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CEOs with interests in Russia wary of tougher U.S. sanctions

Companies with investments in Russia – such as General Electric Co. and Boeing Co. – are growing concerned as the U.S. prepares to impose tougher sanctions over the crisis in Crimea that may spur retribution against corporate interests.

Almost 100 chief executive officers with the Business Roundtable met in Washington last week with Defense Secretary Chuck Hagel, said John Engler, the group’s president and former governor of Michigan. He said there’s “no doubt” that the sanctions will be on the agenda.

“The CEOs are obviously very concerned about what is happening in Russia,” Engler said. “For some companies, it’s a substantial bit of their business. They are watching it very intently, trying to understand what will happen and what the next steps will be.”

U.S.-based companies are the largest source of foreign investment in Russia, primarily in technology and financial services, according to a 2013 report by Ernst & Young. Business interests in the country have been growing after the nation joined the World Trade Organization in 2012, the analysts said in their report.

General Electric, whose GE Capital Aviation Services unit is the world’s largest aircraft leasing company, has 54 airplanes in Russia and is tracking developments closely.

“Hopefully the industry can weather it out, avoid heavy sanctions,” said Norm Liu, chief executive officer of GECAS, General Electric Co.’s aircraft leasing unit. “This is a unique situation for all Western businesses.”

If the conflict between President Vladimir Putin and the West is confined to diplomatic circles, he said he’s less concerned. “If it crosses beyond that, it’s a different story,” he said.

For corporations, additional restrictions present two risks: They could inadvertently punish U.S. interests, and the Russians could push back against American companies.

“They are worried about retaliation,” said William Reinsch, president of the National Foreign Trade Council, a Washington-based group that advocates on behalf of companies operating globally. “The Russians have been pretty clear that if we do something to them, they will hit back.”

Reinsch said he has been getting calls from energy, technology and financial companies concerned about the prospects for their investments in or sales to Russia.

“The Russians have proven themselves very good at doing things that annoy us,” while not harming their economic interests, he said. Because of that, seizure of foreign assets, such as oil-production facilities, is unlikely, he said.

Exxon Mobil Corp. Chairman and CEO Rex Tillerson on March 5 said the company wouldn’t take sides in the Russia-Ukraine conflict or any other geopolitical disputes.

Russia is Exxon’s largest exploration prospect outside the company’s home country and Exxon has also sought permission from Ukrainian authorities to drill beneath the Black Sea off the Crimean coast.

Aerospace manufacturers and airlines are concerned about the effect on travel and demand for aircraft if tensions escalate to where global economic growth is stymied, said Kostya Zolotusky, managing director with Boeing Capital, the aircraft financing unit of Chicago-based Boeing Co.

“If last year we were concerned about Iran impacting global GDP, now we’re mindful of the situation between Russia and Ukraine and its potential macroeconomic impact,” he said.

A U.S. Treasury official, who asked not to be identified discussing policy talks that are underway, said the agency has heard from American businesses with operations in Russia. He said corporations operating should have known there would be risks investing in the country.

The U.S. and European Union imposed a round of sanctions against Russia on March 17 after Putin recognized Ukraine’s Crimea region as an independent state. U.S. Vice President Joe Biden told reporters in Poland last week that Russia “will see additional sanctions” in response to its “land grab.”

One punishment that could affect businesses is if the U.S. were to release some of its strategic oil and gas reserves, said Bernd Scheifele, the chief executive officer of HeidelbergCement AG, the world’s third-largest cement maker.

The Russian economy is dependent on oil and gas revenue, so a U.S. infusion of supply “bursts the Russian bubble very quickly,” he said.

“If the Russian state has no money, then all infrastructure and construction projects come to a standstill, and that will lead to the economy tanking very quickly,” Scheifele said.

Two Washington-based trade associations – the U.S. Chamber of Commerce, which represents 3 million businesses, and the National Association of Manufacturers – separately stressed the importance of multinational sanctions.

“A go-it-alone approach by the United States could be both economically damaging and ineffective in accomplishing its goals,” Myron Brilliant, head of international affairs at the chamber, said in an email statement. “We will continue to monitor action on this issue as it develops.”

The manufacturers’ group said they are pushing lawmakers for faster approvals of U.S. liquefied natural gas facilities, which could help make Western Europe less dependent on Russian gas. Russia, the world’s largest oil producer, exported $160 billion worth of crude, fuels and gas-based industrial feedstocks to Europe and the U.S. in 2012.

One business determined to stay out of the fray is Yum! Brands Inc., which operates or licenses restaurants worldwide that include Taco Bell, Pizza Hut and KFC.

“Our business in Russia is strong and robust,” Virginia Ferguson, a spokeswoman for the Louisville, Ky.-based company.