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An employee of the Hungarian Mol Natural Gas Transporting Corp. checks the pressure in the pipeline forwarding Russian natural gas from Ukraine at the gas receiving station in Vecses, about 30 kilometres east of Budapest. (Bela Szandelszky/AP)
An employee of the Hungarian Mol Natural Gas Transporting Corp. checks the pressure in the pipeline forwarding Russian natural gas from Ukraine at the gas receiving station in Vecses, about 30 kilometres east of Budapest. (Bela Szandelszky/AP)

Eric Reguly

Russia dismisses sanctions, gambles energy needs will weaken EU resolve Add to ...

Russia’s quick recognition of Crimea as an independent state is risking a second round of more damaging sanctions that could unleash a new Cold War.

On Monday night, Russian President Vladimir Putin issued a decree to declare Crimea fully independent of Ukraine. The act of defiance came a few hours after the United States and the European Union launched sanctions against about 30 individual Russians and pro-Russian Ukrainians for what was described as their role in threatening the security and the borders of Ukraine.

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The sanctions, which consisted of travel bans and asset freezes, are the first retaliatory measures against Russia since Ukraine’s pro-Moscow president, Viktor Yanukovych, was ousted on Feb. 22, triggering the Russian military intervention in Crimea and Sunday’s referendum, in which Crimeans overwhelmingly approved joining Russia.

Canada joined the U.S. and the EU in imposing sanctions on 10 Russian and Ukrainian individuals.

The confrontation – increasingly reminiscent of the mutual hostility between the West and the Soviet Union – seems set to deepen.

“If Russia continues to interfere in Ukraine, we stand ready to impose further sanctions,” U.S. President Barack Obama said.

Mr. Putin is due to speak Tuesday to a joint session of the Russian parliament, which could vote to annex Crimea and effectively dismember Ukraine.

Western leaders said the sanctions could be followed by a broader range of penalties designed to damage the Russian economy, the world’s eighth largest. But Russia seemed willing to gamble that divisions within the EU, which depends on Russian gas and could be the target of Russia’s retaliation, will prevent potentially more damaging trade sanctions. Both the EU and the U.S. indicated that more sanctions could follow later this week. But clouding that possibility is that the Kremlin also has what geopolitical analysts and investment managers call “the nuclear option” if economy-wrecking sanctions are put in place: reducing natural gas supplies to the EU.

Russia, through state-controlled energy giant Gazprom, supplies about a quarter of all the gas consumed in the 28-country EU – worth almost $100-million (U.S.) a day – and half of the gas supplied to Ukraine. Most of the EU-bound gas travels through pipelines that cross Ukraine.

Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London debt investment consultancy that monitors the effects of the Crimean crisis on global markets, said the EU and American sanctions put in place Monday would hardly deter Mr. Putin from relinquishing control of Crimea or possibly demanding autonomy for Eastern Ukraine.

“The current sanctions are a slap on the wrist and maybe not even that,” he said. “The question now is whether more aggressive trade and investment sanctions will be announced later this week. … While Germany has hardened its line on sanctions, there are still great reservations within the EU.”

The travel bans and asset freezes announced by President Barack Obama hit 11 Russians and Ukrainians. They include two aides to Mr. Putin, deputy prime minister Dimitri Rogozi and Mr. Yanukovych, the ousted Ukraine president who fled to Russia.

Mr. Rogozin mocked them. “Comrade Obama, what should those who have neither accounts nor property abroad do? Or maybe you didn’t think of that?” he tweeted.

The EU targeted 21 Russians and Ukrainians, among them Alexsandr Vitko, commander of the Black Sea fleet that has been based in the Crimean port of Sevastopol since the late 1800s. Several names appear on both the U.S. and EU lists, including Leonid Slutsky, head of the committee in Russia’s lower house of parliament that is responsible for ties with the Commonwealth of Independent States. The names on the EU sanctions list were generally less powerful figures than those on the American list.

The White House said the names were put on the sanctions list “for threatening the peace, security, stability, sovereignty, or territorial integrity of Ukraine, and for undermining Ukraine’s democratic institutions and processes.” Mr. Putin himself was not put on the sanctions list.

“It is a highly unusual and rather extraordinary case for the United States to sanction the head of state of another country,” said a senior Obama administration official, speaking on condition of anonymity, adding that “We do not begin [with the head of state].” The official said that the seven individuals covered by the U.S. sanctions are very close to Mr. Putin and “provide him with a lot of the advice, support and implementation of the policy we see in Crimea. There’s no question this hits close to home in that regard.”

Any new sanctions could include trade and investment restrictions, or restrictions on Russian banks ability to interact in the global financial markets. Similar restrictions against Iran virtually crippled the Iranian banks. Whether the EU would go so far in the case of Russia is an open question. “I would do anything possible to avoid sanctions, because I believe everyone will suffer if we get into sanctions,” Dutch foreign minister Frans Timmermans said Monday, just before the EU meeting in Brussels.

Russia’s ultimate weapon is energy. In a research note published Monday, Rob Carnell, chief international economist at ING Financial Markets in London, said “Europe is heavily dependent on Russian gas – so if tensions over Ukraine result in retaliatory embargoes from Russia on its gas exports to Europe, it could hurt.”

The EU countries most dependent on Russian gas are Hungary, Slovakia, Austria, Poland, Greece, Czech Republic and Finland. In each case, gas delivered by Russian pipelines account for no less than 10 per cent of total energy needs and in some cases close to 30 per cent.

While some alternative supplies would be available from Algeria or from shiploads of liquefied natural gas, there simply isn’t enough pipeline capacity from gas-producing regions of North Africa and the Middle East to deliver enough replacement supplies in a hurry. The countries highly dependent on Russian gas are gambling, perhaps foolishly, that Russia would not risk reducing or eliminating gas supplies to for fear of strangling its exports earnings.

With a report from Joanna Slater in New York

Follow me on Twitter: @ereguly

Follow on Twitter: @ereguly

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