January 12, 2016 / 1:31 PM / 2 years ago

Sanctions impact on Russia to be longer term, U.S. says

BRUSSELS (Reuters) - Western sanctions on Moscow are intended to exert long-term pressure on Russia and not to push it “over the economic cliff,” a U.S. State Department official said on Tuesday.

EU and U.S. restrictions imposed on Moscow in 2014 over the Ukraine conflict shaved about 1.5 percent off Russian economic output in 2015, the official said, citing data from the International Monetary Fund.

The effect of falling world oil prices was far greater, said the official, who requested anonymity, meaning that Russia’s economy shrank 3.8 percent in 2015.

“The direct effect is pretty small ... at about 1 to 1.5 percent. It’s the indirect effect that’s larger,” the official said, adding that international companies previously considering 20-year investments in Russia were scaling back to five years.

“The sanctions are designed not to push Russia over the economic cliff,” the official, who was on a visit to Brussels, said. “That would be bad for the Russian people.”

Sanctions on Russia’s banking, energy and defense sectors, imposed from July 2014, are part of the West’s efforts to pressure Russia to help end the crisis in eastern Ukraine, which has killed more than 9,000 people since April 2014.

Russian President Vladimir Putin was quoted on Monday as telling Germany’s Bild newspaper that sanctions “are severely harming Russia”, although he also noted a bigger impact from global oil oversupply that is weakening energy prices.

With neither the West nor Russia able to resolve the Ukraine crisis so far, the European Union and the United States will keep economic sanctions on Russia until the end of July 2016.

That means Russian companies cannot borrow from the EU and the U.S. banks and on markets for more than 30 days, limiting oil producers such as Rosneft from raising funds for investment.

“From what we know and from my conversations with market participants, other countries are not bridging the gap,” the official said, although he added that China has offered some financing at higher rates and with shorter maturities.

Any lifting of sanctions on Russia is tied to the implementation of a peace deal on Ukraine which was negotiated by the leaders of France, Germany, Ukraine and Russia almost a year ago.

Editing by Richard Balmforth

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