Obama’s Stealth Sanctions Against Russia Are a Dirty Trick

These are fast times for Ukraine. The crisis over its future between East and West suddenly has more momentum and more chance of resolution than it has in many months. But it is newly fragile, too. A false move now could have us talking about Cold War II and Russian isolation all over again.

In quick succession at the end of last week, the Kiev government signed its contentious association treaty with the European Union; Moscow signaled that it could live with the pact; and rebellious militias in the east of the country agreed to extend a ceasefire in their smoldering war with the Ukraine military. Astutely, Brussels also announced that a new round of sanctions prepared in Washington would be held back.

Related: 12 Things You Didn’t Know About Ukraine

All good. Now the Obama administration needs to do its part. This means taking its trigger finger off the sanctions gun it insists on pointing at the Kremlin. As a threat to the peace process, Obama’s stance is rivaled only by the rambunctious militias in the eastern, Russian-tilted sections of Ukraine.

Brussels took the lead last week in deferring new sanctions against selected Russian individuals, including travel bans. This is as it should be, since Germans and other Western Europeans will pay the dearest price in a sanctions war that they appear to understand nobody can win.

In this context, Secretary of State Kerry’s assertion that he hid a fistful of tougher sanctions behind his back was an off-key miscalculation, probably not much more appreciated in Berlin or Brussels than in Moscow.

“It is critical for Russia to show in the next hours, literally, that they are moving to help disarm the separatists, to encourage them to disarm, to call on them to lay down their weapons and become part of a legitimate political process,” Kerry said after talks in Paris with Laurent Fabius, the French foreign minister.

Related: How Obama Lost Ukraine in a Few Stupid Steps

In a list of four demands, in truth there is only one, and Russian President Vladimir Putin has consistently exerted pressure on Ukrainian rebels at least since May, when he called on them to cancel two referendums on the eastern region’s status—which went ahead anyway. If there is more the Kremlin ought to do or stop doing, it is past time Washington, the allies, and Kiev explain—specifically, with evidence and without recourse to innuendo—what it is.

In effect, the Obama administration has created the same environment that arose as soon as the president and secretary of state announced last year that they would open talks with Iran on its nuclear program. The overhanging sanctions threat, now as then, does nothing for the prospects of success.

More visible than ever now in the financial markets, if not the news pages are what I called “silent sanctions” in this space some weeks ago. “The market is calling this campaign “stealth sanctions,” Business Insider now reports. “It is an attack on the international market for Russian corporations, and on the international currency and security clearance systems on which the market depends.”

This off-the-record game is dangerous, given the potentially disruptive consequences. It is a crude dismissal of all efforts Russia may make to a solution in Ukraine and—in plain English—a dirty trick on the Europeans.

Related: Why Germany and Poland Are Winners in the Ukraine Crisis

Evidence of stealth sanctions surfaced last month, when Lloyds Banking Group withdrew as lead manager of a loan worth $1.5 billion to $2 billion to finance BP’s purchases of crude and refined products from OAO Rosneft, the Russian oil giant. HSBC Holdings, another manager of the syndication, followed suit a day later.

Background: BP has a 20 percent stake in Rosneft, whose CEO, Igor Sechin, is a sanctions target. The two were forced in April to drop their debt target from $5 billion. Interestingly, the other two financing banks were Deutsche Bank and Bank of China—one German institution and one non-Western, neither of which backed out. Lloyds is part owned by the British government.

Japanese banks have since been reported to be standing back from lending to Russian companies. Ken Courtis, formerly Goldman Sachs’ vice-chairman in Asia and still a man with an acute ear to the ground, wrote me not long ago that two top Japanese banks just told him they were “for the moment pretty much out of the business of lending to Russian companies.”

Related: Obama Revokes Russian Trade Status

Same story in the bond markets. Russia had been canceling debt auctions for weeks before a recent rally, inspired by the ceasefire in Ukraine and Putin’s explicit support for a negotiated settlement. Now comes another fizzle and the return of more expensive spreads, reflecting the fragility of the ceasefire “and the continued threat of tougher economic sanctions,” Bloomberg just reported.

Now we have confirmation that the stealth campaign is officially inspired, at least in part. “In the New York and London markets,” John Hellmer reports in Business Insider, “brokers and bankers explain that they are being discreetly called by U.S. Treasury officials with this message: Buying Russian equity or debt paper is legal, but in the event there is a new round of sanctions, it will be illegal to re-sell them, so there can be no profit in Russian assets.”

Once again, bad judgment produces poor diplomacy. And that rally in Russian debt just now fading should tell the Obama administration something about undermining as a strategy: Russia is too wired into the global economy and too attractive as a business proposition for sanctions to hold, however much mess they may temporarily cause.