo, allowing France to move ahead with delivery of a warship it has already sold to the Russian navy.

Still, big Western companies, especially in the energy sector, will feel pain. Britain’s BP, the largest foreign investor in Russia with nearly 20 per cent stake oil company Rosneft, said its business could be hurt.

French oil major Total, which owned 18 per cent of Russian joint venture partner Novatek at the end of June, said on Wednesday it halted buying Novatek shares the day of the plane crash. In April, Total had predicted the Novatek venture would make Russia its biggest source of oil and gas by 2020.

Although Europe buys huge amounts of oil and gas from Russia, its exports to Russia are far more limited. Nevertheless, it is vulnerable to pressure in particular sectors, such as German manufacturing and British financial and legal services.

* Reuters, with additional reporting from Agence France-Presse