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Originally published March 3, 2014 at 4:56 PM | Page modified March 3, 2014 at 11:46 PM

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Sanctions threat grows as Ukraine tensions rise

Fears of a tit-for-tat campaign of economic sanctions between Russia and Western powers over Ukraine ratcheted up Monday, with concerns largely centering on Russia's supplies of natural gas to Europe.


Associated Press

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LONDON —

Fears of a tit-for-tat campaign of economic sanctions between Russia and Western powers over Ukraine ratcheted up Monday, with concerns largely centering on Russia's supplies of natural gas to Europe.

But with the situation in Ukraine still fluid, it's not clear how far either side is willing to go. While the European Union is by far the biggest consumer of Russian gas, any disruption would come at huge financial cost to Moscow.

"The world now faces a new round of geopolitical tension with potentially very high stakes," said Jane Foley, an analyst at Rabobank International.

Over the past couple of days, the crisis has ratcheted up sharply. With Ukraine accusing Russia of declaring war by taking control of the Crimea region, investors around the world took fright on Monday, sending stock indexes lower and energy and staple foods higher.

Even if military conflict does not break out, Western powers are looking at how they can punish Russia for what they consider to be a breach of international law.

U.S. Secretary of State John Kerry warned Russian President Vladimir Putin that he may "find himself with asset freezes on Russian business." European foreign ministers meeting in Brussels were considering economic sanctions, but have yet to commit to anything concrete. Some have suggested boycotting the Group of Eight summit of leaders in the Olympic host city of Sochi this summer.

The biggest economic risk revolves around Russia's supply of natural gas. Many eastern European countries rely almost entirely on those imports and even Germany, Europe's largest economy, gets 35 percent of its supplies from Russia. Gazprom, the Russian energy giant, has threatened to end a cheap deal on gas it sells to Ukraine, and claimed it is owed around $1.55 billion.

"No wonder Europe's response to the on-going problems has been little more than a wag of the finger at this stage," said Kathleen Brooks, market analyst at Forex.com. "We will have to wait and see if the EU merely looks the other way when it comes to Russian-Ukrainian problems and leaves the diplomatic response to the U.S. and U.K. as they try and protect their energy supplies."

But cutting gas supplies or raising their prices would be a dangerous game for Russia as well, whose economy relies heavily on energy exports -- shares in Gazpom, the Russian energy giant, plunged 14 percent on Monday.

Gazprom's retreat was a large reason why Moscow's RTS stock index slid 12 percent while the dollar spiked to an all-time high of 37 rubles. That prompted the country's central bank to make an emergency interest rate increase, by 1.5 percentage points to 7 percent. Though it didn't mention Ukraine as a motivation for the increase, the move is clearly an attempt by the Russian authorities to stem the financial outflows and support the currency.

European officials suggested Russia had more to lose in the case of an exchange of economic sanctions.

"Those consequences will be bad for everyone, but for Russia they will be far worse than for the EU," said Dutch Foreign Minister Frans Timmermans, adding it would not be wise to threaten sanctions now.

The EU is Russia's biggest trading partner, and Russia is the EU's third-largest partner with imports predominantly raw materials such as oil and gas, according to the EU Commission. Russian exports to the EU totaled 213 billion euros ($293 billion at current prices) in 2012, with imports from the EU at about 123 billion euros.

Russia is the largest oil, gas, uranium and coal exporter to the EU. Gazprom exported 133 billion cubic meters of gas to the European Union in 2013. Almost half of this amount -- 65 billion cubic meters-- was transported through pipelines on Ukrainian soil. Germany is Russia's single-biggest client, gobbling up some 40 billion cubic meters alone, according to Gazprom statistics.

Given Russia's dependence on European markets, there are hopes that cool heads will prevail.

"Moscow will likely keep such disruptions to a minimum under almost all circumstances," said Holger Schmieding, chief economist at Berenberg Bank.

Fears also grew that trade of basic agricultural products will be impacted by the crisis. Wheat futures, for example, were up over 5 percent, while corn futures spiked more than 2 percent.

Some experts suggest that instead of wide-ranging sanctions on industries, western powers might prefer more focused ones on individuals. Russians are huge investors outside their country. They store deposits in banks in Cyprus, control companies in the Netherlands and own property in many western capitals, notably in London. Penalties on those activities could be most effective.

"That would upset a lot of London estate agents," said Louise Cooper, an analyst at CooperCity.

One part of Europe that is likely to suffer anyway is Ukraine, which is hanging in limbo. The country's currency has in recent days hit a record low and the economy is estimated to be sliding into recession. The government estimates it needs $35 billion in international rescue loans over the next two years.

Ukraine's richest man, Rinat Akhmetov, has thrown his support behind the new government that wants Russia to end its control of Crimea.

"I call upon all my fellow citizens to unity for the sake of a whole and undivided Ukraine ... Our strength is in the solidarity of business, government and society," said Akhmetov. His company alone employs 300,000 people.

___

Juergen Baetz in Brussels contributed to this report.



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