Russian reaction to sanctions subdued

Posted: August 02, 2014

While both the U.S. and the European Union have begun to ratchet up economic sanctions on Russian banks and other interests following the July 17 downing of Malaysia Airlines Flight 17 over Ukraine, the reaction of the Russian government so far has been muted, a panel of Dechert L.L.P. lawyers said in a conference call Thursday.

Thus, the potential for a sharply escalating trade war apparently has been averted - at least for now. The conflict between the U.S. and European governments and Russia over Russian support for separatist rebels in Ukraine already has had damaging consequences for the Russian economy, said Dechert partner Laura Brank, and concern by the Russians over further harm from western sanctions has tended to weigh against retaliation.

"The Russian reaction has been restrained," Brank said. Russian Foreign Minister Sergey Lavrov "has said Russia would not respond tit for tat."

Dechert, a Center City-based firm with a substantial presence in Moscow and throughout the European Union, organized the phone conference for hundreds of banks, investment funds, technology companies and other businesses trying to sort through the likely impact of the sanctions.

President Obama and European Union leaders announced on Tuesday a range of new sanctions, including restrictions on Russia's VTB Bank, the Bank of Moscow and the Russian Agricultural Bank. The U.S. and Europe also banned the export of oil- and gas-drilling technology for use in the Russian arctic, offshore or shale sites, and other actions.

Penalties for violating the sanctions, depending on whether the laws are enforced in the U.S. or in Europe, could range to $1 million or more in fines and possibly even jail, the Dechert lawyers said.

Brank said that hostilities have had a measurable impact on the Russian economy, a major market for American goods and services, and that there has been a net outflow of $78 billion in capital from Russian banks in the first six months of this year.

Although the sanctions are expected to cause some measure of financial pain, they fall far short of what the west has imposed on other nations, most notably Iran, for what western authorities believe is Iran's program to develop nuclear weapons.

The United Nations and many of the world's governments have joined in the Iran sanctions, which have sharply curtailed the Iran economy and impacted the lives of everyday citizens. One difference between the Iran and Russia sanctions, though, is that the latest Russian sanctions cover only domestic U.S. businesses that seek to do business with Russian entities. They do not cover so called offshore companies - businesses that are headquartered outside those jurisdictions. The U.S. sanctions on Iran apply to both domestic and nondomestic companies.

Jeremy Zucker, cochair of Dechert's International trade and governmental regulation practice, said the toughened sanctions were a direct result of the downing of the Malaysian jet, and likely would not have happened otherwise.

"The downing of the airliner reinforced the frustration that the Russian government is not fully engaged in the effort to bring the violence in Ukraine to an end, and by contrast may be providing significant weaponry to forces not entirely under its control," Zucker said. "And as a result, terrible accidents can occur."



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