Background Conference Call on Ukraine Sanctions
9:24 P.M. PHT
MS. HAYDEN: Hi, everyone. Thanks for joining. We're here to talk about the new sanctions that will be going out today on Russia. We have senior administration officials to speak with you on background. There is no embargo on this call. Again, it's a backgrounder; these are senior administration officials.
And with that, I'll turn it over to our first senior administration official.
SENIOR ADMINISTRATION OFFICIAL: Thanks, everybody, for joining the call. We just wanted to update you on the sanctions that are being imposed on Russia today. I'll just give a brief opening and then hand it over to my Treasury colleagues to walk through the details.
First of all, this comes in the context of Russia continuing to violate the sovereignty and territorial integrity of Ukraine and completely failing to meet its commitments under the agreement that was reached in Geneva. That agreement did provide a basis for de-escalation. Yet, over the course of the last days and weeks we have not seen the Russians follow through in urging separatists to stay back in eastern Ukraine to, for instance, lay down their arms, vacate buildings, and begin a process of dialogue and lead to a de-escalation.
Because of that failure, the President convened a call with several of his European counterparts over the weekend. And those consultations led to a very strong G7 statement over the weekend that found that Russia was not meeting their commitments, and therefore urged additional targeted sanctions to impose a cost on Russia.
Today, the United States is doing its part to move out on those sanctions. And as you've seen, this includes sanctions of a number of individuals, a substantial number of companies, as well as limits on exports of certain high-tech materials relevant to the Russian defense industry.
I would also just say that we've already seen that these sanctions and the isolation of Russia has had an impact, a substantial impact, on the Russian economy. We believe that with these additional steps, the impact on the Russian economy will only grow, just as Russia’s political isolation is growing because of its actions in violation of Ukraine’s sovereignty and territorial integrity.
At the same time, it's also important to note that we will be continuing to consult and coordinate with our partners about the types of targeted sanctions that we're pursuing, but also we have additional options available to us should Russia further escalate the situation. For instance, should they move their troops into Ukraine across the border, we have made very clear through the G7 and with our European allies that very robust sectoral sanctions on the Russian economy could be imposed -- will be imposed if we see that type of escalation.
With that, I will turn it over to my colleague to walk through the details of the sanctions.
SENIOR ADMINISTRATION OFFICIAL: Thanks. Good morning, everybody. I'll basically discuss the sanctions imposed today. And as my colleague explained, these are in response to Russia’s continued destabilizing, provocative, and dangerous actions in the Ukraine.
Treasury today is imposing sanctions on seven Russia government officials and 17 entities under Executive Order 13661. This executive order, which is part of the administration’s broad, flexible, and powerful sanctions program directed at the situation in Ukraine, targets among others Russian government officials as well as those who provide critical support to -- or derive critical support from senior Russian government officials, or so-called oligarchs or cronies.
Of note, in today’s set of sanctions are two key members of the Russian leadership’s inner circle. They are Igor Sechin, who’s the President and Chairman of the Management Board of Rosneft, Russia’s leading petroleum operation; and Sergey Chemezov, the Director General of Rostec, a very large industrial conglomerate in Russia. We are imposing sanctions on Sechin and Chemezov individually.
In addition, each of the 17 entities sanctioned today are affiliated with the oligarchs we designated a few weeks ago, on March 20th, including the Rotenberg brothers and Gennady Timchenko. Among these entities are Timchenko’s holding company, the Volga Group, and three banks -- InvestCapitalBank, SMP Bank, and JSB Sobinbank.
The April 17th Geneva joint statement provided an opportunity for Russia and Ukraine to work together, supported by the OSCE, to deescalate the situation in eastern Ukraine and make progress towards a diplomatic solution.
As my colleague noted, it’s clear that the Ukrainian government at all levels has been following through on its commitments under the Geneva agreement. And as Secretary Kerry detailed in his remarks on Thursday, and as my colleague reiterated this morning, the government in Kyiv is taking concrete steps to fulfill its obligations under the Geneva agreement.
