Russian President Vladimir Putin chairs a meeting of the Security Council in Moscow's Kremlin March 21, 2014. REUTERS/Alexei Druzhinin/RIA Novosti/Kremlin

By Timothy Heritage and Vladimir Soldatkin

MOSCOW (Reuters) - When President Vladimir Putin signed a treaty this week annexing Crimea to great fanfare in the Kremlin and anger in the West, a trusted lieutenant was making his way to Asia to shore up ties with Russia's eastern allies.

Forcing home the symbolism of his trip, Igor Sechin gathered media in Tokyo the next day to warn Western governments that more sanctions over Moscow's seizure of the Black Sea peninsula from Ukraine would be counter-productive.

The underlying message from the head of Russia's biggest oil company, Rosneft, was clear: If Europe and the United States isolate Russia, Moscow will look East for new business, energy deals, military contracts and political alliances.

The Holy Grail for Moscow is a natural gas supply deal with China that is apparently now close after years of negotiations. If it can be signed when Putin visits China in May, he will be able to hold it up to show that global power has shifted eastwards and he does not need the West.

"The worse Russia's relations are with the West, the closer Russia will want to be to China. If China supports you, no one can say you're isolated," said Vasily Kashin, a China expert at the Analysis of Strategies and Technologies (CAST) think thank.

Some of the signs are encouraging for Putin. Last Saturday China abstained in a U.N. Security Council vote on a draft resolution declaring invalid the referendum in which Crimea went on to back union with Russia.

Although China is nervous about referendums in restive regions of other countries which might serve as a precedent for Tibet and Taiwan, it has refused to criticize Moscow.

The support of Beijing is vital for Putin. Not only is China a fellow permanent member of the U.N. Security Council with whom Russia thinks alike, it is also the world's second biggest economy and it opposes the spread of Western-style democracy.

Little wonder, then, that Putin thanked China for its understanding over Ukraine in a Kremlin speech on Tuesday before signing the treaty claiming back Crimea, 60 years after it was handed to Ukraine by Soviet leader Nikita Khrushchev.

Chinese President Xi Jinping showed how much he values ties with Moscow, and Putin in particular, by making Russia his first foreign visit as China's leader last year and attending the opening of the Winter Olympics in Sochi last month.

Many Western leaders did not go to the Games after criticism of Russia's record on human rights. By contrast, when Putin and Xi discussed Ukraine by telephone on March 4, the Kremlin said their positions were "close".

A strong alliance would suit both countries as a counterbalance to the United States.

WARM EMBRACE, BUT NO BEAR HUG

But despite the positive signs from Beijing, Putin may find China's embrace is not quite the bear hug he would like.

There is still some wariness between Beijing and Moscow, who almost went to war over a border dispute in the 1960s, when Russia was part of the Communist Soviet Union.

State-owned Russian gas firm Gazprom hopes to pump 38 billion cubic meters (bcm) of natural gas per year to China from 2018 via the first pipeline between the world's largest producer of conventional gas to the largest consumer.

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Russian President Vladimir Putin (L) attends a business conference in Moscow March 20, 2014. REUTERS …

"May is in our plans," a Gazprom spokesman said, when asked about the timing of an agreement.

A company source said: "It would be logical to expect the deal during Putin's visit to China."

But the two sides are still wrangling over pricing and Russia's cooling relations with the West could make China toughen its stance. Russian industry sources say Beijing targets a lower price than Europe, where Gazprom generates around half of its revenues, pays.

Upheaval at China National Petroleum Corp, at the centre of a corruption investigation, could cause also delays, and Valery Nesterov, an analyst with Sberbank CIB in Moscow, said China also needs time to review its energy strategy and take into account shale gas and liquefied natural gas (LNG).

"The bottom line is that the threat of sanctions on energy supplies from Russia has indirectly strengthened China's position in the negotiations," Nesterov said.

BOOSTING BUSINESS

Russia meets almost a third of Europe's gas needs and supplies to the European Union and Turkey last year exceeded 162 bcm, a record high.

However, China overtook Germany as Russia's biggest buyer of crude oil this year thanks to Rosneft securing deals to boost eastward oil supplies via the East Siberia-Pacific Ocean pipeline and another crossing Kazakhstan.

If Russia is isolated by a new round of Western sanctions - those so far affect only a few officials' assets abroad and have not been aimed at companies - Russia and China could also step up cooperation in areas apart from energy.

