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Published: Tuesday March 4, 2014 MYT 10:20:02 AM
Updated: Tuesday March 4, 2014 MYT 10:21:11 AM

U.S. and EU marshal economic tools to punish Russia

By Warren Strobel, Arshad Mohammed and Anna Yukhananov

WASHINGTON (Reuters) - The United States has a number of economic weapons to punish Russia for its military intervention in Ukraine, ranging from asset freezes to kicking Moscow out of the exclusive G8 group of countries, and President Barack Obama is focusing first on measures that would not require congressional action.

But Washington needs Europe to join it to make sanctions tough enough to potentially deter Russian President Vladimir Putin.

Obama is seriously considering an executive order imposing asset freezes and visa bans on Russian officials, a U.S. official said on Monday.

Such an order could be drawn narrowly to focus on Russian officials directly involved in the intervention in Ukraine's Crimea or more broadly to target a wider range of Russian officials, two officials said.

Any moves to slow investment into Russia could also hurt. Russia's economy, which has softened significantly in recent months, is more vulnerable than it was during a previous 2008 crisis over Georgia.

"The Russian economy is extremely weak," said Anders Aslund, a senior fellow at the Peterson Institute for International Economics. The impact of Putin's move into Crimea "will be enormous," he said.

Steep drops on Monday in the value of the ruble and the Russian stock market, including natural gas monopoly Gazprom, would be particularly difficult for Russia's rich.

Longer term the United States could help cut European demand for Russian energy.

Here are details of some of the measures the United States and the European Union could take:

- Target Russia's membership in the G-8 group of major industrialized countries, a prestigious "club" that brings Russia together with the United States, the United Kingdom, Canada, France, Germany, Italy and Japan.

Leaders of the G-7, which does not include Russia, said on Sunday they were suspending participation in talks to prepare for a G-8 summit in Sochi, Russia, this summer.

Canadian Prime Minister Stephen Harper said Russia might be ejected from the group if Putin does not change course. "President Putin's actions have put his country on a course of diplomatic and economic isolation that could well see Russia exit the G8 entirely," he said.

The G-7 also could meet by itself, excluding Russia without formally ending the broader group.

- Target Russian banks. Under broad new authorities gained since the September 11, 2001 attacks, the U.S. Treasury has employed financial warfare against banks worldwide, when it finds complicity in terrorist financing, money laundering or weapons proliferation.

Former senior Treasury official Juan Zarate said moves against Russian banks suspected of illicit financing would take time, but would eventually have an impact, and would have the added benefit of exposing Russia's financial backing for Syrian President Bashar al-Assad.

Cutting Russian banks off from the U.S. financial system could hurt them significantly. But Zarate said Washington would need solid evidence of illicit financial conduct.

- Hunt for Putin funds. In a related move, the United States could hunt for assets controlled by Putin and his close allies, something it has never openly done, said Zarate, now at the Washington-based Center for Strategic and International Studies.

Such actions "are not going to change the course of events tomorrow. But it could demonstrate to Putin and those close to him that the West can bite back," he said.

- Cut back on U.S.-Russian bilateral trade. Trade in goods between the two countries was worth $38.12 billion in 2013 and U.S. firms have $14 billion in direct investment in Russia.

Russia and the United States had started talking about a bilateral investment treaty, but a planned visit by U.S. trade officials to discuss that treaty has now been scrapped.

"We have suspended upcoming bilateral trade and investment engagement with the government of Russia that were part of a move toward deeper commercial and trade ties," a spokesman for the Office of the U.S. Trade Representative said on Monday.

Russia needs investment to keep its economy humming -- it has suffered from about $60 billion in net capital outflows annually in the last two years.

The Russian central bank already has raised interest rates to defend the ruble, threatening to push the economy into recession, by some economists' reckoning.

U.S. oil major ExxonMobil and aircraft maker Boeing are two companies with strong links to Russia and involved in joint ventures with Russian partners.

- Blunt European dependence on Russian energy.

Several EU member states, particularly in the Baltics, rely almost entirely on Russian oil and gas supplies, while even major countries such as Germany, France and Italy import 25 to 35 percent of their gas from Russia. And two-thirds of all the gas imported to the EU from Russia transits via Ukraine.

A European Commission spokeswoman said the EU, after a warm winter, had enough gas in storage to meet almost 10 percent of annual needs. [ID:nL6N0M02DF] Europe could increase storage capacity to buffer it further.

Longer term, there are also calls for Europe to diversify by developing capacity for liquefied natural gas, which can be shipped. Some U.S. energy industry supporters are eager to help.

LNG supplies from the United States or the Middle East could help some Western European countries react to any Russian aggression in coming years, although added transportation costs could be too expensive for others in Central Europe who are likely to remain dependent on neighbours, energy experts said.

"The U.S. energy transformation of recent years gives us options we didn't have several years ago. So we ought to explore using those options," said Richard Haass, the president of the Council on Foreign Relations think tank.

- Expanded target sanctions. Under a 2012 U.S. law named after Russian lawyer Sergei Magnitsky, who died in prison, the United States targeted Russian officials involved in human rights abuses with visa bans and asset freezes.

The State Department placed 18 Russian individuals on a public list of those affected, and a handful of other senior officials are on a list that was not made public. Moscow responded by banning some Americans from travelling to Russia and halting U.S. adoptions of Russian children.

An executive order from Obama could create another, similar list, even though its effect might be limited.

"Political figures targeted by sanctions normally have few, if any, assets in U.S. banks or under the control of U.S. entities or persons," said Clifton Burns, who works on sanctions issues at the law firm Bryan Cave LLP.

European Union targeted sanctions have to be agreed unanimously among all 28 member states, however, and with several members, such as Cyprus and Italy, enjoying close business ties to Russia, securing that consensus is difficult.

Britain is seen as reluctant to support measures that might affect the vast number of wealthy Russians who have chosen London as their home and base for their business empires.

(Additional reporting by Krista Hughes, Patricia Zengerle, and Timothy Gardner in Washington, Brian Grow in Atlanta and Luke Baker in Brussels. Editing by Alistair Bell and Peter Henderson)

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