In stark contrast, Russia has done precisely nothing to fulfill its obligations -- not even calling on those who have illegally seized buildings to relinquish control. To the contrary, Russia in word and deed has continued to provoke unrest in an illegitimate and unlawful effort to destabilize Ukraine. From the very outset of Russia’s illegitimate and unlawful actions in Ukraine, we have been clear: The United States, acting on its own and alongside our international partners, will impose increasing costs on Russia if it persists in its efforts to destabilize Ukraine and will hold Russia accountable for its provocative actions. Today’s steps underscore our commitment to this promise.
And we can see the impact of our actions in Russia. President Putin himself acknowledged last week that the sanctions are causing damage -- his words -- causing damage. Indeed, the facts speak for themselves. Already, this year, there has been a huge rush of capital out of Russia. The $60 billion in capital outflows from Russia this year exceed all the outflows last year. This is contributed to sharp declines in the value of Russian equities, which are down almost 15 percent this year, and the Russian ruble, which has depreciated almost 9 percent against the dollar since January 1st.
The Russian stock market is performing worst among major emerging market economies this year. And the ruble is also the worst performing currency among major emerging markets over the same period.
Our sanctions and the overall increase in uncertainty in the Russian economy have led investors to demand significantly higher risk premiums to hold Russian government debt, causing the country’s 10-year bond yields to increase nearly 175 basis points since the start of the year. That is worse performance than high-risk borrowers such as Greece and Portugal. Russia’s 10-year bond is now trading at about 9.7 percent, and things are so bad that the Russian government was forced to cancel a recent bond auction because of a lack of investor demand.
The Russian corporate sector is faring no better. In the first quarter of this year, bond issuance was down more than 70 percent compared to the same quarter last year. And some Russian companies have been unable to refinance maturing debt.
And to top things off, last Friday S&P downgraded Russia’s credit rating to BBB-, which is just one step above junk status. Overall, economists have lowered their expectations for Russia’s 2014 GDP growth, and the Russian Central Bank recently downgraded its own 2014 growth projection to less than 1 percent.
As the President has made clear, we continue to work very closely with our allies to increase the costs on Russia for its actions in Ukraine. On a daily basis we are coordinating with the European Union and other partners on increasing sanctions in response to Russia’s refusal to deescalate the situation and its provocative actions. As other speakers on this call will note, we expect the EU will announce additional sanctions today.
And one final point -- we have at our disposal additional, even more powerful sanctions, including the ability for the Secretary of the Treasury to identify for sanctions certain sectors of the Russian economy, such as financial services or energy, and to sanction individuals and entities determined to operate in those sectors. We have not yet done so, and our preference is for the Russians to abide by their commitments in the Geneva agreement and deescalate the situation. But no one should forget that the President has put in place a sanctions program that gives us these tools.
SENIOR ADMINISTRATION OFFICIAL: Meanwhile, the violence in eastern Ukraine continues with Slovyansk becoming quickly the Bermuda Triangle or mafia central of eastern Ukraine. You all will have seen today that south of Slovyansk at the Kramatorsk Airport, there was another effort to seize that flight that was repelled by the Ukrainians. There was another Ukrainian servicemember shot, and a Mi-8 helicopter was fired at by an RPG, by militants.
In addition, the mayor of Kharkiv, the pro-Kyiv mayor was shot and seriously wounded by unknown assailants. He is in the hospital today for surgery. And also 30 pro-Russian separatists seized (inaudible) in Konstantinovka today, also at Donetsk Airport. And just to remind that we still have eight OSCE Vienna Document observers who are being held captive by militants, we believe in the basement of the Public Administration Building in Slovyansk, the same place where our American journalist was held and beaten.
You will have seen over the weekend that these guys were paraded on television like POWs, forced to make a statement to the press. There is broad belief that they have also been abused in captivity. And meanwhile, the Russians have the gall to blame this abuse of people who are in Ukraine at the government of Ukraine’s invitation and with diplomatic privileges and immunities on the inability of the Ukrainians to provide security. And as far as we can tell, Russia has done also virtually nothing to get their release. I’ll pause there.
Q Hi, guys. Thanks for doing the call. I appreciate it. Two things -- can you say how closely aligned this list today will be with the EU? What will be the difference between this list and theirs, and if, in fact, does it make a difference that they might not be the same people; for instance, Sechin obviously has these joint ventures with Exxon Mobil. And then, secondly, there has been talk that Alexey Miller was on one of the draft lists at least. What was the thinking going on in not including him on the final list? Thanks.