CAST's Kashin said the prospects of Russia delivering Sukhoi SU-35 fighter jets to China, which has been under discussion since 2010, would grow.

China is very interested in investing in infrastructure, energy and commodities in Russia, and a decline in business with the West could force Moscow to drop some of its reservations about Chinese investment in strategic industries.

"With Western sanctions, the atmosphere could change quickly in favor of China," said Brian Zimbler Managing Partner of Morgan Lewis international law firm's Moscow office.

Russia-China trade turnover grew by 8.2 percent in 2013 to $8.1 billion but Russia was still only China's seventh largest export partner in 2013, and was not in the top 10 countries for imported goods. The EU is Russia's biggest trade partner, accounting for almost half of all its trade turnover.

DILEMMA FOR JAPAN, SUPPORT IN INDIA

Sechin, whose visit also included India, Vietnam and South Korea, is a close Putin ally who worked with him in the St Petersburg city authorities and then the Kremlin administration, before serving as a deputy prime minister.

In Tokyo, he offered Japanese investors more cooperation in the development of Russian oil and gas.

Rosneft already has some joint projects with companies from Japan, the world's largest consumer of LNG, and Tokyo has been working hard under Prime Minister Shinzo Abe to improve ties with Moscow, despite a territorial dispute dating from World War Two.

But Japan faces a dilemma over Crimea because it is under pressure to impose sanctions on Moscow as a member of the Group of Seven advanced economies.

It does not recognize the referendum on Crimea's union with Russia and has threatened to suspend talks on an investment pact and relaxation of visa requirements as part of sanctions.

Closer ties are being driven by mutual energy interests. Russia plans to at least double oil and gas flows to Asia in the next 20 years and Japan imports huge volumes of fossil fuel to replace lost energy from its nuclear power industry, shut down after the 2011 Fukushima disaster.

Oil imports from Russia rose almost 45 percent in 2013 and accounted for about 7 percent of supplies.

But if the dilemma is a tough one for Japan, it is unlikely to cause Putin much lost sleep.

"I don't think Putin is worried much by about what is said in Japan or even in Europe. He worries only about China," said Alexei Vlasov, head of the Information and Analytical Center on Social and Political Processes in the Post-Soviet Space.

Putin did take time, however, to thank one other country apart from China for its understanding over Ukraine and Crimea - saying India had shown "restraint and objectivity".

He also called Indian Prime Minister Manmohan Singh to discuss the crisis on Tuesday, suggesting there is room for Russia's ties with traditionally non-aligned India to flourish.

Although India has become the largest export market for U.S. arms, Russia remains a key defense supplier and relations are friendly, even if lacking a strong business and trade dimension, due to a strategic partnership dating to the Soviet era.

Putin's moves to assert Russian control over Crimea were seen very favorably in the Indian establishment, N. Ram, publisher of The Hindu newspaper, told Reuters. "Russia has legitimate interests," he added.

For Putin, the Crimea crisis offers a test case for ideas he set out in his foreign policy strategy published two years ago as he sought a six-year third term as president.

He said at the time he wanted stronger business ties with China to "catch the Chinese wind in the sails of our economy". But he also said Russia must be "part of the greater world" and added: "We do not wish to and cannot isolate ourselves."

Two years on, he is closer to securing the first goal, but it is not yet clear how his population feels he has done on the second.

(Additional reporting by William Mallard, Aaron Sheldrick and Linda Sieg in Tokyo, Ben Blanchard in Beijing, Jack Frank Daniel and Douglas Busvine in New Delhi, and Lidia Kelly in Moscow; editing by Philippa Fletcher)

He may not take shirtless horseback rides across the steppes, or have a black belt in judo, but on Thursday, President Obama sent a message to Russian president Vladimir Putin about strength. Specifically, economic strength.

The message was this: Whenever I decide to, I can pick up a pen, and kill a significant financial institution in your country.

Related: Does Putin Want to Carve Up Ukraine and Take the Spoils?

Obama’s victim was the St. Petersburg-based Bank Rossiya.

In response to Russia’s takeover of the Ukraine’s Crimean peninsula, Obama yesterday authorized the Treasury Department to add 20 members of Putin’s inner circle, as well as Bank Rossiya, to the Office of Foreign Asset Control’s list of “specially designated nationals.”

The designation makes the individuals named ineligible to do business with U.S. financial institutions, which is likely a major personal inconvenience. But for Bank Rossiya, the designation is something like the kiss of death.

