Russia's central bank promises support for targets of new sanctions

AP

MOSCOW -- Russia's central bank is promising to support financial institutions hit by U.S. sanctions as stocks took a tumble on opening in Moscow.

In an online statement, the bank promised to "take adequate measures" to support targeted institutions. Russia's state-owned VTB bank -- Russia's second-largest -- was trading down 1.2 per cent on Wednesday morning.

Other major banks that were left unscathed by sanctions -- such as the country's largest, Sperbank -- were trading higher.

U.S. officials said Tuesday that roughly 30 per cent of Russia's banking sector assets are now constrained by sanctions.

The move comes after Malaysia Airlines Flight 17 was shot down over East Ukraine. Western officials accuse pro-Russian separatists of bringing down the plane with a missile supplied by Moscow.

The West is also halting future sales to lucrative Russian economic sectors, with the U.S. announcing plans to block future technology sales to the oil industry and Europe approving an arms embargo. The Europeans on Tuesday also backed sanctions against state-owned banks and the energy sector, though the specific EU targets won't be made public until later in the week.

Western officials insist the new sanctions will damage an already struggling Russian economy. The International Monetary Fund has slashed Russia's growth forecast for this year to nearly zero, and the U.S. says more than $100 billion in capital is expected to flow out of the country.

"Russia's actions in Ukraine and the sanctions that we've already imposed have made a weak Russian economy even weaker," President Barack Obama said Tuesday.

It remained uncertain whether the tougher penalties would have any impact on Russia's actions in Ukraine -- nor was it clear what further actions the U.S. and Europe were willing to take if the situation remains unchanged. In the nearly two weeks since the Malaysia Airlines plane was felled in eastern Ukraine, Russia appears to have only deepened its engagement in the conflict, with the U.S. and allies saying that Russia was building up troops and weaponry along its border with Ukraine.

Europe has a far stronger economic relationship with Russia than the U.S. does, and until this week European Union leaders had been reluctant to impose harsh penalties -- in part out of fear of harming their own economies.

EU President Herman Van Rompuy and the president of the European Commission, Jose Manuel Barroso, said the sanctions sent a "strong warning" that Russia's destabilization of Ukraine could not be tolerated.

"When the violence created spirals out of control and leads to the killing of almost 300 innocent civilians in their flight from the Netherlands to Malaysia, the situation requires urgent and determined response," the two top EU officials said in a statement.

The new EU sanctions put the 28-nation bloc on par with earlier sector sanctions announced by the U.S. and in some cases may even exceed the American penalties.

Obama said co-ordinating Tuesday's actions will ensure that the sanctions "will have an even bigger bite."

Despite the West's escalation of its actions against Russia, Obama said the U.S. and Europe were not entering into Soviet-era standoff with Russia.

"It's not a new cold war," he said in response to a reporter's question.

The new European penalties ban the unapproved sale to the Russians of technology that has dual military and civilian uses or is particularly sensitive, such as advanced equipment used in deep-sea and Arctic oil drilling. The EU also approved an arms embargo, though it would not restrict past agreements, allowing France to go forward with the delivery of two warships to Russia, a deal that has been sharply criticized by the U.S. and Britain.

To restrict Russia's access to Europe's money markets, EU citizens and banks will be barred from purchasing certain bonds or stocks issued by state-owned Russian banks, according to EU officials.

The U.S. sanctions target three major Russian banks: the Bank of Moscow, Russian Agricultural Bank and VTB Bank.

Analysts said the effort was aimed at cutting off access to resources that these banks would need to support their own lending operations, an action that could weaken economic activity in Russia.

"This limits the ability of these banks to do new business. That means the Russian economy will suffer because the banks will not be able to make as many loans," said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University Channel Islands.

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