Conference Call by Senior Administration Officials on Ukraine
Via Conference Call
4:34 P.M. EDT
MS. LUCAS MAGNUSON: Hi, good afternoon, everyone, and thanks for your patience. We have with us today some senior administration officials to talk about the situation in Ukraine and some sanctions on Russia that hopefully you will have seen or will see shortly in a few minutes from the Department of Treasury.
SENIOR ADMINISTRATION OFFICIAL: Thanks, everybody, for getting on the call. Today, we have moved to impose additional sanctions on Russia for its actions in violation of Ukraine’s sovereignty and territorial integrity, and my Treasury colleague will speak to that.
Since the beginning of this crisis in Ukraine, we have worked at the same time to impose costs on Russia for its actions while also providing support to the Ukrainian government and people. Over the last several weeks, I think it’s important to note that the Ukrainian people have taken a number of important steps to determine their own destiny and to build their own democracy. We saw a successful election held even amidst the violation of their sovereignty and territorial integrity. The new government, under President Poroshenko, has launched important reforms that could help stabilize Ukraine’s economy and develop Ukraine’s democratic institutions. And that Ukrainian government has reached its association agreement with the European Union, which, of course, was the initial point that led to the popular dissatisfaction with the previous Ukrainian government.
We have increased our own support for Ukraine both through the provision of nonlethal assistance to their military, which has ramped up over the last several weeks, and also through our support for an economic stabilization package. The Ukrainian government has also demonstrated a willingness to de-escalate and pursue a peaceful resolution to this situation in eastern Ukraine.
But what we have seen time and again from Russia is a refusal to follow through on necessary commitments and conditions for de-escalation. We have made clear time and again that if Russia does not respect Ukraine’s sovereignty and territorial integrity and does not in good faith follow through on necessary commitments for de-escalation that we’ll move to impose additional costs. That’s what we’re doing today.
We have also coordinated every step very closely with our European allies, in particular, and in recent days, President Obama has spoken with leaders such as President Hollande of France, Chancellor Merkel of Germany, [and] Prime Minister Cameron to discuss the situation in Ukraine. The Europeans, of course, are meeting today in Brussels, and we have been very clear in both discussing with them the types of steps that we’re taking today and coordinating our actions both in support of the Ukrainian government and in imposing costs on Russia.
And with that, I’ll turn it over to my Treasury colleague to go over the sanctions package.
SENIOR ADMINISTRATION OFFICIAL: Great. Thanks and good afternoon, everyone. Thanks for joining. Over the last several months and especially over the past several weeks, the Russian government has chosen to escalate its unlawful activities in Ukraine and has chosen to do so in the face of very clear messages that continuing down that path will lead to increasing sanctions pressure. And that is precisely what we are doing today.
We are announcing a broad-based package of actions that will affect firms across key sectors of the Russian economy -- the financial services, energy, and defense sectors -- while also imposing sanctions against a set of senior Russian officials in the misappropriated business in Crimea.
Let me take a moment to go into some detail about the actions we’ve taken today. First, under Executive Order 13662, Secretary of the Treasury Jack Lew determined to apply sanctions against entities in the financial sector and the energy sector of Russia. And we have then imposed a set of prohibitions on two major Russian banks and two major Russian energy firms.
Executive Order 13662, which was signed by the President on March 20th of this year, allows the Secretary to identify sectors of the Russian economy as subject to sanctions and then to impose sanctions on specific persons operating within those sectors.
As I noted earlier today, Secretary Lew made a determination that persons operating within Russia’s financial services sector and energy sector may now be subject to targeted sanctions. And following that determination, Treasury imposed sanctions that prohibit U.S. persons from providing new financing to two major Russian banks -- Gazprombank and VEB -- and two Russian energy firms -- Rosneft and Novatek -- effectively limiting their access to the U.S. capital markets.
Now, with regard to the financial sector, Treasury imposed measures prohibiting U.S. persons from dealing in new equity or new debt of longer than 90 days’ maturity for the two banks I listed -- Gasprombank and VEB. As a practical matter, this will close the medium- and long-term U.S. sources of financing for these banks. This is a significant step. These financial institutions are among the largest in Russia and routinely access the U.S. capital markets to finance their operations. They will no longer be able to do so.
