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Obama Envisions Russia Sanctions With Limited Global Fallout

The U.S. is looking to minimize the
global harm from further penalties on Russia over Ukraine, as
the International Monetary Fund moves forward with a
multibillion-dollar lifeline to the government in Kyiv.

President Barack Obama said that Russia’s military, energy
and finance industries are possible targets if it moves deeper
in Ukraine. While additional sanctions would inevitably also
affect the economies of the U.S. and Europe, Obama said, the
goal is to limit the collateral damage.

“Hopefully, we can design sanctions that minimize the
impact on U.S. companies or Italian companies, and maximize the
impact on the narrow set of interests in Russia that help drive
the decisions that they’re making,” he said yesterday at a news
conference in Rome with Italian Prime Minister Matteo Renzi.

Obama spoke hours after the IMF unveiled a preliminary
accord with Ukraine for a two-year loan of $14 billion to $18
billion designed to help the country avert default. Ukraine’s
government, which came to power after an uprising ousted
President Viktor Yanukovych last month, is grappling with
dwindling reserves, a weakening currency, and an economy
threatening to slide into a third recession in six years.

In Washington, Congress is poised to give final passage as
soon as today to legislation that includes about $1 billion in
loan guarantees and authorizes $150 million in direct assistance
to Ukraine. The bill would impose sanctions on Russian officials
for the nation’s annexation last week of Crimea from Ukraine.

‘Implementing Reforms’

Concern that Russia’s economy would suffer from an extended
confrontation over Ukraine with the U.S. and other nations in
the North Atlantic Treaty Organization helped push the benchmark
Micex Index (OPNMICX) down 1.3 percent by the close yesterday in Moscow.
The gauge is down 11 percent this quarter.

Economists have reduced their expectations for Russia’s
economic growth this year, projecting expansion of 1.2 percent,
down from 2.2 percent last month, according to the median of 37
forecasts in a Bloomberg survey.

Russia’s tactics in Ukraine, particularly its annexation of
the Crimean peninsula, have sparked the worst standoff with the
U.S. and its allies in more than 20 years. Olexander Motsyk,
Ukraine’s ambassador to the U.S., said yesterday “there have
been numerous provocations aimed at inciting ethnic hatred” and
sowing instability in the eastern part of his country.

Motsyk, speaking at an event in Washington, warned that
“if Russia crossed the border of the mainland, it is the duty
of every Ukrainian citizen to protect our country.”

Sanctions’ Cost

In New York, the United Nations General Assembly approved a
non-binding resolution yesterday declaring Crimea’s March 16
referendum on exiting Ukraine and joining Russia as “having no
validity,” and calling on all states and agencies to not
recognize “any alteration of the status” of Crimea.

The resolution had 100 votes in favor, 11 against and 58
abstentions. It doesn’t mention Russia or directly blame or
accuse it of violating Ukraine’s territorial integrity.

The U.S. and European Union already have imposed asset
freezes and travel bans on individual Russians and Ukrainians,
including businessmen associated with Russian President Vladimir Putin. One Russian bank also has been sanctioned by the U.S.

Obama has authorized, though not put into effect,
additional U.S. sanctions targeting the Russian economy.

European governments are debating the costs of more
penalties. Banking curbs would hurt Britain, an arms embargo
would bar France from selling Mistral-class helicopter carriers
to the Kremlin, and cutbacks in purchases of Russian gas would
harm a swath of EU countries, including Germany.

Marketplace ‘Uncertainty’

Among companies that might be affected, British oil company
BP Plc (BP/) holds the single biggest foreign investment in Russia —
a 20 percent stake in OAO Rosneft (ROSN) it acquired last year. Rosneft
has exploration projects with other international oil producers,
including a venture with Exxon Mobil Corp. (XOM:US) to drill a
multibillion-barrel prospect in Russia’s Arctic Ocean.

Another is Caterpillar Inc. (CAT:US), the largest maker of
construction equipment, which has more than 1,000 workers in
Russia at manufacturing plant near St. Petersburg and an office
in Moscow. Caterpillar rose 0.7 percent yesterday in New York.

Accenture Plc (ACN:US), the world’s second-largest technology-consulting company, said yesterday the crisis in Ukraine is
causing “uncertainty in the marketplace.” Shares fell 5
percent to $78.80 in New York, the biggest one-day drop since
June 28, 2013. The Dublin-based company has been counting on
expansion in emerging markets to help make up for sluggish sales
growth in western Europe and the U.S.

IMF Accord

The IMF board still must sign off on the financial rescue
package, Ukraine’s third since 2008, needed to unlock $27
billion in international aid. In Kyiv, lawmakers yesterday
approved budget changes and a tax bill required for the accord.

As part of the deal, Ukraine agreed to cut its budget
deficit to 2.5 percent of gross domestic product by 2016 and to
raise retail energy tariffs toward their full cost, according to
the Washington-based lender. The central bank will shift to a
flexible exchange rate and inflation targeting, while the nation
will tackle bad debts at banks.

Prime Minister Arseniy Yatsenyuk, who was voted into office
last month, said yesterday that GDP will shrink 3 percent in
2014 and inflation may reach 14 percent.

“The country is on the edge of economic and financial
bankruptcy,” he said. “This package of laws is very unpopular,
very difficult, very tough. Reforms that should have been done
in the past 20 years.”

April Approval

The government Eurobond due in June gained to 97.8 cents on
the dollar yesterday from 96.5 March 26, pushing the yield,
which reached 55.7 percent on March 12, down 7 percentage points
to 20.71 percent, data compiled by Bloomberg show. The Ukrainian
Equities Index fell 0.6 percent, while the hryvnia, the worst
performer against the dollar in 2014 with a 26 percent decline,
strengthened 0.3 percent to 11.12.

Approval for the loan package is expected in April after
authorities adopt measures to “stabilize the economy and create
conditions for sustained growth,” IMF mission chief Nikolay Gueorguiev said yesterday in a statement. Disbursement may start
next month, he told reporters in Kyiv.

The IMF agreement will pave the way for a planned 1.6
billion euros ($2.2 billion) in emergency aid from the European
Union, European Commission President Jose Barroso said March 5.

The EU has also pledged project loans and grants that could
reach 11 billion euros over seven years. The European Bank for
Reconstruction and Development said yesterday that it would
increase investments in Ukraine to 1 billion euros a year and
would resume lending for state-run projects.

“The IMF package should be sufficient to prevent the
country falling into a full-blown balance-of-payments crisis,”
London-based Capital Economics Ltd. said in an e-mailed note.
“But the volatile political situation and Ukraine’s poor track
record in implementing reforms demanded by the fund mean that
there will still be many doubts about whether politicians will
be able to push substantial changes through.”

To contact the reporters on this story:
Julianna Goldman in Rome at
jgoldman6@bloomberg.net;
Mike Dorning in Rome at
mdorning@bloomberg.net

To contact the editors responsible for this story:
Steven Komarow at
skomarow1@bloomberg.net;
Balazs Penz at
bpenz@bloomberg.net
Michael Shepard, Don Frederick