SENIOR ADMINISTRATION OFFICIAL: Sure, I’ll say a couple of things and then let my colleagues add in. Well, first of all, we have been moving in concert and coordination with the Europeans since the beginning of this crisis, both in terms of our support for the Ukrainian government and also in terms of imposing costs on Russia. That was the case with previous rounds of sanctions. That was the case with the G7 statement over the weekend.
In terms of the lists that are published today, I expect there to be a divergence in the lists. They have not in the past matched up exactly, and it will continue to be the case given the different nature of our sanction regimes that we hit different targets. I do think it sends an important and powerful message of unity in the international community that we do move together -- the United States and our European allies -- in imposing costs.
Importantly, I'd also note that the most severe sanctions that we have in reserve should Russia further escalate the situation are the sectoral sanctions. And on that score, based on the conversations that the President has had both with the G7 and with European counterparts, we're also confident that the Europeans are with us in their commitment to impose those sectoral sanctions should we see, for instance, Russian troops move across that border.
I don't know if my colleagues want to add to that.
SENIOR ADMINISTRATION OFFICIAL: We are in very close touch with the Europeans about sanctions in general. On sectoral sanctions, we and the Europeans have been both thinking internally about our options and discussing these options with each other. This process is intense, ongoing, and I'm confident that it will continue. So we will be ready if we need the sectoral sanctions.
Q Thanks for doing this, guys. I want to ask -- first of all, there had been talk last week, particularly in Moscow, about some of the key banks, like Gazprombank and VEB being sanctioned. And now that they haven't, some of their stock has rallied. And I want to get your response to those bankers who are feeling that these sanctions are weak, and also to the question of whether, if Putin hasn’t responded so far to sanctions, what makes you think he’s going to respond to these?
SENIOR ADMINISTRATION OFFICIAL: I'll take the second question first, and then my colleague can take the first question.
Look, we've been very clear that we're going to keep ratcheting up the costs on Russia for continued destabilization and violation of international law on Ukraine. And clearly, President Putin’s calculus has not changed sufficiently because Russia has continued its destabilizing actions and has completely failed to live up to the commitments that they agreed to in Geneva.
So we don't expect there to be an immediate change in Russian policy. What we need to do is to steadily show the Russians that there are going to be much more severe economic pain, much more severe political isolation, and frankly, that Russia stands far more to lose continuing these actions over time than pursuing de-escalation. And ultimately, we believe that that can affect Russia’s calculus over time and give them the incentive to deescalate this situation.
So, again, it's important that we are ratcheting up this pressure to impose very concrete economic costs on the Russians through these types of sanctions. It's also important that, together with the additional prospect of sectoral sanctions, Russia sees the dead end that it's going down in Ukraine and, frankly, the fact that their interests will be severely compromised and set back in the world if they continue down this course. And that’s the purpose of this series of escalatory actions that we've taken in concert with our European allies.
You may want to take the first question.
SENIOR ADMINISTRATION OFFICIAL: Look, and I've seen articles where there’s been speculation and -- armchair designations done by people outside thinking what we should and shouldn’t do. I would urge you all to pay attention to what we're doing and not the wild speculation.
And what we're doing is having a very significant impact. These are calibrated and firm moves that have, as I noted in my opening, had a significant impact on the Russian economy. It has worked against an economy that was already in a weak state to further exacerbate the weakness in the Russian economy. And every indicator shows, both on the public sector and the private sector in Russia, that they are feeling the heat from our actions.
Now, there may be daily fluctuations here and there, but the trend is unmistakable, and that's that Russia is suffering from its actions in Ukraine as the market punishes Russia for this, and as the market responds to the sanctions that we've imposed and, frankly, the sanctions that we can impose. And just to emphasize one point that my colleague just made, we have at our disposal additional sanctions, very powerful sanctions that can target sectors of the Russian economy and entities within those sectors. And I think the deterrent value of that should not be underestimated.
SENIOR ADMINISTRATION OFFICIAL: I would just add to this that we have noted a distinct uptick in the last three days from major European capitals beginning to look very hard at sectorals in response to the egregious treatment of the Vienna Document monitors in Slavyansk, and that's really been galvanizing -- both the viciousness of their treatment and the fact that Russia has done nothing to restrain them.