Bank Rossiya is not the largest bank in Russia by a long shot, but its significance lies in its clientele rather than its size. In announcing the sanctions, the Treasury Department noted that Bank Rossiya “is the personal bank for senior officials of the Russian Federation” including members of the Ozero Dacha Cooperative, an exclusive community where members of Putin’s inner circle live. In addition, it provides financial services to the single largest segment of the Russian economy – the oil, gas, and energy sector.

Essentially, this is a credit union for oligarchs, with a side business in financing the Russian energy industry. Its customers include many more high-profile Russians than just those named in the Treasury statement. As of Thursday it is, for all intents and purposes, out of business.

Related: How Vladimir Putin Is remaking a New World Order

If account holders want to do any kind of business at all short of paying their utility bills and using Russian ATMs, they are going to need to go elsewhere, said experts.

“They’ve got to go to another bank,” said Lester M. Joseph, former principal deputy chief of the Department of Justice’s Asset Forfeiture and Money Laundering section. “That bank is pretty much a pariah.”

Currently the international investigations manager at Wells Fargo Bank, Joseph said when heard about the sanctions on Bank Rossiya, the first thing he did was check to see if it was a customer of his institution. “It is not, thankfully,” he said.

The impact doesn’t stop there, Joseph explained. His next step, which is ongoing, is to see if any banks that Wells Fargo has relationships with are also doing business with Bank Rossiya, and to make sure that none of those banks are routing transactions from the Russian bank through Wells Fargo’s system. “If a transaction from that bank is coming from another bank, we would have to block it,” he said.

Related: IMF Now Divides Congress Over Support of Ukraine

Joseph said that every other bank in the U.S. is – or ought to be – doing exactly the same thing.

Considering the volume of international wire transfers that flow through the systems of U.S. banks, he said, this essentially shuts down Bank Rossiya’s access to a huge portion of the worldwide banking system.

As one U.S. official told Reuters, Bank Rossiya will be “frozen out of the dollar.”

And it only gets worse.

Even if governments in other countries don’t join the U.S. in sanctions against Bank Rossiya, their bankers will have a very strong incentive to stop doing business with the Russian bank if they have any ties at all to U.S. institutions – which virtually all significant international banks do.

Related: Russia’s Provocative New Act of Aggression in Ukraine

“If they are doing business with that bank, and they are also doing business in the United States, if something slips through,” then suddenly they’re facing U.S. regulatory action, said Robert Rowe, vice president and senior counsel for the American Bankers Association. International wire traffic is voluminous and largely automated, he said, making it easier for an international bank to simply stop doing business with Bank Rossiya rather than trying to route transactions associated with it away from the U.S.

Rowe said this would affect not only individuals who do their banking at Bank Rossiya, but perhaps more importantly, the oil and gas companies that arrange their trade financing through the bank.

“That’s where it’s going to have an impact,” said Rowe.

Banking experts said that one of the uncertainties surrounding yesterday’s move is how Russia will respond. The Russian government immediately released a widely mocked list of U.S. officials whom it said would be blocked from doing business in Russia.

Related: Confusion Reigns Over Path Forward in Crimea

Politicians named on the list rushed to Twitter to boast about being sanctioned and to leave sarcastic comments about being forced to forgo vacations in Siberia.

However, according to John Byrne, executive vice president of the Association of Certified Anti-Money Laundering Specialists – a trade group for bankers and law enforcement professionals who deal with issues including OFAC compliance – that’s likely not the end of it.

“There’s no question these sanctions are an appropriate and effective national security tool,

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he said, “but this is a country that can fight back.”

How Russia reacts to the sanctions, Byrne said, will be closely watched by the financial community. And that reaction is by no means predictable. In general, major industrialized countries don’t try to shut down each other’s financial institutions without evidence of blatant illegal activity – which does not appear to exist in the case of Bank Rossiya.

“This is a new thing,” said Joseph. “It’s not a rogue bank. It’s a bank in a country where we do a lot of business. It’s not involved in a criminal case.” Compared to other actions by past administrations, he said, “It’s much more complex.”

Obama's one move cripples Russian bank

The president sends Vladimir Putin a powerful message by targeting this institution for its key clientele.
Why it's 'a pariah' now

Israel steps up talk of threat of force on Iran

JERUSALEM (AP) — A rising chorus of Israeli voices is again raising the possibility of carrying out a military strike on Iran's nuclear facilities in what appears to be an attempt to draw renewed attention to Tehran's atomic program — and Israel's unhappiness with international negotiations with the Iranians.

