Are sanctions enough to hold Putin at Ukrainian border?

Months after Russia annexed Crimea and stepped up support for separatists in eastern Ukraine, Europe and the United States are still searching for a way to persuade Russian President Vladimir Putin to change course.

Dmitry Lovetsky/AP
A Donetsk People's Republic APC travels in the city of Donetsk, eastern Ukraine Sunday. Ukrainian armed forces mounted a major onslaught against pro-Russian separatist fighters Sunday in an attempt to gain control over the area where a Malaysia Airlines plane was downed earlier this month.

Months after Russia annexed Crimea and stepped up support for separatists in eastern Ukraine, Europe and the United States are still searching for a way to persuade Russian President Vladimir Putin to change course.

Targeted economic sanctions and threats of tougher ones have yet to alter what western officials say is Moscow's growing backing for the rebels, including the shelling of Ukrainian military targets in southeast Ukraine from inside Russian territory and alleged plans to boost weapons supplies.

The Pentagon says the movement of Russian heavy-caliber artillery systems across its border into Ukraine is "imminent." That escalation of military posturing is not the retreat the West was hoping sanctions would encourage.

Putin has been walking a tightrope in recent months, limiting his involvement in the Ukraine crisis just enough to avoid truly biting Western sanctions. But the downing of a Malaysia Airlines passenger jet July 17, blamed by the U.S. and Ukraine on pro-Russian rebels – possibly with Russian help  –might have changed the equation, galvanizing support among reluctant Europeans for additional penalties.

The European Union has said it will enact more sanctions on Russia by the end of the month and the United States, which had imposed its toughest sanctions just a day before the plane went down, is expected to follow suit.

Yet despite the promise of more pain, Russia has only boosted its role in the days since the plane went down, with the loss of nearly 300 passengers and crew, according to U.S. officials. That has left Washington and Brussels in a quandary over finding Putin's Achilles' heel and exploiting it.

Sanctions have not yet bitten Putin hard enough to change his behavior and neither have diplomatic moves to isolate him. Having been tossed out of the Group of Eight bloc of leading industrialized nations and seen his already limited contacts with NATO further reduced, Putin was still invited to join western leaders at ceremonies marking the 70th anniversary of D-Day in France. And France said this week it will go ahead with the sale of two warships to Russia, the biggest ever sale by a NATO country of military equipment to Moscow.

At the same time, Russia has moved to align itself more closely with BRICS, representing the five major emerging economies of Brazil, Russia, India, China and South Africa. In part because of that, U.S officials say there is currently no serious consideration of trying to bar Russia from other diplomatic events. Thus, the sanctions approach remains the focus.

The 28-nation EU has much greater leverage over Russia, but so far, to the frustration of U.S. officials, the EU has refrained from imposing broader sanctions because of divisions among its member states and fears of an economic backlash. But the death of some 200 EU citizens on the Malaysia Airlines plane, most of them Dutch, has made a tougher course seemingly inevitable.

"This is no longer about a war somewhere far away," said Amanda Paul, an analyst with the Brussels-based European Policy Center think-tank. "If they don't impose tougher sanctions, there will be a big question over the European Union's credibility," she said. "This is the only way Russia will draw back. When businesses and oligarchs feel the economic pain, they will start questioning Putin's policies."

On Friday, the EU imposed travel bans and asset freezes on 15 people, including the head of Russia's Federal Security Service and the head of the agency's department overseeing international operations and intelligence. Four members of Russia's national security council are also on the list. Russia on Saturday fired back, saying the sanctions endanger the fight against international terrorism, and accused the United States of spreading flagrant lies about Russia's alleged involvement in the downing of the airliner.

European business lobbies have warned against tougher sanctions. The Association of German Chambers of Commerce and Industry said some 300,000 jobs there partly depend on exports to Russia. In addition, Moscow could hit some of the more than 6,000 German firms doing business in Russia, the fear goes.

Despite any retaliation by Moscow, analysts predict Russia would suffer more. They note that EU sends only 7 percent of its exports to Russia while Russia ships about 45 percent of its exports to the EU, more than anywhere else.

"Most of the sanctions would inflict much higher costs on Russia than on Europe," said economist Georg Zachmann of the Bruegel think-tank in Brussels.

The EU could inflict severe economic pain on Russia's economy by following the U.S. lead and sanctioning major Russian banks. The bloc could restrict investments and limit access to its capital market, which encompasses the euro currency zone and the EU's biggest financial hub, the City of London. The EU also could impose an arms embargo and export restrictions for high-tech products, energy equipment and goods that can be used for civilian and military purposes.

The most radical step, however, would be to limit its import of Russian oil and gas – which would cost Moscow dearly, but also cause energy shortages for EU countries.

The energy sector represents the bulk of Russia's exports, generating some 20 percent of its gross domestic product.

Such sanctions would lead Commerzbank to revise its economic growth forecast for Russia from 0.8 percent now "to zero percent, looking to negative territory," said Simon Qijano-Evans, the bank's London-based head of emerging market analysis. Another bank, Berenberg, already cut its 2014 Russia forecast to a 1 percent slump, while warning that "the risk of a more serious Russian recession keeps rising."

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