EU Threatens New Sanctions; Russia Responds with Threats on Natural Gas and Airspace Flight Restrictions

The tit-for-tat sanction madness in Europe took a huge leap forward today with new sanctions in the work on Russian energy companies.

Russia responded by threatening to restrict commercial flights over its airspace, by threatening to halt reverse flows of natural gas to Ukraine, and with a threat to reduce gas delivery to Europe.

EU Plans New Sanctions

The Wall Street Journal reports New EU Sanctions to Stop Fundraising by 3 Russian Oil Giants

New European Union sanctions on Russia will expand the number of Russian companies unable to raise money in the bloc's capital markets to include three state-owned oil companies, according to documents seen by The Wall Street Journal.

The documents show the EU seeking to hit Russian oil companies, but leaving unscathed those involved in gas production and export, which are critical to many European countries' energy supplies.

Under a modest expansion of sanctions introduced in late July, the three oil companies — Gazpromneft, the oil-production and refining subsidiary of OAO Gazprom, oil transportation company Transneft, and oil giant Rosneft — will be forbidden from raising funds of longer than 30 days' maturity.

Three companies involved in military production — Oboronprom, United Aircraft Corp., and Uralvagonzavod — will be barred from future EU fundraising. The sanctions will also bar new contracts for services needed for oil exploration and production in deep water, the Arctic or shale-oil projects.

Unacceptable Behavior

EC president José Manuel Barroso commented on the Unacceptable Behavior of Russia.

“We are showing to the Russians this kind of behaviour is not acceptable,” José Manuel Barroso, the European Commission president, said on the sidelines of the Nato summit in Wales. “We believe it’s extremely important to have a firm position in terms of making clear to Russia it should respect international principles.”

Russia immediately responded to the threat of more sanctions with its own views on what is unacceptable behavior.

Airspace Restrictions

In part one of Russia's two-part asymmetrical response to the EU, Russia Threatens Flight Ban.

Blaming the West for damaging the Russian economy by triggering "stupid" sanctions, Prime Minister Dmitry Medvedev said Moscow would press on with measures to reduce reliance on imports, starting with increasing output of domestic aircraft.

Medvedev suggested Russia should have hit back harder over the action by the United States and European Union to punish Moscow for its role in Ukraine, saying it had been too patient in the worst confrontation with the West since the Cold War.

"If there are sanctions related to the energy sector, or further restrictions on Russia's financial sector, we will have to respond asymmetrically," he told Russian daily Vedomosti, adding the airlines of "friendly countries" were allowed to fly over Russia.

"If Western carriers have to bypass our airspace, this could drive many struggling airlines into bankruptcy. This is not the way to go. We just hope our partners realise this at some point," he said in the interview published on Monday.

Russia Threatens to Reduce Gas Supply

For part two of Russia's response to the EU regarding unacceptable behavior, please consider Russia Aims to Choke Off Gas Re-Exports to Ukraine.

Moscow is seeking to prevent its European customers re-exporting Russian gas to Ukraine, threatening to choke off a crucial lifeline for Kiev and deepen the energy crunch it faces this winter.

The threats come as EU officials geared up to announce sanctions against three state-controlled Russian energy companies – Rosneft, Gazpromneft and Transneft – that will sharply limit their access to western financial markets.

In an effort to offset lost volumes from Russia, Ukraine has sought to secure more gas from the EU, principally through “reverse flows” – re-exports of Russian gas via countries such as Poland, Hungary and Slovakia.

But Gazprom, Russia’s state gas company, has long complained about the re-exports, with Alexei Miller, its chief executive, denouncing them as a “semi-fraudulent mechanism”.

Senior officials in the European Commission and in eastern European governments say Russia has been raising the prospect of reducing export volumes so their customers have no gas left over for reverse flows to Ukraine. “They say this pretty openly,” said one central European ambassador.

Why EU and US economic-jackasses think sanctions will accomplish anything positive or change Russia's behavior one bit is at first glance a bit of a mystery.

However, economic-jackasses by definition are going to do stupid things, so we should expect more and more of the same failed tactics.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.