In recent days, a series of newspaper reports and comments by top defense officials have signaled that the military option remains very much on the table. While Israeli officials say Israel never shelved the possibility of attacking, the heightened rhetoric marks a departure from Israel's subdued approach since six world powers opened negotiations with Iran last November.

Prime Minister Benjamin Netanyahu has been an outspoken critic of the international efforts to negotiate a deal with Iran. He has spent years warning the world against the dangers of a nuclear-armed Iran and fears a final deal will leave much of Iran's nuclear capabilities intact.

But since the global powers reached an interim agreement with Iran last November, Netanyahu's warnings about Iran have been largely ignored. A frustrated Israeli leadership now appears to be ratcheting up the pressure on the international community to take a tough position in its negotiations with Iran.

A front-page headline in the daily Haaretz on Thursday proclaimed that Netanyahu has ordered "to prep for strike on Iran in 2014" and has allocated 10 billion shekels (2.87 billion dollars) for the groundwork. Earlier this week, Defense Minister Moshe Yaalon hinted that Israel would have to pursue a military strike on its own, with the U.S. having chosen the path of negotiations. And the military chief, Lt. Gen. Benny Gantz, said this week that Iran "is not in an area that is out of the military's range."

An Israeli military strike would be extremely difficult to pull off, both for logistical and political reasons. Any mission would likely require sending Israeli warplanes into hostile airspace, and it remains unclear how much damage Israel could inflict on a program that is scattered and hidden deep underground. In addition, it would likely set off an international uproar, derail the international negotiations and trigger retaliation on Israeli and U.S. targets.

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Israel's Prime Minister Benjamin Netanyahu speaks at the sixth Negev Conference in the southern …

Yoel Gozansky, an Iran expert at the Institute of National Security Studies, a Tel Aviv think tank, said the comments were meant as a wake-up call to the world.

"It was in a coma. It has awoken suddenly," he said of the military-option talk. "Someone has an agenda to bring up this subject again, which has dropped off the agenda in recent months, especially after the deal with Iran."

Netanyahu has long been at odds with his Western allies over how to dislodge Iran from its nuclear program. He has called the interim agreement a "historic mistake," saying it grants Iran too much relief while getting little in return, and fears a final agreement would leave Iran with the capability to make a bomb.

Israel believes that Iran is trying to build a nuclear weapon, a charge Iran denies. Israel says a nuclear-armed Iran would pose an existential threat to the Jewish state, citing Iranian calls for Israel's destruction, its development of long-range missiles and its support for hostile militant groups.

During a swing through Washington early this month, Netanyahu tried to draw attention to the Iranian issue in stops at the White House and in an address to AIPAC, the pro-Israel lobbying group. Israel then engaged in a six-day PR blitz when naval commandos seized a ship in international waters that was carrying dozens of sophisticated rockets Israel said were bound for militants in the Gaza Strip and sent by Iran. The effort was capped by a display of the seized weapons.

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European foreign policy chief Catherine Ashton, left, and Iranian Foreign Minister Mohamad Javad Zar …

But beyond placid acknowledgments from world leaders, the ship's seizure did little to change the course of negotiations with Iran.

Netanyahu said the world's indifference to the naval raid was "hypocritical," and he lashed out at Western leaders for condemning Israeli settlement construction while ignoring Iran's transgressions.

Netanyahu's past warnings have been credited with bringing the Iran issue to the fore and galvanizing world powers to take action on the nuclear program. He made headlines in 2012 when he drew a red line on a cartoon bomb during his speech at the U.N. General Assembly.

Yaakov Amidror, who recently stepped down as Netanyahu's national security adviser, said the threat of a military strike is a real possibility.

"We aren't playing a game of neighborhood bully. This is a stated policy of the state of Israel and has been made clear ... to anyone who meets Israel's representatives."

But if Israel is trying to raise the alarm again, the move comes at an inopportune time. The urgency of the Iran issue has taken a backseat to more pressing international crises, namely Russia's annexation of the Crimea peninsula. With world powers charging forward with negotiations with Iran, threats from Israel are likely to be ignored at best. At worst, they could alienate Israel's closest allies.

Gozansky said the renewed threats were largely empty because if Israel carried out a strike with diplomacy underway, it would be seen as a warmonger out to destabilize the region. But he said the threats could nonetheless serve as leverage on Iran while it conducts talks. Netanyahu has suggested that may be the case.