Now, with regard to the energy sector, Treasury imposed measures that prohibit dealing in new debt of longer than 90 days’ maturity for the energy firms of Novatek and Rosneft. These firms are among the largest energy firms in Russia. Now, as with the financial institutions, we have not blocked the property of these companies, nor prohibited transactions with them beyond the specific financing restrictions I mentioned. But I do want to be clear that the steps that we have taken today to restrict access to the U.S. capital markets for these two major banks and two major energy firms is what we are doing today.
We have the capacity in our sanctions programs to expand the scope of the prohibitions and the list of the entities affected if the situation warrants. And the Secretary of the Treasury determination to open the financial sector and the energy sectors of Russia for sanctions will remain in place.
Second, Treasury today has designated and blocked the assets of eight Russian state-owned defense technology firms, pursuant to Executive Order 13661, for operating in the arms or related materiel sector of Russia. Those firms are listed in our press release, so I won’t go through each of them individually. But the designated firms are responsible for the production of a range of materiel from small arms to mortar shells to surface-to-air missiles to tanks.
Third, Treasury today designated and blocked the assets of two entities and one individual, pursuant to EO 13660, for threatening the peace, security, stability, sovereignty, or territorial integrity of Ukraine. They include the so-called Lugansk People’s Republic and the so-called Donetsk People’s Republic, as well as Aleksandr Borodai, the self-declared prime minister of the Donetsk People’s Republic.
Fourth, we have imposed sanctions on Crimea-based Feodosiya Enterprise, which is a key oil shipping facility in the Crimean Peninsula that the separatists’ self-styled Crimean parliament nationalized. This is misappropriated assets of Ukraine. And because of this designation, no U.S. person can deal with Feodosiya Enterprise.
**Fifth and finally, Treasury designated four Russian government officials pursuant to EO 13661. They include Sergey Beseda, the head of Russia’s Federal Security Service; Oleg Savelyev, Russia’s Minister for Crimean Affairs; Sergei Neverov, the Deputy Chairman of the State Duma of the Russian Federation; and Igor Shchegolev, an aide to the President of the Russian Federation.
I want to stress the significance of the steps we’ve taken today, particularly Executive Order 13662, which authorized the Secretary to identify sectors of the Russian economy for sanctions and then to select specific targets for action. This is a broad, flexible, and potent sanctions tool, and we have used this authority today for the first time and have done so in a precise yet powerful fashion by going after these two Russian banks and two Russian energy firms and their ability to access the U.S. for financing. And as I noted, we have the ability to expand the scope of the actions we took today if Russia continues its provocative behavior.
From the very beginning, we have been thoughtful and strategic in our approach to sanctions and have carefully calibrated our steps to impose increased pressure on the Russian government while limiting the negative spillover risks to the global economy. Today’s steps will only further exacerbate Russia’s economic problems. And these problems are quite substantial. Already market analysts are forecasting significant and continued outflows of both foreign and domestic capital from Russia and a further weakening of growth prospects for this year.
The IMF has downgraded Russia’s growth outlook to 0.2 percent for this year and suggested that recession is not out of the question. Since the start of this year, Russia’s stock market has declined by 2 percent while other emerging stock markets have gained as much as 20 percent. The Russian ruble has depreciated by over 4 percent since the beginning of the year despite substantial market intervention by the Russian Central Bank and multiple interest rate hikes.
The Central Bank of Russia has spent nearly $51 billion -- about 10 percent of its foreign exchange reserves -- in an effort to defend the value of the ruble since the start of this year. The yield on Russia’s 10-year government bond is up almost 90 basis points. The IMF expects as much as $100 billion in capital flight from Russia this year and the World Bank put that estimate at $130 billion. So all together, the actions that we have taken thus far have had a significant impact on the Russian economy and we expect that the steps that we have taken today, including the steps against the Russian banks and the Russian energy firms, will only exacerbate that situation.
So with that, why don’t I conclude and turn it over to my colleague from the State Department.
SENIOR ADMINISTRATION OFFICIAL: Thanks very much. Just to remind that at no stage has this been our preference or, frankly, the preference of the Ukrainian government to have to move in this direction. As the President has said from the beginning, there is an off-ramp here for Russia if it would choose to take it, and we have consistently supported the Ukrainians in pursuing a diplomatic path -- notably when the President first met then-President-elect Poroshenko on his European trip, and during the Normandy stop when President Poroshenko first presented his peace plan.
