Deputy Assistant Secretary Peter Harrell
Counter Threat Finance and Sanctions
Bureau of Economic and Business Affairs
November 5, 2014
Deputy Assistant Secretary Harrell: Let me first say that I really appreciate the chance to be here in Hanoi yesterday and today to talk with the Vietnamese government about a variety of issues including Russia and our policy towards Russia.
I’ve been out here to Asia a couple of times since the summer consulting on behalf of the American government with our partners in this region including in Japan, in Korea, and in Singapore. This [Russia] is an important player in this region, and as we think about our own strategy and our own policies with respect to Russia it’s important for us to be able to have open discussions with our partners here in this region as well as in Europe to exchange views and share perspectives. So I should begin by just saying how much I appreciated the chance to be here in Hanoi to talk with the Vietnamese government today as we’ve talked with other governments here in Asia over the last couple of months.
What we have done with respect to sanctions on Russia really is one piece of our response to Russia’s territorial aggression in Ukraine. It was not our goal a year ago to put sanctions or pressure on Russia. In fact President Obama’s administration is an administration that wanted to pursue a reset policy with Russia, improve relations with Russia. And we endeavored in a number of different ways to try to do that.
But at the beginning of this year, in February and March when Russia began first to occupy and then to illegally annex the Crimean Peninsula, southern Ukraine, and then to provide people, weapons, and other support to pro-Russian separatists in Eastern Ukraine in violation of Ukraine’s territorial sovereignty, clearly we in the United States joined by our allies in Europe and around the world needed to show Russia the international community would stand united against that kind of territorial aggression, and that Russia would face consequences for that kind of territorial aggression.
VietnamNet: I will go right to the questions.
So the U.S. and EU have decided to expand the sanctions and impose tighter sanctions against Russia. So, could you say to us how fast these sanctions may go?
Deputy Assistant Secretary Harrell: As you mentioned, the United States and the European Union, but I should say it’s not only the United States and the European Union (but other nations), who have imposed several rounds of sanctions on Russia over the course of this year. Obviously the United States and the European Union are important allies in this, but Canada, Australia, Japan, Switzerland, Norway and other countries have also imposed sanctions on Russia in response to its aggression.
Whether we escalate our sanctions further really is in the hands of Russian President Vladimir Putin. What we have done has been in response to Russia’s territorial aggression, and if Russia continues that territorial aggression, if Russia increases its aggressive activities in Eastern Ukraine, we and our allies may go further and increase the costs on Russia, including through additional sanctions.
How far we go really is with President Putin. It’s not our goal to put sanctions on Russia for the sake of putting sanctions on Russia, but unless President Putin de-escalates the situation, unless he takes steps to comply with the ceasefire that he agreed to in September with the Ukrainians, and if he continues to escalate the situation, there may be further sanctions.
Conversely, if President Putin does de-escalate, if he complies with the ceasefire of Minsk and otherwise de-escalates the situation in eastern Ukraine, we and our allies would be prepared to roll back some of the sanctions. It really is with President Putin where this is headed.
VietnamNet: But many observers and even the politicians in the EU question the effectiveness of economic sanctions in influencing Putin’s attitude towards Ukraine and so what do you think about these concerns?
Deputy Assistant Secretary Harrell: I think we, the United States, and I think our European allies, disagree with your assessment. From our assessment, the sanctions are having a significant impact on the Russian budget and on the Russian economy. It seems likely that we’re going to see more than $100 billion of capital out-flows from Russia this year. The ruble’s down some 20 percent. The Russian Central Bank has had to spend tens of billions of dollars shoring up the value of the ruble in order to manage the impact of the sanctions, and we’ve seen major Russian companies like [Rusnet], the Russian energy company, say that they are frozen out of international financial markets and turning to the Russian government for bailouts. So I think we’re seeing very clearly some significant economic impact and fiscal impact on the Russian government as a result of these sanctions, and we think the economic costs are going to increase the longer this lasts.
We do also think that this is having an impact on Russia’s strategic calculus. We do think it is impacting President Putin’s calculus. I think that he has been particularly struck by the fact this is not only an American endeavor, but this is one where the European Union and our other allies have acted very closely with us. The international community is united on this issue.
I think we are influencing his calculus and we are prepared with our allies to increase costs further should he not change his calculus.
VietnamNet: Many say that Putin is unpredictable. And even under huge international pressure, he annexed Crimea in Ukraine, right? So how has Putin’s reaction affected the U.S. calculation about imposing economic sanctions?