"The greater the pressure on Iran," he said in his speech to AIPAC, "the more credible the threat of force on Iran, the smaller the chance that force will ever have to be used."

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Has Israel run out of patience with Iran?

A rising chorus of voices in Israel has signaled growing discontent with international nuke talks.
Military option on table

(Alexander Zemlianichenko/AP Photo)

MOSCOW - In his first reaction to a stinging set of sanctions imposed by the Obama administration on some of his closest friends and advisers, Russian President Vladimir Putin suggested that Russia not retaliate with more sanctions.

But, in remarks to Russia's Security Council, he responded sarcastically when told about who was on the American list.

"Russia needs to avoid these citizens as they are compromising the country," he said. He also appeared to mock the Treasury Department's designation of Bank Rossiya, which it described as "the personal bank" for many senior Russian officials.

"I understand that this is a middle-sized bank," Putin said. He added that he did not have an account at Bank Rossiya, but planned to open one to start receiving his official salary there.

"The clients of the bank must be taken under our protection. We also should make sure that neither clients nor the bank will sustain any negative outcome from this situation," he said.

Putin's comments came shortly before he signed a law finalizing Crimea's unification with Russia, a sign that while Russia appears to have little appetite for a sanctions battle with the United States, this latest round of punitive measures was not enough to prevent him from completing the accession of Crimea.

Yet there were signs this morning that the sanctions are biting the Russian economy.

Russia's stock market immediately dropped nearly 3% when it opened Friday morning and the ruble, Russia's currency, ticked down versus the dollar.

Visa and Mastercard quietly stopped processing transactions for Bank Rossiya as well as another bank, SMP, which is owned by Arkady and Boris Rotenberg, who were also sanctioned on Thursday.

Fitch followed fellow credit rating agency S&P in downgrading Russia's investment outlook from stable to negative, citing the threat of additional American and European sanctions.

Still, at least one more person sanctioned Thursday shrugged off the designation, which freezes any assets under American jurisdiction, prohibits traveling to the United States, and essentially freezes the individual out of international banking system.

"I felt uncomfortable that many of my friends were on the first list but not me," Vladimir Yakunin, a Russian tycoon close to Putin, told Bloomberg. "Now I am at peace."

Moscow (AFP) - Prime Minister Dmitry Medvedev on Friday demanded Ukraine pay back $11 billion that he said Kiev had saved through discounted gas prices in return for hosting a Russian naval base in Crimea.

Ukraine owes the money because Crimea is now part of Russia and the two countries' 2010 lease agreement was now "subject to annulment," Medvedev said at a meeting of the Security Council.

"The Ukrainian state saved some $11 billion dollars and accordingly the Russian budget has a missed profit of the same $11 billion," he warned.

Soon after coming to power in 2010, then president of Ukraine, Viktor Yanukovych, agreed to extend the lease on Russia's Black Sea fleet in Crimea that was due to expire in 2017 for 25 years, until 2042.

In return, Moscow agreed to cut natural gas prices for Ukraine by $100 for every 1,000 cubic metres.

According to Moscow, Ukraine has been receiving the discount since 2010 even though the new lease agreement was not to enter force before 2017.

This week Russia officially made Crimea part of its territory despite condemnation from Kiev authorities and the West.

Medvedev, who signed off on the agreement with Yanukovych in his capacity as president in 2010, said it would be "absolutely legitimate" to seek the return of the money through courts even though he acknowledged such measures would be "tough".

He put Ukraine's total debt to Russia at $16 billion.

"I believe that we cannot lose such money taking into account the fact that our budget is also struggling," Medvedev said in comments released by the Kremlin.

Ties between Moscow and Kiev plunged to unprecedented lows after the Kremlin sent troops to Crimea following a popular uprising that ousted Yanukovych last month.

Washington introduced sanctions against Putin's close allies and urged Moscow to reconsider its takeover of Crimea.

Kommersant business daily reported earlier Friday that if the fleet agreement was annulled, Ukraine would end up paying up to $480 per 1,000 cubic metres for natural gas, the highest price of any of gas giant Gazprom's clients in Europe.

The expected gas price hike will deal a huge blow to Ukraine's struggling economy and is likely to exacerbate the raging political crisis.

End-of-the-year haggling over energy prices has become a familiar problem in bilateral ties, with Russia repeatedly cutting gas supplies to Ukraine and Europe over the past few years.