More 'crushing' sanctions ahead for Russia in hard-hitting Senate bill — if it passes

Key Points
  • Following Washington's announcement of fresh sanctions on Russia for its alleged poisoning of Sergei Skripal, a raft of more sweeping and controversial measures from Congress may be on its way.
  • The Defending American Security from Kremlin Aggression Act of 2018 (DASKAA), spearheaded by Republican Senator Lindsey Graham, details broad sanctions on investments in Russian energy projects, Russian sovereign debt, and national banks.
  • Experts believe the bill will be more powerful than its predecessors, and could become law before the midterm elections.
A national flag flies above the headquarters of the Central Bank of the Russian Federation in Moscow.
Andrey Rudakov | Bloomberg | Getty Images

Following Washington's announcement of fresh sanctions on Russia for its alleged poisoning of an ex-spy in Britain, a raft of more sweeping and binding measures is in the pipeline — if they can be passed by Congress.

And several experts believe these measures are likely to push their way through to becoming law before the midterm elections.

On Wednesday, Russian newspaper Kommersant published the draft by U.S. senators of the Defending American Security from Kremlin Aggression Act of 2018 (DASKAA), which details broad sanctions on investments in Russian energy projects, Russian sovereign debt, oligarchs and national banks. The bill also calls for new protections for the NATO alliance and requires U.S. intelligence agencies to report President Vladimir Putin's personal wealth.

If passed, it would completely prevent American entities from purchasing Russian debt securities, sanction Russian state banks and potentially issue secondary sanctions on investing in the country's oil sector, something that would draw particular opposition from the European Union.

Sanctions experts have described the measures as "extreme" and "nuclear" as well as broad-based and more likely to be effective than previous efforts to deter Russian election interference.

While likely to be heavily debated and amended before going to a final vote, the measures detailed in the bill are expected to be a more powerful tool against Moscow.

"The document clearly shows the determination to go further than before in order to cause damage for Russia," Liza Ermolenko, emerging Europe economist at Barclays Plc, wrote in a client note Wednesday.

Previous sanctions have failed

Six senators — three Republicans and three Democrats — led by Republican Lindsey Graham penned the DASKAA legislation, which Graham described as intended to "impose crushing sanctions and other measures against Putin's Russia until he ceases and desists meddling in the U.S. electoral process, halts cyber-attacks on U.S. infrastructure, removes Russia from Ukraine, and ceases efforts to create chaos in Syria."

Graham also admitted that previous sanctions legislation had failed to prevent Russian election meddling, which national security officials say is currently targeting the 2018 midterm elections.

"If the bill restricts access to all Russian sovereign banks and commercial banks closely allied with the government or with oligarchs close to Vladimir Putin and his regime, that would be meaningful," said Evelyn Farkas, a former U.S. deputy assistant secretary of defense for Russia, Ukraine and Eurasia. "It would effectively put a whole slew of banks on a no-go list."

Russian ruble slumps after US announces fresh sanctions
Russian ruble slumps after US announces fresh sanctions

Energy sanctions will set up a fight

The most controversial area of DASKAA? Energy sanctions. It calls for sanctions "on transactions related to investment in energy projects supported by Russian state-owned or parastatal entities," which experts say is an issue for U.S. energy companies and will likely be actively lobbied against. Oil and gas comprise about 40 percent of Russian budget revenues.

Far-reaching energy sanctions could doom the bill to fail, said Brian O'Toole, senior vice president and the anti-money laundering executive for sanctions at BB&T Bank.

"I just don't see how we could credibly do that," O'Toole told CNBC via phone. "We could probably force U.S. companies to get out, but are we really going to go ahead and sanction [international oil companies] ENI and BP and Shell in Russia? That's not realistic." BP on its own has a 20 percent stake in Russian oil giant Rosneft.

But these measures are likely to be watered down or altered in order for the bill to succeed, O'Toole added, sharing the view among many commentators that the stipulations on Russian bonds will be what makes DASKAA most hard-hitting.

Worker at Vankor Field, operated by Russian national oil company Rosneft, in Igarka, Russia.
Stanislav Zalesov | Kommersant | Getty Images

"The bill includes strong and potentially effective sanctions, including on Russian sovereign debt, and closes a channel for corrupt Russian money flows by requiring disclosure of high-end real estate deals," said former U.S. Ambassador Dan Fried, who served as National Security Council senior director under Presidents Clinton and Bush and helped formulate NATO policy. "Its energy provisions are more problematic," he added, "but overall it is a good piece of work."

Wednesday saw Russia's currency fall on the news of separate sanctions from the executive branch over what the U.S. has determined to be its poisoning of ex-spy Sergei Skripal in the U.K. in March, charges the Kremlin strongly denies. The ruble fell to nearly two-year lows while Russian bonds fell across the curve, indicating market fears of what may be yet to come.

Moscow has shot back at the sanctions, calling them "illegal" and "draconian." The Kremlin has not yet specifically commented on DASKAA.

The backlash following President Donald Trump's controversial summit with Putin in Helsinki, Finland, where he appeared to accept the Russian president's denials of election meddling, has spurred some of this action.

Congress taking the lead

"This bill is the latest example of a more assertive congressional role in foreign policy prompted by concerns about some of the policy inclinations of President Trump," said John Herbst, Eurasia center director at the Atlantic Council. "At a minimum, it seeks to limit the president's ability to make undue concessions to the Kremlin or to weaken our NATO alliance."

With Congress currently in summer recess, the bill won't be voted on in both houses for a few weeks, and it's unclear whether the White House will support it. But as the bill's language reveals, the bipartisan appetite for an aggressive response to Russia is real.

The question now is which sanctions actions are likely to make it into law, and how extreme they will be, said Timothy Ash, senior emerging markets sovereign strategist at Bluebay Asset Management. He referenced Congress's April 6 sanctions, which took Russian markets by storm after hitting a number of targets in Putin's inner circle.

"The sheer momentum building behind these various bills means that it is becoming very likely something gets passed," he said. 

"We have to expect the unexpected, assume that no Russian entity [or] oligarch is necessarily untouchable, but that actions can be extreme and market-moving in Russia and beyond."