President Obama Finally Hit Russia Where It Hurts

Why a new round of sanctions isn't likely to put Russia in its place.

Jul 19, 2014 at 7:42AM


If Vladamir Putin is longing for a replay of the Cold War, he got closer to achieving his objective this week.

On Wednesday, President Obama announced a fresh round of sanctions against the Eurasian power following allegations that it escalated the conflict in Ukraine by shooting down a military transport plane on Monday.

"What we are expecting is that the Russian leadership will see, once again, that its actions in Ukraine have consequences, including a weakening Russian economy and increasing diplomatic isolation," President Obama told the press Wednesday evening.

Can new sanctions stop Russian aggression?
The latest round of sanctions is aimed at the heart of the Russian economy. Most notably, they restrict a collection of Russian financial and energy giants from accessing America's capital markets, which are far and away the largest and most liquid in the world.

The companies targeted include some of Russia's most prominent firms. Among others, Rosneft is its biggest oil producer, and Gazprombank is the multibillion-dollar financing arm of Gazprom, the state-controlled producer of natural gas.

While Russia's leadership has repudiated its effectiveness, there's little doubt that the most recent sanctions ratchet up the tension between the former empire and America. Credit is the lifeblood of an economy. And the American dollar is the foundation of global commerce. Without access to both, bone fide economic growth is little more than a pipe dream.

This isn't to say that the sanctions announced Wednesday will bring Russia's economy to a halt. Indeed, far from it.

In the first place, they are narrowly tailored to put pressure on only a small number of Russian companies. Additionally, because Europe refused to follow suit, even the targeted companies have alternatives for accessing both sufficiently liquid capital markets and, if needed, American dollars.

"This will constrain to some degree the size of the capital pool that the sanctioned firms can access, but not nearly as much as could be," a professor of finance at the University of Houston told The New York Times.

Will the sanctions have a chilling effect on American business?
Surprisingly, some of the staunchest critics of President Obama's latest move are here at home.

"It's disappoint[ing] that the U.S. is fundamentally extending sanctions in increasingly unilateral ways that will undermine U.S. commercial engagement and reduce the effectiveness of the measures imposed," a spokesman for the National Association of Manufacturers told the Times.

At few companies is concern likely to be greater than ExxonMobil, which has had a "continuous business presence" in Russia for more than two decades. Most recently, it's entered into a handful of multibillion-dollar development and exploration agreements with none other than Rosneft, one of the firms specifically singled out for punishment.

According to ExxonMobil's webpage explaining its Russian activities:

The August 2011, Rosneft and ExxonMobil strategic cooperation agreement includes joint exploration and production of oil in Russia, the United States and other parts of the world, and also sharing technology and expertise. In April 2012, Rosneft and ExxonMobil signed agreements to implement a series of multibillion-dollar exploration projects established under the strategic cooperation agreement; and, in June 2012, Rosneft and ExxonMobil signed agreements to progress the development of tight oil in western Siberia and jointly participate in an arctic research center to support Rosneft-ExxonMobil joint projects in Russia.

The new Cold War
If you put the pieces together, it's hard to deny that Russia has entered into another expansionary phase.

In 2008, it sent troops into neighboring Georgia, effectively annexing a large swath of the latter's access to the Black Sea. It's widely assumed to be assisting the anti-western Syrian regime. And just this year, it annexed the strategically significant Crimean Peninsula in the midst of the ongoing Ukrainian conflict.

Ultimately, while there's no denying the significance of sanctions, it's also naïve to conclude that these particular ones are anything other than symbolic. There's little reason to believe, in other words, that they'll halt Russia's renewed appetite for growth.

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John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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