In Digest, Ukraine

By Keith Johnson, Foreign Policy. December 12, 2014

On its way into the history books, the 113th Congress is ladling up a fresh batch of sanctions on Russia, especially targeting the energy sector and authorizing military aid, in a bid to force Moscow to end its aggressive and destabilizing incursions into the eastern Ukraine.

U.S. Senate chamber, image from Wikipedia

U.S. Senate chamber, image from Wikipedia

The lame-duck Senate passed the Ukraine Freedom Support Act Thursday [S. 2828, ‘An Act to impose sanctions with respect to the Russian Federation, to provide additional assistance to Ukraine, and for other purposes.’ 42-page act here.] The House quickly signed off on a nearly identical version before leaving town [House Resolution 758, approved on Dec. 4, 2014, report here].  The bill is expected to easily pass the Senate again Friday, moving the legislation to President Barack Obama’s desk for his signature.

The bill seeks to ramp up both U.S. support for embattled Ukraine and also intensify the economic pressure on key segments of the Russian defense and energy sectors. The bill authorizes, but does not mandate, $350 million in military aid for Ukraine to help beat back Russian aggression. That includes both military training and also defense items such as anti-tank weapons, counter-battery radars, and surveillance drones.

“This legislation sends a very direct message to President [Vladimir] Putin who must change his calculus in Ukraine and abandon this disruptive path,” said the bill’s co-sponsor, Senate Foreign Relations Committee Chairman Robert Menendez (D-N.J.) The House last week condemned Russia’s role in Ukraine.

Russia’s Foreign Ministry lashed out at the bill on Friday, calling it “overtly confrontational.” The White House had no immediate comment regarding the bill’s passage.

The measure intensifies U.S. economic pressure against the energy sector, one of the key pieces of the Russian economy, which is already reeling from earlier sanctions, a crumbling ruble, and collapsing oil prices. The bill directs Obama to impose at least three sanctions on any company worldwide that makes “significant investments” in a wide range of Russian energy projects, including most offshore oil exploration, Arctic oil projects, and projects meant to tap Russia’s abundant deposits of shale resources.

Possible sanctions include travel and banking bans, capital-market restrictions, and further limitations on the use of U.S. technology for the energy sector. This fall, the U.S. barred the export to Russian energy firms of specialized gear needed to exploit those energy finds.

Additionally, the bill directly targets Russian gas giant Gazprom and its control of about one-third of Europe’s natural gas. If Gazprom withholds “significant natural gas supplies” from NATO member countries or Ukraine –a tactic that it has used in the past to put pressure on downstream customers with few energy alternatives–it would be unable to issue any new debt or equity in U.S. capital markets.

This fall, Gazprom reduced gas flows to several Central and Eastern European countries after they had begun shipping gas to Ukraine to keep that country supplied; Ukraine had been without Russian gas since June. But Russia and Ukraine reached a short-term deal that should keep minimum volumes of gas flowing to Kiev over the winter, which should minimize the risk of a larger supply disruption.

So far, several rounds of U.S. and European sanctions have already squeezed the Russian economy, and particularly the future development of the energy sector. ExxonMobil had to stop work on an Arctic joint venture with Russian firm Rosneft in the wake of the last round of U.S. sanctions. Russia needs to juice production at exotic new locations, including shale plays and the offshore Arctic, to compensate for declining production at older, more mature oil and gas fields.

However, for all the sturm und drang of Western sanctions, the biggest wallop this year to the Russian economy has come from the market. Russia’s finance minister said last month that lower global oil prices –they have fallen more than 40 percent since summer highs– will cost Russia about $100 billion this year, or more than twice as much as sanctions.


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