At that stage, he was very much hoping that with a broad outreach to the Russian Federation and a diplomatic process supported by the OSCE, the U.S. and the EU, he would be able to achieve his major goals, which were to have a bilateral cease-fire between his forces and the separatists; to have a release of hostages, to have a sealing of the border monitored by the OSCE, and to have an end to the flow of weapons crossing the border.
And, in fact, when he was unable to negotiate a bilateral cease-fire within the first two weeks in office, he called a 10-day unilateral cease-fire. Unfortunately, the Ukrainian side honored that and the separatists did not. There were some 100 violations of the cease-fire. More heavy weapons found their way into Ukraine. And the Ukrainians lost three border posts to separatists during that time.
Since then, as you know, the Ukrainians have resumed their efforts to secure their country. They have made some significant gains on the ground, including the liberation of key towns, including Slavyansk and Svyatogorsk, where they are now in the process of restoring public services. But the fight goes on.
And even in the face of all this diplomacy that’s been going on and very high-level efforts by us and by key members of the European Union, notably France, Germany, the U.K., in fact, over the past month, the flow of heavy weapons and support for separatists from Russia has actually increased. You will have seen on social media over the last week convoys of Russian tanks, armored personnel carriers, infantry combat vehicles, Grad rocket launchers, Howitzers, self-propelled mortars flowing into Ukraine.
On July 14th, Ukrainians lost an An-26 transport jet, which was shot down from an altitude of 21,000 feet, with eight crew on board. And only very sophisticated weapons systems would be able to reach this height. On July 15th, as you know, several bridges into Donetsk were taken by separatists, as well as continued attacks on border checkpoints. So the concern has been that not only has Russia not availed itself of the diplomatic openings to deescalate, but the support for separatists has increased.
We would also note the increasing sophistication of the military tactics that we’re seeing in recent weeks, indicating training and coordination from outside; and then, also, just to remind that the three leaders of the separatist movement -- Mr. Gubarev, Mr. Strelkov, and Mr. Borodai -- or supposed leaders of the separatist movement are, in fact, all Russian citizens.
So from that perspective, after more than a month of asking us, in fact, to withhold further sanctions while they tried to implement their peace plan, the Ukrainians have now urged both the U.S., Canada, and the EU to take further sanctions measures, because the Russians have not responded to the repeated diplomatic efforts led by the Ukrainians and supported by us.
One final point: The European Union is meeting at head-of-state level this evening. We do expect that they will take some action today, but they are still in their meeting. So watch that space. I will pause there.
Q Thank you very much. Is there an issue, though, despite what you expect to come from Brussels, with the fact that the Europeans are not expected to be as forceful as the U.S. has been? And to what extent do you think the tension with Angela Merkel has exacerbated this and made it more difficult for the President to get support from his allies?
SENIOR ADMINISTRATION OFFICIAL: I’ll say a couple of things. First of all, on your last point, I would not suggest that there has been any effect whatsoever with respect to Germany’s stance on this issue and the recent revelations about certain intelligence activities. The fact of the matter is actually that Angela Merkel has been at the forefront in Europe in pressing for a strong response to Russia’s violation of Ukraine’s sovereignty and territorial integrity. And we believe that Germany has played a very significant and constructive role in leading Europe to, again, insist upon respect for Ukraine’s sovereignty and territorial integrity. And in fact, in their conversation just yesterday, the President was able to discuss the types of steps that we were contemplating taking and to hear from Chancellor Merkel about the types of steps that Europe is considering as well.
With respect to the broader point, we have been moving in coordination with Europe. It is the case that the United States has been very forceful in the sanctions that we have imposed. The Europeans have also moved with us in imposing sanctions against different individuals and entities. I think the broad statement of common purpose with respect to signaling to Russia a cost through broad-based sectoral sanctions for the most egregious potential escalation has served as a deterrent and remains in place.