Deputy Assistant Secretary Harrell: Look, we have obviously seen Russia engage in a series of aggressive moves in Eastern Ukraine over some months. We have steadily escalated the cost to him and to Russia as he has taken those moves, and we’re committed to doing so further.
I do think what we have done is having a real cost on Russia. I think those costs are growing. And we certainly hope that he will change course before these costs grow even greater.
VietnamNet: Politically, we see that Putin’s popularity has not been affected. Can you comment on the way in which he uses the nationalist card to promote himself as the guardian of the state and encourage suspicion of the West?
Deputy Assistant Secretary Harrell: I think we’ve seen major Russian companies and Russian officials express concern publicly about the costs of the sanctions. I think there is a growing awareness on the part of Russians that unless the Russian government changes course in Ukraine those costs will grow. So I think that the Russian private sector and the Russian people are beginning to understand the costs Russia will bear if it does not change course in Eastern Ukraine. And as I say, certainly a number of prominent Russian businesses as well as some in the Russian government are beginning to express publicly their concerns about the course of aggression in Eastern Ukraine.
VietnamNet: Regarding economic sanctions, can you comment on their effects on U.S. and EU companies that have a business relationship with Russia?
Deputy Assistant Secretary Harrell: That’s an excellent question. I’ve talked to a bunch of U.S. and European companies about this issue and it’s very clear that our sanctions on Russia have had some costs to some U.S. and European companies. As we’ve designed our sanctions on Russia with our allies, we have taken care to impose sanctions where the costs on Russia are many times greater than the costs on us and our allies, and I think we’ve hit that. I think if you look at the very significant macro-economic and economic costs to Russia of these sanctions compared to the countervailing costs on us and our allies, you’ll see the effect really is much much higher on Russia than it is for us.
What I tend to talk about when I talk to American companies or European companies affected by this, and those can be — Those are real issues for our companies. But what I explain to our companies is that they need an international order, a set of international set of rules and norms that protect things like territorial integrity. And in the long run the cost to our businesses, the cost to European businesses, the cost to businesses here in Asia, will be much greater if we do not robustly enforce the international law and rules around protecting the sovereignty of all states. I think businesses understand this when they think about it in the bigger picture. Although there are costs, the costs to Russia have been much higher and that we all benefit very, very significantly from enforcing the rules around territorial integrity and the sovereignty of nation states.
VietnamNet: Can you comment on the problems that the sanctions have posed for small farmers who don’t have the same kind of power and voice of large companies in dealing with U.S. and EU politicians? How can they be protected?
Deputy Assistant Secretary Harrell: One of the things Russia did in retaliation for the European and U.S. sanctions is prohibited the import of a variety of food items from Europe, from the United States to Russia. This was a Russian decision. It was a Russian retaliation decision. Not ours. We’re not interested in cutting off food sales to Russia from the United States. This was a Russian retaliation.
Look, I think that is actually something, the EU governments that I’ve talked with in particular are quite concerned about and they’re working very closely with their farmers, including small and mid-sized farmers, to find other markets.
We’ve also, from an American perspective, been talking with our farmers about alternative markets. We don’t think it’s appropriate for Russia to be prohibiting the import of food for the Russian people from countries around the world.
VietnamNet: You’ve met with members of the Government of Vietnam as well as members of the Vietnamese business community. What are their thoughts about U.S. economic sanctions?
Deputy Assistant Secretary Harrell: Well, my discussion here was really part of the comprehensive partnership that exists today between the U.S. and Vietnam. It’s important to us that we discuss issues of global importance with all of our allies. And so, just as I spoke with our partners in Japan, Korea and Singapore, and as we’ve been out talking with other countries in this region, I wanted to take the opportunity to come to Vietnam to talk with your government and also to discuss these issues directly with the private sector, which I also did elsewhere in Asia and have done in Europe. Sanctions are a complicated issue for private sector companies. And they’re growing more complicated, frankly. And recognizing that, we from the American government want to make sure that we have an opportunity to talk with companies as well as governments about what we’ve done, to explain why we’ve done what we’ve done, to answer questions both about the underlying policy and where we might be headed, and also to answer technical questions from the private sector.
So I think it was a very good exchange of views. It was a chance for us to talk with your government about why we’ve imposed costs on Russia, about what kinds of impacts we think this is having, and a chance to talk with some of your companies here to answer questions that they may have as well as to discuss with them about where we’re coming from.
VietnamNet: So in your view how will the economic sanctions affect the Vietnamese companies who have businesses in Russia?
