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. Last Updated: 07/27/2016

These Sanctions Have Bigger Targets

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Despite President Vladimir Putin's blessing on Friday for an $18 billion deal between Russian titanium producer VSMPO-Avismo and U.S. aircraft producer Boeing, the announcement by the U.S. State Department on Aug. 4 that it was slapping sanctions on Russian state arms exporter Rosoboronexport and leading aircraft manufacturer Sukhoi could still cause serious problems for U.S. and Russian companies. The sanctions were imposed for two years under a new U.S. law aimed at weapons nonproliferation with regard to Iran. The formal reason for the sanctions was reportedly a $200 million contract to modernize Iran's aging fleet of Su-24 Fencer fighter-bombers, which can theoretically carry nuclear weapons. Both Rosoboronexport and Sukhoi deny the existence of the contract.

Previously, the United States has imposed sanctions against various Russian companies and research institutes as a result of contracts signed with Iran and Syria. Until now, however, the U.S. measures have for the most part been largely symbolic, as the companies targeted have not been involved in cooperation with U.S. firms or the U.S. government. For example, the sanctions that were placed on an instrument design bureau in Tula in 1999 resulted in nothing more than sarcastic comments in the media from the company's managers.

This time, though, the sanctions affect companies that directly or through affiliates have business ties -- either actual or potential -- with the United States worth billions of dollars. It was thought that one of the hardest hit would be VSMPO. Rosoboronexport is currently in the process of taking over VSMPO, and roughly half of the company's output is exported to the United States at a value that has been estimated from $300 million to $450 million annually. The $18 billion deal to supply titanium and finished titanium components to the U.S. aircraft producer struck on Friday represents much more value added than simple production of the metal. While VSMPO would not have had much problem finding alternative customers -- the titanium market is fiercely competitive and the aerospace industry is booming both in Russia and internationally -- arranging these deals would have taken time and meant some financial loss.

But the threat to Rosoboronexport's business remains in relation to contracts under discussion for the supply of Russian weapons -- mainly small arms, rifles, and helicopters -- to the Iraqi Army, being trained and outfitted in a U.S.-led operation, and the Afghan army, which is being trained and supplied by NATO forces. The value of these contracts has been estimated at as high as $1 billion. The negotiations were being held with the Pentagon and other U.S. government agencies, but the imposition of the latest sanctions will significantly complicate the signing and fulfillment of any such agreement.

The sanctions also threaten to cause difficulties for Sukhoi's Superjet 100 project for the construction of a Russian regional passenger aircraft. The jet is being built in collaboration with a number of U.S. firms supplying crucial systems including auxiliary power units, generators, and landing gear. Boeing is also involved in the project as a consultant.

Russia's initial reaction to the news of the sanctions was severe. In particular, the State Department's announcement was seen as payback for Russia's recent rapprochement with Venezuela on military cooperation. This reading of events was supported by the fact that the sanctions were announced immediately after Venezuelan President Hugo Chavez's visit to Moscow, during which major contracts were announced for the supply of Russian fighter jets, helicopters, and weapons to the South American country. Washington issued repeated warnings that it was unhappy with the arms deals during Chavez's trip.

It does seem, however, that the State Department sanctions are largely the result of the unfortunate application of routine legislation. American companies like Boeing, which buys 35 percent of its titanium from VSMPO, could still suffer financially. If Boeing ultimately runs into problems over Russian titanium, it will have to look for alternatives on the U.S. or Australian markets. Although this can be done, it will take some time and will likely mean higher costs. Boeing's chances to win an Aeroflot tender to supply the airline with 22 of its 787 series aircraft could also be hurt. Airbus, with its 350WXB passenger jet is also competing for the order.

But a week after the sanctions were introduced, tempers seemed to have cooled and the situation was already looking much less dramatic. A number of major U.S. firms had already assured Sukhoi that their equipment does not fall under the sanctions and that they have no plans to pull out of programs with the two Russian companies.

Should the situation with regard to American producers take a negative turn, these systems could be replaced quickly and painlessly. VSMPO management announced almost immediately that supplies of titanium to the U.S. market would continue, a point echoed by Boeing Russia Chairman Sergei Kravchenko. In any case, Boeing, which has a team of effective lobbyists, will try to ensure that the deal with VSMPO is allowed to stand. Finally, if the Pentagon really is interested in supplying the Iraqis and the Afghans with Russian weapons, then it will find a way to push through its plans without busting the sanctions. At the end of the day, the end users will not be Americans, and the United States already has experience in arming others where the circumstances with regard to legality are murky -- during the Iran Contra affair, for example.

All the same, the recent announcement represents an alarming new element in the history of U.S. sanctions against Russian companies. Whereas previously sanctions of this type were of no real commercial import, substantial losses for both sides in the case of Sukhoi and Rosoboronexport are more likely than ever before.

There is no doubt that, if the crisis is not resolved favorably for Sukhoi and Rosoboronexport, the Russian executives and the political establishment will come to the conclusion that any collaboration with the United States, especially in the high-tech sphere, carries unacceptably high political risks -- risks so high that the attractiveness of the colossal U.S. market is not enough to compensate. In theory, this has already been clear from the problems some U.S. partners in Europe and Asia -- and Israel in particular -- have had in the past with U.S. sanctions. This could end up being the first time Russia feels the effect of an American diktat. No doubt a lesson will be learned.

Konstantin Makiyenko is deputy director of the Center for Analysis of Strategies and Technologies.