With respect to actions that we’re taking given Russia’s ongoing support for separatists, again, we do expect the Europeans to take action. We’ve always said that we’ll take different types of actions based on our approach to sanctions, but we’re pleased that there remains close coordination. There remains coordinated support for Ukraine. And I’d note, again, that the EU reached an agreement with respect to the association agreement, which is the root of this crisis, earlier this year. So they’ve been forthcoming in their support for Ukraine, and they have moved to impose costs and pressure on Russia.
Even as it is the case that in the European Union in which you need to reach agreement among all the members, necessarily it takes time and effort to tee up different sanctions packages.
But I don’t know if my colleagues have anything to add to that.
SENIOR ADMINISTRATION OFFICIAL: The only thing I would add is that some of the individuals and entities at the end of our list, as outlined by speaker one, that we are sanctioning today, are entities that the EU has already sanctioned -- the Luhansk People’s Republic, Donetsk, some of the Russian’s -- Feodosia. So there has been a little bit of a yin-yang where at times we’re catching up with them; at times, they’re catching up with us. But I don’t want to prejudge what they’re going to decide tonight because it’s very much a work in progress.
SENIOR ADMINISTRATION OFFICIAL: And if I could just add one final point, which is that the financial institutions, in particular, that we sanctioned today and have cut off from equity financing from the U.S. and from debt financing of 90 days or greater maturity, they are heavily skewed in their financing and their capital structure to the dollar. And so the impact of these sanctions even if Europeans don’t match them precisely, will be quite significant because of the dominance of the dollar in the financing for those firms.
Q We wanted to ask about the significance of the debt market financing. It sounds like from what you’re saying if it’s over 90 days that it’s going to allow these companies to continue doing their business, just not get the longer-term loans. Am I correct on that? And also, to the extent of these sanctions being against Gazprom, Rosneft, et cetera, it’s just limited to the 90 days and companies like Exxon will not be prohibited from conducting business with them under this -- correct?
SENIOR ADMINISTRATION OFFICIAL: So let me take that. The prohibition is on for the financial institutions, so for Gazprombank and VEB, on any equity financing and any debt financing over a 90-day equity.
So essentially, we’re not going after the short-term or the overnight financing, but the financing that they need as part of their capital structures to roll over on a regular basis that’s of longer than 90-day maturity in debt, they will not be able to access the U.S. markets and no U.S. person will be permitted to lend to those financial institutions. It will increase their cost of borrowing. They’ll have to look elsewhere for dollars, if they can find them. For their financing, they will likely have to turn to the Central Bank of Russia, which has dollar reserves, as a way to fill the hole that they’re not going to be able to fill when their financing needs come up as their debt rolls over.
On the energy firms, it, as you noted, applies just to debt, not to new equity infusions. How that applies in any particular circumstance we’ll let others who are involved with those firms determine. But, again, it will prohibit any debt financing for those energy firms of 90 days or greater maturity.
Q I have a couple of things. Firstly, how much of an effect do you expect all of this to have on U.S. businesses? And we all know that the U.S. businesses are against this action. And then, secondly, in terms of sanctioning the Donetsk and the Luhansk Republic, does this, in effect, amount to recognition of those entities?
SENIOR ADMINISTRATION OFFICIAL: I’ll say a couple of things, and then my colleague may want to add. First of all, on your last question, absolutely not. It just allows us to target the individuals who are associated with the activities under the self-described names of the Luhansk and the Donetsk People’s Republic. So it has nothing to do with recognition of those entities. It has to do with targeting the individuals associated with their actions.
And I’ll turn to my colleague on the first question.
SENIOR ADMINISTRATION OFFICIAL: I’ll actually respond to both of those questions. Just one further thought on the designation of the Luhansk People’s Republic and Donetsk People’s Republic, these purported entities. It will allow us to impose sanctions on anyone who is providing support to any of those entities. So to the extent that they are seeking to solicit funding, for instance, for their activities, or individuals who are affiliated with those entities, this will go as an opportunity to take action against anyone who is financing those entities or providing other material support to those entities.
In terms of the U.S. business community, what we have heard time and again is that the U.S. business community understands the importance of a robust response to the unlawful activity of the Russian federation in Crimea and in eastern Ukraine. I think the notion that our businesses are not supportive of the U.S. government being forceful in addressing this significant threat is mistaken. They, like businesses everywhere, want the burden to be shared, but in terms of understanding that there are burdens to be borne for broader principles beyond just the bottom line, I don’t think our businesses have any difficulty with that notion.