Deputy Assistant Secretary Harrell: I think how sanctions are going to affect any given company, whether it is here in Vietnam or in the United States, really is going to depend on the specific company’s interests in Russia.
When we designed the sanctions on Russia, we made them targeted. We’ve made them targeted against certain sectors and we’ve made them targeted against only specific aspects of those sectors. That really is the goal, of having very large costs on Russia relative to the costs on companies around the world, including here in Vietnam.
I do think for companies that are working with Russian banks, there are certain Russian banks that are on our sanctions list. They’re greater risks and we talked some about that. I think it’s useful for banks to be aware of what some of those risks are so that they can factor them into their business decisions.
Likewise, for the energy sector of Russia. We’ve been very careful with the energy sector in terms of how we designed our sanctions to focus only on specific discreet aspects of the Russian energy sector — like Arctic production and deep water production in Russia — not to broadly target the Russian energy sector. And we had a chance to discuss some of those steps as well. But certainly if there are companies anywhere in the world that are dealing with the Russian Arctic oil sector or other unconventional parts of the Russian energy sector, there are some risks and complications to that too. But again, that’s in a targeted kind of way.
VietnamNet: How about weapons. We know Russia was very is a big weapons provider and that Vietnam has a contract to buy arms from Russia.
Deputy Assistant Secretary Harrell: With respect to the arms sector in Russia, just another sector we’ve targeted, we’ve really done two different things. One is we’ve taken a number of Russian defense companies and we’ve put them on our sanctions list, as has the European Union. Our allies have done the same. We have also, along with our allies, prohibited exporting to Russia a number of dual-use goods, the kinds of technologies that the Russian military could use to modernize its military equipment.
I wanted a chance to explain the Russian defense sector sanctions to your government as part of our comprehensive overview. Clearly U.S. companies and U.S. banks can’t be involved in any of the transactions with sanctioned Russian defense companies any more and U.S. companies can’t provide the dual-use equipment, nor can EU companies, to the Russian defense sector anymore.
I think the risks associated with doing business with the Russian defense sector for companies around the world are increasing. Again, it’s because of what Russia’s doing in Eastern Ukraine because of its territorial aggression.
VietnamNet: So in Vietnam we are more attentive to unexpected outcomes of economic sanctions. For example, we see China as the main beneficiary of the economic sanctions because, in addition to the giant gas deal with Russia, it has now sealed a weapons deal. This causes concerns among Vietnamese and in the region. Is the United States making China stronger and giving them a chance to upgrade their military capabilities?
Deputy Assistant Secretary Harrell: We have been very clear with our partners in this region, whether it’s Japan, Korea or Singapore about these issues with China. The European Union and the United States do not think that companies here in Asia should be stepping in to do the kinds of work that companies in the U.S. and Europe can’t do.
We think it’s important — There’s a lot of trade that remains completely permissible with Russia for United States companies, for European companies, and others. Most trade in fact remains permissible. But where we have imposed sanctions, we are strongly discouraging companies elsewhere in the world from coming in to backfill, as we call it, that kind of business with Russia.
With respect to China and Russia, I think that in some ways if you look at, for example, the gas deal between China and Russia that’s been announced, we’ve seen in the press all the reports that Russia had to agree to a much lower price than it wanted. So we actually think that’s another example of the sanctions having worked because they have forced Russia into a situation where it’s having to agree, over a very long term, to take prices that it had not wanted to agree to.
In terms of the broader issue of China and Russia and the relationship there, that’s one of the reasons we’ve been out to Asia over the last month. We want to understand the regional perspectives and be able to have an exchange of views about how we see, how our partners in this region, see Russia and Russia’s role here in this region. So we’ve had a good exchange of views with countries across this region about that.
VietnamNet: How do they see Russia?
Deputy Assistant Secretary Harrell: I think there are different perspectives on that. I obviously don’t want to comment on private conversations that a particular government might have had with us.
VietnamNet: The economic sanctions have had some complicated political implications. We are concerned that China and Russia may form a political and strategic alliance. After keeping neutral for years, Russia has voiced its support for China’s position in the South China Sea dispute. What is your response?
Deputy Assistant Secretary Harrell: There are some issues that I have discussed with your government and others about which I am not going to comment for the press.
I will say is I think this trip to Vietnam, as well as my other recent travels in this region, have really helped us understand different governments’ perspectives and that has been really valuable for us as we think about our own policies here in this region with respect to Russia. But I’m not going to comment in detail.
VietnamNet: Given that the United States is pulled in many directions, there are questions about its visibility and reliability in the region. What would you like to say about the rebalance?