Q Thanks very much for doing the call. Just to briefly -- I've spoken to Ukrainian officials who are not happy with the degree of the sanctions, the degree of the pain so far. They’d like to have seen not only sector sanctions immediately, but also they’re looking for, as you know, more robust aid, including in the category of military aid. And I wonder if you could just react to that criticism.
And second, you mentioned about raising the cost if Russian troops crossed the border into eastern Ukraine, that the intention of these sanctions in effect deter that. And I just wonder, is there any intention at this point to reverse Russia’s annexation of Crimea? Or is Crimea, in effect, granted?
SENIOR ADMINISTRATION OFFICIAL: There’s a lot there. Let me just say a few things, Jim. First of all, with respect to Crimea, we've made very clear that we're not going to recognize that annexation, and so have many of our allies around the world. The U.N. General Assembly overwhelmingly passed resolutions condemning that. And we're just not going to recognize it. And there are sanctions that were put in place because of that and will continue. And that will continue to be our position that we don't recognize the legitimacy of either the referendum or that annexation.
With respect to sectoral sanctions, number one, it's important, as my colleague said, it's important that there be a spectrum of options that we have so we can escalate if we see severe escalation by the Russians. So we have very powerful sectoral sanctions that could allow us to inflict significant damage on the Russian economy.
At the same time, clearly you have to weigh those options and calibrate the pressure based on what we're seeing in Ukraine, based on the fact that there are considerations as to how you manage the impact on the global economy, how you prepare those sanctions together with the Europeans. So that's what we're doing in terms of having those sectoral sanctions prepared over time, discussing with the Europeans what the triggers for that might be. We've been very clear that one trigger would be a Russian invasion across the border.
So we do have those available. But simply to cock every bullet in our gun in the current context in our view does not make sense. It’s better to ratchet up the pressure while having further deterrent value in these more robust sectoral sanctions that have been prepared together with the Europeans.
With respect to assistance, we've been talking to the Ukrainian government in Kyiv every single day. We have committed a billion dollars in a loan guarantee; we have committed tens of millions of dollars in additional technical assistance. We've committed nonlethal military assistance.
With respect to lethal assistance, the President addressed this today. The fact is there’s not going to be any scenario where the Ukrainian military is brought quickly up to parity with the Russian military. This is not the type of action that usually has the most significant deterrent on Russia’s calculus. We have a far greater ability to affect Russia and impose a cost on Russia by imposing sanctions rather than by that type of provision of assistance.
Similarly, with the Ukrainian government, we believe that the best thing we can do is help them stabilize their economy and prepare for very important elections this May. And that's what has been a focal point of the United States and our allies.
So we're confident that we have a policy that is effectively calibrated, that is imposing a sufficient cost, that has also an additional escalation that we can pursue up to sectoral sanctions, and that provides the best type of support for the Ukrainian government. And I think that we do need to recognize that there’s not a silver bullet of some type of military assistance that is going to level this playing field in this very difficult situation. We have to be using all of these tools at our disposal to support the Ukrainians and to impose costs on the Russians.
I don't know if any of my colleagues want to address.
SENIOR ADMINISTRATION OFFICIAL: I want to underscore what my colleague said about non-recognition of Russia’s illegal annexation of Crimea. That is not simply rhetoric. We have the ability under our executive orders and the intention of imposing further sanctions. On April 11th [we] imposed a sanction on one of Crimea’s major economic firms, Chernomorneftegaz, an energy company which had been illegally expropriated by the separatists in Crimea. We are looking at additional steps. And we’ll make it clear that our non-recognition of the illegal annexation is not rhetorical vitriol. And we’re working with the Europeans as well on this.
Q Hi, thanks so much for having this. I’m just wondering, are there any new levels of sanctions between what we’re seeing now, which are senior officials and kind of crony financiers and smaller companies, and the sector sanctions? In other words, would it ever be ratcheted up to publicly traded companies, major billionaire oligarchs, et cetera? Or will we just see more Russian officials, more state-controlled companies, or move all the way up to sector sanctions if there’s a troop invasion in Ukraine? Thanks so much.
SENIOR ADMINISTRATION OFFICIAL: What we have designed is a sanctions program that is scalable, is flexible, and we can impose sanctions on a range of actors from the ones we’ve done already through the big state-owned companies that you’ve referenced.