SENIOR ADMINISTRATION OFFICIAL: Can I just underscore what was said at the beginning about the so-called Luhansk People’s Republic and the so-called Donetsk People’s Republic -- the idea here is that the separatists are trying to create entities that behave like separate governing structures, and as such could conceivably seek outside financing or support. This ensures that we strangle those efforts.
Q I have a couple of quick ones. First of all, I think Alexey Miller, the head of Gazprom, still hasn’t been targeted. Is that right?
SENIOR ADMINISTRATION OFFICIAL: We have not -- the list of people who we have imposed sanctions on is known. He is not on the list.
Q It seems as if you’ve gone after just about everybody but Gazprom itself. I mean, Gazprombank is obviously related, but it’s not the same thing as Gazprom. I’m wondering if the thinking there is that you don’t want to do things that would disrupt energy, energy flows to Central and Western Europe. And then, a second quick follow-up -- most of us know what the FSB is, but can you explain what the fifth service of the FSB is and why it was targeted for sanctions?
SENIOR ADMINISTRATION OFFICIAL: We, as a general matter, don’t talk about entities that we have not imposed sanctions on and don’t speculate about who we may sanction. We talk about those who we have sanctioned, so I don’t really have any comments on Gazprom itself.
SENIOR ADMINISTRATION OFFICIAL: With regard to the FSB, we sanctioned today the head of the FSB, which is playing a key role, we believe, in organizing the separatists and supporting them and funneling money to them, as well as operational expertise and supporting the recruitment inside of Russia, which has had a significant uptick of fighters and military retirees to participate.
Q Thanks so much for having this. I was just wondering about the flexibility of sector sanctions for the two banks and the energy companies –- is that the kind of thing that would likely –- would it be more likely that the Treasury would adjust the companies involved in these sectors, or is it designed to be more flexible in the types of transactions with these entities that are being targeted, which are currently limited to –-
SENIOR ADMINISTRATION OFFICIAL: I think the financing sanctions that were broken today on those entities will certainly have a direct impact on the entities themselves. But I think as we've seen in our sanctions efforts throughout the course of this episode, there is broader impact in the Russian economy from steps we have taken as the market recognizes that we are quite serious when we say that we are intent on imposing costs if the Russians don't de-escalate the situation. So I think we are anticipating both direct costs with respect to those entities and for the market to recognize the seriousness with which we're taking the situation.
Q I wanted to ask was there any thinking -- I know Brussels was announcing it -- was there any thinking in announcing before they reached a decision? And just on the new banking and energy sanctions, whether those -- I just wanted to clarify, those allow U.S. individuals to do business with them -- restriction on their capital market?
SENIOR ADMINISTRATION OFFICIAL: I'll just say one thing about the first question. We have coordinated closely with our European allies in both the substance and timing of sanctions throughout the last several weeks and months, and we have tended to see the meetings the European leaders and the European Council as important moments to check in on the status of progress and the status of conditions that have been laid out in terms of Russia’s actions. And so these tend to be natural moments for the United States to take action in coordination with our European allies.
And President Obama, in his recent conversations with the leaders of France, the United Kingdom, and Germany, has discussed both the substance and timing of the type of actions that we're announcing here today -- as recently as in his conversation with Chancellor Merkel yesterday.
SENIOR ADMINISTRATION OFFICIAL: If I could jump in and fix something that I said earlier -- Sergei Besesda, (inaudible) who is sanctioned today, is a top general -- not the head, but a top general in Russia’s Federal Security Service, the FSB, and reportedly one of the main leaders within the FSB of support for separatists.
And just to build on what was said with regard to the EU, the EU tends to -- in fact, in all cases with regard to Ukraine, has taken its major decisions at the level of heads during heads meetings.
SENIOR ADMINISTRATION OFFICIAL: And just to finish up on the last question, the prohibition extends to any transactions related to the financing for the energy firms or the banks in the fashion I indicated. So over 90 days and any equity financing for the banks. Beyond that, it does not prohibit transactions with those entities.
MS. LUCAS MAGNUSON: Thank you, everyone, again for joining. We'll conclude the call now. Just as a reminder, all information is attributable to senior administration officials. Thank you and have a good evening.
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