Deputy Assistant Secretary Harrell: I think that’s a great question. I think, as you note, the United States is very committed to Asia. We’re very committed to North Asia; we’re very committed to Southeast Asia. We’re very committed to positioning ourselves out here across this region and across a wide variety of issues.
Obviously, we along with Vietnam and many other countries are very focused on the TPP as a central part of our trade agenda. We are working to deepen our bilateral economic and diplomatic ties across this region. And indeed, I think a lot of our outreach on Russia here in this region reflects our commitment to the rebalance.
We want to talk about Russia and Ukraine not only with our partners in Europe who are obviously having a lot of conversations. But, with respect to this region where Russia is an important player, it’s important as we rebalance to come out here and talk with key governments in this region about it. So I actually think that part of the rebalance to this region is increasing our diplomatic engagement and our discussions here in Asia about global problems and not only about the issues here in this region.
Clearly, there’s a lot going on in the Middle East right now. Clearly there’s a lot going on in Ukraine and elsewhere. But I think that when you look at where we are investing our diplomatic resources, where we’re focused on the trade front, where we are focused on deepening our bilateral and multilateral military exchanges and other kinds of engagement, I think you will continue to see our engagement out here. I think that the Asian summits this month will be a great opportunity for our leadership in the United States to continue discussions here about the full range of issues in East Asia.
The U.S. is fortunate that we’re a big country. We have a large State Department, a large government, and we’re fortunate that we are able to invest very significant resources out here even as we manage crises in the Middle East and in Eastern Europe.
Again, part of the rebalance is coming out here to talk about these issues that are happening elsewhere in the world. It reflects our commitment to hearing the views and perspectives here, to sharing our views and perspectives with folks out here.
VietnamNet: Let’s get back to the sanctions. You said that the United States does not want other countries to play a backfill role. So, how do you enforce that with giant Chinese companies that are willing to replace U.S. companies?
Deputy Assistant Secretary Harrell: Look, first of all again, we’ve designed these sanctions to be targeted, so we’re not trying to focus on ordinary trade. We’ve targeted a few different specific areas, and that means that there are fewer areas of backfill that we have to worry about because, again, these are targeted areas.
Our goal is to build a very strong multilateral coalition for this, to talk early and often both with governments and with the private sector around the world to talk about what we’re doing, what we’re seeing, to make sure the governments and the private sector understand what we’ve done so that we don’t get in a situation where a company may be backfilling something.
Our strategy on that is engagement, including with Beijing. We’ve sent people to China, including just a couple of weeks ago. That also includes engagement directly with companies here in Asia as well. And I think that’s a dialogue we’re going to continue.
Let me comment on a couple of specific issues. Take for example our energy sanctions on specific aspects of Russian energy technology. Those areas in the Arctic and the deep water, those are things that actually only a small number of companies have. So they’re not technologies that Russia can just buy from any energy company around the world. They’re limited to a couple of companies. Again, that’s an area where, in the design of the sanctions because of the technologies we’ve targeted, it’s going to be quite hard for the Russians to go and find some other supplier. The other suppliers just don’t have that technology.
VietnamNet: Do you strongly believe that economic sanctions are enough to force President Putin to de-escalate in Eastern Ukraine? Has the United States considered other measures?
Deputy Assistant Secretary Harrell: That’s a great question. Sanctions are always only one tool to help us achieve a strategy. Sanctions aren’t going to work if they’re our only strategy. And that’s what we’ve done here. Sanctions are an important tool in our tool kit, but they are by no means the whole strategy.
We, along with our allies, have put significant diplomatic pressure on Russia over the course of this year, the most prominent example obviously being taking the G8 back down to the G7. But there has been a wide variety of steps we’ve taken that put diplomatic pressure on Russia.
Obviously there are the sanctions. We’ve also sent military forces to our NATO allies in Eastern Europe to help reassure our NATO allies in the Baltics, Poland and elsewhere that we will stand with our NATO allies. We have a very engaged diplomatic strategy, particularly with the European Union, where they are talking both with the Russians and with the Ukrainians to try to help broker a diplomatic solution. There’s a diplomatic element to help mediate and resolve the conflict.
So, sanctions are only one piece of what we see as a multi-part diplomacy, economic pressure, engagement and mediation of the conflict itself. It is a comprehensive strategy to try to reach a resolution where Russia respects the sovereignty and territorial integrity of Ukraine.
VietnamNet: Thank you so much.
Deputy Assistant Secretary Harrell: Thank you. I really appreciate the opportunity to talk with you.