August 4, 2014 / 11:04 AM / in 3 years

COLUMN-The new 'micro-targeting' of Russia

(The opinions expressed here are those of the authors, columnists for Reuters.)

By Jason Bordoff and Elizabeth Rosenberg

NEW YORK/WASHINGTON, Aug 4 (Reuters) - - The most recent escalation in economic sanctions against Russia sends an important signal that the United States and its European allies are willing to act, even at some risk to their own economies, to punish Moscow for fostering instability in Ukraine and supporting rebels that the U.S. government says downed a commercial jetliner.

Beyond this objective, however, it is also important to recognize how the design of the measures being imposed represents an innovative “micro-targeting” approach that has the potential to transform the role sanctions can play in foreign policy and geopolitics in the years ahead.

The United States and Europe this week expanded financial restrictions - creating extremely narrow prohibitions on technology exports and on the use of U.S. and EU financial markets - aimed at increasing the strain on Russia’s banks, oil industry and military. They build on two prior rounds of sanctions that targeted Russian cronies and some banking, arms and energy entities.

The banking restrictions are the most significant actions taken this week. They will prevent a broad swath of Russian banks from raising money in Europe and similarly refuse several significant banks in Russia access to U.S. capital markets. With the doors closing to the world’s most attractive markets, Russian banks will have to scramble domestically - or look East - to find new financing.

In the energy sector, new precision-guided restrictions will make it difficult for Russia to access the technology and equipment needed to produce oil from deep water, Arctic or shale deposits. These are precisely the complex, challenging projects that Russia will have difficulty achieving without the technology of Western energy firms. The measures are designed to make it more difficult and costly for Russian energy companies to invest in replacing declining conventional oil output and meeting future production goals.

Russia is the world’s second-largest oil and gas producer (after the United States), so cutting off its energy exports would be neither feasible nor advisable. Doing so would just impose economic pain on Europe and the United States, and bolster Russia’s revenue from its remaining energy sales, by pushing up global oil prices.

This “micro-targeting” strategy aims to exact economic pain on Moscow and limit the fallout for the West. The sanctions have disrupted business and investment in Russia, and sent a clear signal to Putin and the Russian people about the economic costs of Russia’s actions - without any actual oil supply disruption. Indeed, global oil markets barely moved in response to the most recent sanctions measures.

Micro-targeting sanctions on Russia can be intensified gradually, over time. They expand the risk of doing business with Russia and produce a chilling effect on future investment. If Western firms believe further sanctions may be coming, they will likely put particular investments in Russia on hold.

However, for now, micro-targeted sanctions should avoid excessively harming Western energy firms. Careful Western companies partnering with Russian companies can stay the course on complex oil projects. Similarly, they can progress on sophisticated LNG projects, which were not implicated by this week’s sanctions - although natural gas may be affected by some of the restrictions on technologies that are used in both oil and gas production.

Of course, Western firms also know that incremental sanctions can be ratcheted up at any time. BP, which saw its share price tumble following news of the sanctions this week, warned investors that further sanctions “could adversely impact our business and strategic objectives in Russia.”

Moving forward, potential future energy sanctions could expand the list of targeted energy extraction and production technologies, impose export controls on more goods and specialized equipment needed for complex projects, or expand these more oil-focused restrictions to natural gas as well. Even more severe, direct sanctions on Russian energy companies would paralyze joint ventures they have with foreign firms.

The significance of the sanctions announced this week was not only a strong show of solidarity from the United States and Europe that Russia’s recent actions will not be allowed to stand. The actions are also important as they represent a new frontier in the use of sanctions as a tool of statecraft and foreign policy.

By combining financial sanctions with export controls, applying them through unprecedented “micro-targeting” market measures to inflict economic pain while mitigating collateral damage, and pursuing a gradual, multilateral escalation, Western leaders are defining new rules of engagement to respond to the aggression of Russia - and other nations -- in the future.

(Jason Bordoff, a former energy adviser to President Barack Obama, is a professor and founding director of the Center on Global Energy Policy at Columbia University. Elizabeth Rosenberg is the director of the Center for A New American Security’s Energy Program and a former senior sanctions adviser at the U.S. Department of the Treasury.)

Editing by Jonathan Leff and Dan Grebler

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