Even as the European Union, the United States, and Britain announce new sanctions on Russia following Moscow’s move to recognize two breakaway provinces in Ukraine as independent entities, their primary target appears to be the ability of Russian banks to operate internationally.

The first round of Western sanctions on Russia is likely to be minimal, with governments preferring to keep heavier sanctions packages in reserve should the crisis escalate.

U.S. banks do not expect global sanctions to have any significant impact on US businesses or spark contagion risk, given their limited exposure to the Russian economy, said three executives familiar with industry thinking.

Here’s a quick look at how the Russian banks are being targeted.

Western Sanctions

European foreign ministers have agreed to sanction 27 Russian individuals and entities, including banks financing Russian decision-makers and operations in the breakaway territories.

The first round of sanctions includes all members of the lower house of the Russian parliament who voted in favour of the recognition of the breakaway regions.

The Russian lenders who have been sanctioned are relatively small with only military bank Promsvyazbank being the exception since it is on the Russian central bank’s list of systemically important credit institutions.

Since 2014, Bank Rossiya is already under U.S. sanctions.

While the US has imposed sanctions on Promsvyazbank and VEB bank, it has also ramped up prohibitions on Russian sovereign debt, which U.S. President Joe Biden said meant the Russian government would be cut off from Western financing.

In a statement the U.S. Treasury said, it was extending current US sanctions on Russia to include participation in the secondary market for bonds issued after March 1 by Russia’s Central Bank and other entities.

With the news reaching the market, Russian dollar bonds extended their losses with longer-dated issues slipping to record lows, as per trading data.

Impact of US Sanctions

For now, the impact of US sanctions is minimal since large Russian banks are deeply integrated into the global financial system, which means sanctioning them could have wider ramifications.

The first round of US sanctions have focussed on smaller Russian lenders and are not as extensive as those imposed in 2014, after Russia’s annexation of Crimea. Many of those sanctions continue to remain in place.

According to analysts, Russian institutions are better able to cope with Western sanctions compared to eight years earlier, especially since Russian state banks have trimmed their exposure to Western markets.

As per a report from the Institute of International Finance, after 2014, Russia has diversified away from U.S. Treasuries and dollars, to gold and the euro, which together account for a bigger share of Russia’s reserves.

Additionally, Moscow also has some strong macroeconomic defences, including abundant hard currency reserves of $635 billion, and a low debt-to-GDP ratio of 18% as of 2021.

“The ones today were not that significant,” said Samuel Charap, a senior political scientist at the nonprofit, nonpartisan RAND Corporation, in reference to U.S. sanctions.

“The question is where we go from here,” said Charap. “I am increasingly pessimistic, and I think there is a high probability of significant further Russian military action and I think in that case, we are likely to see some of the really qualitatively more devastating measures than in the past.”

Reserve sanctions

While the European Union has said it is ready to impose “massive consequences” on the Russian economy it has taken a cautious approach given its trade and energy ties with Moscow.

Beyond EU lenders stopping direct business with the breakaway regions, it’s not clear yet, when the EU will target Russia’s bigger banks.

The US move to disable international payments is expected to have a major impact on the Russian economy.

As per a senior U.S. administration official, Russia’s Sberbank and VTB would face US sanctions if Russia invades Ukraine. Naturally, Russia could retaliate in the form of cyber attacks, said Charap.

What would make a significant dent to the Russian economy is if Western leaders ban Russia from SWIFT – the widely used global payment system, which is being used by more than 11,000 financial institutions in over 200 countries.

While such a move could hit Russian banks hard, it could make it tough for European creditors to get back their money especially since Russia has been building up an alternative payment system.

According to data from the Bank of International Settlements (BIS), European lenders hold the lion’s share of the nearly $30 billion in foreign banks’ exposure to Russia.

Europe’s banks, especially those in France, Austria, and Italy have significant exposure to the Russian market.

BIS figures show, French and Italian banks each had outstanding claims of some $25 billion on Russia as of the third quarter of 2021. Austrian banks had $17.5 billion while US banks stand at $14.7 billion.

Among the most exposed lenders is Austria’s RBI which has big operations in Russia and Ukraine.

Categories: Creativity, Economy & Finance, Entrepreneurship, Geopolitics, HR & Organization, Regulations & Legal, Strategy