Wielding sanctions as scalpel, Obama aimed for Putin's inner circle

WASHINGTON Fri Mar 21, 2014 9:16pm EDT

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WASHINGTON (Reuters) - U.S. sanctions this week against Russia were carefully crafted in an attempt to target President Vladimir Putin's inner circle without provoking a backlash from Moscow against U.S. businesses, senior U.S. officials said.

Concerns about possible Russian retaliation "helped shape the discussions about appropriate sanctions" within the White House, said a senior U.S. official, speaking on condition of anonymity. "There's an awareness that even targeted sanctions can have broad effects."

Obama on Thursday announced assets freezes and bans on U.S. business dealings against 20 Russians and a Russian bank, in response to Putin's annexation of the Crimea from Ukraine.

The measures, notably tougher than those Obama unveiled just three days earlier, have helped spark steep losses for Russian stocks, and Russia's Finance Ministry said it may be forced to cancel plans to borrow abroad this year.

Whether the sanctions will dissuade Putin from further incursions into Ukraine, much less reverse Russia's annexation of Crimea or force him to the negotiating table, is unclear.

Moreover, the careful balance of punishing Russia while shielding U.S. businesses and the global economy will be harder if Obama's administration decides another round of measures is necessary.

TARGETING PUTIN'S CIRCLE

Moscow brushed off a first set of U.S. sanctions, asset freezes and travel bans against seven Russian officials and four Ukrainians. The Thursday action targeted 16 Russian officials, four wealthy individuals linked to Putin and Bank Rossiya, which the U.S. Treasury said was Russia's 17th largest.

Bank Rossiya was targeted to put Putin on notice Russia's financial sector was not immune, officials said.

Other than the bank, which the Treasury Department said also was used by senior Russian officials and whose shareholders included members of Putin's inner circle, all of the U.S. sanctions have targeted individuals rather than companies.

Since Putin's rule in Russia is highly personal, the aim is to put pressure on the coterie of people closest to him in terms of money and power, officials said.

To make an impact, "you've got to go in that political system to people around the president," the senior official said.

A Treasury Department spokesperson did not rule out further sanctions against entities, but said, "When sanctioning individuals, our focus remains on identifying their personal assets, not any businesses that they operate."

NEXT STEP WOULD BE DIFFICULT

U.S. officials believe any further rounds of sanctions will need to be even more carefully targeted to avoid a ban on an entire sector of the Russian economy, like oil or metals, that could reverberate through the global economy. Europe, for instance, remains dependent on Russian natural gas.

In an executive order on Thursday, Obama opened the door to targeting entities in specific sectors of the Russian economy, such as energy and gas, mining, and financial services. He has not yet used that tool.

Absent from the Thursday list were major Russian state-owned enterprises such as energy giants Gazprom and Rosneft, or the state-run arms export firm Rosoboronexport.

U.S. officials said Russian troops streaming into eastern and southern Ukraine, which have pro-Russian populations, might trigger additional sanctions. So might attempts by Moscow to undermine the Ukrainian government in Kiev or crack down on civilians, especially minorities, they said.

Fiona Hill of the Brookings Institution think tank in Washington, believes that broad, tough sanctions would be the only way to get Putin's attention.

"To really have any kind of impact, the sanctions have to be akin to the kinds of sanctions we've applied against Iran, they have to be all-encompassing and they have to get right to the heart of the economy," she said.

Russia is counting on the U.S. holding fire, said Hill, a former U.S. National Intelligence officer for Russia and Eurasia.

"I think there's been a calculation on the Russian side that we wouldn't go too far, because it puts a pall on the business environment," she added.

Some U.S. officials are more optimistic and believe there is some evidence Putin wants a truce and is signaling he will not retaliate for the latest U.S. moves. But whether that is a temporary pause in the crisis is unclear.

(Editing by Alistair Bell and Peter Henderson)

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