COLUMN-The new 'micro-targeting' of Russia

Mon Aug 4, 2014 11:00am GMT

(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.   Continued...

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