(Bloomberg) — The U.S. and Europe unveiled a limited range of sanctions in response to Russia’s latest escalation over Ukraine, with Germany going the furthest by opting to halt the Nord Stream 2 pipeline’s certification process following President Vladimir Putin’s decision to send troops to two self-proclaimed separatist republics.
German Chancellor Olaf Scholz, who held a call with Putin late on Monday, said that the Russian leader’s recognition of the breakaway republics in eastern Ukraine had materially changed the situation so that “no certification of the pipeline can happen right now.” Without it, he told reporters in Berlin, the gas pipeline from Russia to Germany “cannot go into operation.”
White House press secretary Jen Psaki welcomed the decision, saying that the U.S. would follow up with its own measures later on Tuesday. Still, halting the pipeline looks like the most significant response of an initial wave of penalties that stopped short of more painful measures.
Nord Stream 2 is a priority project for Putin that he has personally pushed from its inception. The decision to put it into limbo demonstrates Germany’s determination to shoulder the economic cost of holding Putin to account for his actions, which effectively tear up years of diplomatic efforts spearheaded by Berlin to bring peace to eastern Ukraine.
European natural gas prices resumed their advance and benchmark Brent crude oil was up about 2% after Scholz spoke. Markets were more sanguine about the other measures, with Russia’s benchmark MOEX index paring a steep decline to trade about 1.9% lower and the ruble up 0.7% as of about 2:30 p.m. in Berlin.
Russia gave no details on how many “peacekeeping” troops might go into the breakaway regions of Donetsk and Luhansk. The U.S. and its allies continue to warn Moscow could soon start a full-scale invasion, something that Russia denies. Treaties Putin signed with separatist leaders Monday allow Russia to deploy forces and build military bases on their territory.
The Kremlin move raised the stakes with the West but so far falls short of the massive invasion of large areas of Ukrainian territory that U.S. and other officials have said is possible.
At the same time, more than 150,000 Russian troops remain massed near Ukraine’s borders, according to Western estimates. A senior U.S. official said Russia is continuing to prepare for military action that could occur in the coming hours or days. A key unknown is whether Russian “peacekeepers” would stop at the line of contact between separatists and the Ukrainian military.
Putin’s spokesman, Dmitry Peskov, maintained ambiguity, saying that Russia recognizes the separatists’ “declared” borders. The breakaway areas control only 30% of the territory that used to be part of the Luhansk and Donetsk Oblasts in Ukraine. The Kremlin wants to continue talks with Western countries, Peskov told reporters on a conference call Tuesday.
“Russia won’t calm down,” said Alexei Chesnakov, a former senior Kremlin official and adviser on Ukrainian policy. “It wants iron-clad guarantees that Ukraine won’t join NATO and as long as it doesn’t get these guarantees, the possibility of escalation will remain permanently on the table.”
President Joe Biden issued an executive order prohibiting U.S. investment, trade, and financing to separatist regions of Ukraine. Prime Minister Boris Johnson said the U.K. would target five banks — all of them already subject to U.S. sanctions — and freeze the assets of three individuals.
The European Union is looking at more sweeping measures that include restrictions on Russian government access to EU capital and financial markets and services, although the process will need to be confirmed by member states.
For the moment, western officials indicated that Russia’s recognition wasn’t a dramatic enough step to prompt the severe economic sanctions threatened in case of a full-scale invasion.
“It’s not yet the invasion our partners have been talking about,” Lithuanian Foreign Minister Gabrielius Landsbergis told reporters in Paris. “But it’s a very steep escalation of the situation.”
Russian legislators voted on Tuesday to ratify the treaties with the separatists, opening the way for more open support for the enclaves Russia’s backed since their foundation. Putin’s decision to recognize them effectively torpedoes years of diplomatic efforts to implement a peace accord to resolve a conflict that has killed 14,000 since Russia-backed separatists seized control of the two areas in 2014.
Russia’s latest move generated condemnation from the U.S., EU and nearly all representatives of the United Nations Security Council who spoke on Monday night. China’s ambassador to the UN, Zhang Jun, called on all sides to exercise restraint.
The U.S. said the White House was still open to a meeting between Biden and Putin — predicated on Russia not proceeding with an attack. Secretary of State Antony Blinken is scheduled to meet with Foreign Minister Sergei Lavrov in Geneva Thursday to discuss the crisis.
Russia doesn’t currently plan any military deployment beyond the existing borders of Ukrainian breakaway areas it’s recognized, according to a political expert close to the Kremlin.
“The crisis can still be resolved,” said Alexei Mukhin, head of the Moscow-based Center for Political Information, which provides consultancy services for the presidential administration. Russia’s demands for a halt to NATO expansion and a pullback of the alliance from eastern and central Europe are just a starting-point for negotiations on security guarantees in the region, he said.