I don’t think it serves anyone’s interest to preview what the next step might be. But I think the important point is that we have available to us a range of options. The sanctions that we’ve imposed particularly on those close to Putin have significant impact not only on them, but on the companies that they are in complete control of. And we are going to continue to calibrate our steps in response to the situation on the ground. I’ll leave it at that.
Q Hi, thanks very much. Thanks again for this. I’m calling from Moscow. I wanted to ask two questions -- one about -- a very simple one. You mentioned in the explanation that a number of these companies help provide services to a senior official of the government of the Russian Federation. I’d like to ask who that senior official is. And the other question -- this situation with OSCE observers and the increasing possibility of sectoral sanctions from Europe, has there been any thought given to economic aid or any other policy changes to help Europe weather any sort of economic impact from any broader sanctions that they would do that would affect the European economy more than the American one?
SENIOR ADMINISTRATION OFFICIAL: I’ll just make one comment. On your second question, I think everybody recognizes that if we move to sectoral sanctions, that would have an impact on the global economy and on national economies. And so, again, there has been discussion and dialogue about what the respective impacts would be. I think that everybody recognizes that it’s important that we do this together in part so that there’s a shared commitment, but also one nation isn’t bearing a significantly greater share of the burden as against other nations with different interests in different sectors.
We have had dialogues, for instance, around energy. We saw the energy ministerial between the U.S. and the EU in discussions on ways of over time certainly diversifying the European energy picture. And you’ve seen us already approve licenses for exports of natural gas to Europe, so that’s one example of an area where there has been initial discussion with the Europeans set against the backdrop of the prospect of sectoral sanctions.
SENIOR ADMINISTRATION OFFICIAL: Each of the 17 entities is being designated for being owned or controlled by a person who has been previously designated for either providing support to or deriving support from senior Russian government officials. So they’re all in one way or another affiliated with either the Rotenberg brothers or Timchenko. The seven individuals who are being designated today are all being designated for being Russian government officials. But of course, everybody knows who Sechin and Chemezov are, and the role that they play in both the Russian economy and, frankly, in the leadership circle in Russia.
SENIOR ADMINISTRATION OFFICIAL: I would just say that (inaudible) there is a conversation about possible counterbalancing and compensatory measures for those states who might have to take it on the chin more if and when sectoral sanctions come on. So they’re talking about helping each other internally there. But, again, as our colleague said, the key here is to do this in a way that balances the equities within Europe.
Q Yes, thank you very much. I would like to ask you about the change in defense export regulation; says that it will halt pending applications for export of defense articles to Russia. I’m wondering if you could explain what are those pending defense applications? How many are there? What exactly are the items they’re asking for? And also, do you have a view on NATO and defense sales to Russia, including the French sale of the amphibious warship, the Mistral? Thank you.
SENIOR ADMINISTRATION OFFICIAL: I can address the first part of the question. Between the Department of Commerce and the Department of State, we have quite a few license applications pending, because we put them all on hold since the beginning of March. We are now in the process of going through them and really scrutinizing them to see which ones involve technology that the Russian defense industrial complex is in need of, and those are the ones that will be denied. So we’re in the process of going through --
Q Do you have any examples at all?
SENIOR ADMINISTRATION OFFICIAL: Well, generally, I can tell you in the area of microelectronics is one particular area.
Q And on the Mistral?
SENIOR ADMINISTRATION OFFICIAL: That is out of my lane. Maybe one of my colleagues can answer.
SENIOR ADMINISTRATION OFFICIAL: I will simply say there that, again, in the context of evaluating what kind of sectoral sanctions might be necessary, the Europeans are looking at defense industry, including this. The French themselves have made a number of comments in regard to the future of the sale, and I would refer you to those comments.
Q Thank you, and thank you for doing the call. All of this of course is very regrettable. And from the Russian point of view, as you understand, all of this comes back to the illegitimacy of the current government of Kyiv. So my question to you is if you are satisfied with the way the situation has evolved, and whether you have any regrets? With the benefit of hindsight, would you have done something differently, not to bring this to this point?
SENIOR ADMINISTRATION OFFICIAL: I’d just make a couple of comments there. Look, we have been focused on one thing and one thing only for the many months that the situation in Ukraine has been unstable, and that is that the people of Ukraine should have a government that reflects their aspirations; that the country of Ukraine should be able to make its own decisions about its associations, and that there need not be conflict and destabilization; that Ukraine could have productive relations with both Europe and Russia, as well as the United States. And those principles have guided us throughout this series of events.
Again, in terms of the government in Kyiv, since President Yanukovych packed up and left town, again, we believe that the government has shown extraordinary responsibility in terms of their commitment to both set a path towards elections in May, which provide a very important opportunity for the people of Ukraine to be heard on their future; in terms of tackling the economic situation in partnership with the international community so that they are working to stabilize the economy and improve the situation for the people of Ukraine; but also, in terms of being willing to engage in dialogue within their country and with Russia about the pathway to deescalate this situation.
And since the Geneva agreement was reached, we saw the government in Kyiv take important steps to live up to their end of the bargain in terms of addressing the nation and stressing the necessity of national unity; in terms of their commitment to move forward with an amnesty law so that those who lay down their arms and leave buildings know that they have amnesty; but also to initiate a dialogue around decentralization of power so that they can assure that the rights and interests of people in eastern and southern Ukraine are met within the context of Ukraine’s future and that that was a dialogue that could include Russia and the European Union and the United States as well.
And so we saw the Ukrainian government living up to their end of the bargain. Unfortunately, Russia did not live up to their end of the bargain -- again, not just in completely failing to use their influence to encourage groups to lay down their arms and leave buildings, but also, outrageously, to be associated in any way with the types of individuals who have taken key diplomats hostage. That is not something that should happen in the 21st century, that a diplomatic monitoring mission can't even operate in eastern Ukraine in the context of an agreement that was reached among a number of members of the United Nations Security Council.
So -- have been clear that the government in Kyiv has lived up to their end of the bargain and that Russia has not. So we have no regrets whatsoever about supporting the Ukrainian people’s right to make decisions about their own future. I do believe that if Russia continues down this path, they will severely regret the decision to take a path of international isolation, politically and economically. And ultimately, that's what we have to continue to show, which is that we recognize that there’s no immediate solution to this crisis, even though there is a pathway that was set in Geneva. We recognize that Russia cares deeply about its interests in that part of the world, and we have sought to address those interests through dialogue and a process of de-escalation. But at the same time, over the next several weeks and months, if Russia continues down this path, we believe ultimately it's going to find itself in a position of much bigger isolation internationally, much bigger economic pain than they were before and that they have been at any time in the recent past.
I don't know if anybody else wants to have any final thoughts.
SENIOR ADMINISTRATION OFFICIAL: I would just add two pieces here. First, with regard to the legitimacy of the current government in Kyiv, just to remind that it was ratified by a vote in the Duma and supported by every single political party across the spectrum with the exception of a communist -- so more than 80 percent of Rada supported it.
Second, just to say if you care about the choice of Ukrainians across the spectrum in their own future, the next major decision point there is the May 25th elections, where you have more than 20 candidates representing every political color in the Ukrainian spectrum running for office. And while we negotiated the Geneva Accord, we wanted the U.S., the EU, and Ukraine to add a line expressing our support for free, fair elections on May 25th so that the Ukrainian people could make that leadership choice in their own future. And Russia refused to add that line and has continued to pass doubt on whether elections are possible or advisable. So my question to Russia is how do you aspire to get legitimacy in government if not by elections. Thanks.
SENIOR ADMINISTRATION OFFICIAL: And I'd add just one final point, which is that from the sanctions standpoint we have been clear from the outset that the preference is to see the situation deescalate in a fashion that’s been described. But if Russia persists on destabilizing Ukraine, persists on fomenting unrest in eastern Ukraine, or takes additional steps with respect to Ukraine, we have at our disposal additional tools, including the ones that we have used today, as well as those that we have in our pocket that can ratchet up and continue, frankly, to have very significant impact on the Russian economy.
And so I think another question to be asked in Russia is whether the cost to the Russian economy as a whole, to the Russian people, is worth it when there is a clear and legitimate path to deescalate the situation in Ukraine.
SENIOR ADMINISTRATION OFFICIAL: Well, thanks, everybody, for joining the call. We'll continue to keep you posted on these matters in the days ahead.
MS. HAYDEN: And just as a reminder, this call was on background. Those were senior administration officials. Thanks, everyone, for joining us.
10:07 P.M. PHT