Explainer: How Western sanctions might target Russia | Inquirer Business

Explainer: How Western sanctions might target Russia

/ 02:00 AM February 23, 2022
A tank drives along a street in Donetsk, for story: Explainer: How Western sanctions might target Russia

A tank drives along a street after Russian President Vladimir Putin ordered the deployment of Russian troops to two breakaway regions in eastern Ukraine following the recognition of their independence, in the separatist-controlled city of Donetsk, Ukraine Feb. 22, 2022. (REUTERS/Alexander Ermochenko)

The United States and its allies are coordinating new sanctions on Russia after Moscow recognized two regions in eastern Ukraine as independent, officials said.

Details have started to emerge on the steps taken or planned by the United States, European Union, Britain, and other western powers.

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Below are details on the curbs proposed so far and on what other sanctions could target Russia:

Banks and financial firms

Britain announced sanctions on five banks – Bank Rossiya, Black Sea Bank, Genbank, IS Bank, and Promsvyazbank — all are smaller lenders, with only Promsvyazbank on the central bank’s list of systematically important lenders.

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Bank Rossiya is already under US sanctions from 2014 for its close ties to Kremlin officials.

A European Union sanctions package has been drafted to include curbs on banks involved in financing separatist activities in eastern Ukraine. EU foreign ministers will discuss the measures in Paris from 1500 GMT and aim to finalize “without delay”.

While Washington has yet to announce exact measures it plans to take, sources have said President Joe Biden’s administration has prepared sweeping measures to hurt the Russian economy which would cut the “correspondent” banking relationships between targeted Russian banks and US banks that enable international payments.

Washington also will wield its most powerful sanctioning tool against certain Russian individuals and companies by placing them on the Specially Designated Nationals (SDN) list, effectively kicking them out of the U.S. banking system, banning their trade with Americans, and freezing their US assets.

Sources familiar with the planned measures said VTB Bank, Sberbank, VEB, and Gazprombank are possible targets. It is unclear whether Russian banks would be added to the SDN list, but both types of sanctions could hit Russia hard and make it difficult to transact in US dollars.

Russia’s large banks are deeply integrated into the global financial system, meaning sanctions could be felt far beyond its borders. Data from the Bank of International Settlements (BIS) shows that European lenders hold the lion’s share of the nearly $30 billion in foreign banks’ exposure to Russia.

According to data from Russia’s central bank, total Russian banking foreign assets and liabilities stood at $200.6 billion and $134.5 billion respectively with the U.S. dollar share amounting to around 53% of both, down from 76-81% two decades ago.

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Sovereign debt and capital markets

The package of measures under discussion by the EU aims “to target the ability of the Russian state and government to access the EU’s capital and financial markets and services, to limit the financing of escalatory and aggressive policies,” according to a statement by the bloc.

Britain threatened last week to block Russian companies from raising capital in London, Europe’s financial center for such transactions, though has stopped short of doing so in its announcements on Tuesday.

Even before the latest events, access to Russian bonds had become increasingly restricted.

US sanctions imposed in 2015 made future Russian dollar debt ineligible for many investors and key indexes. In April 2021, Biden barred US investors from buying new Russian rouble bonds over accusations of Russian meddling in the US election.

The curbs have cut Russia’s external debt by 33% since early 2014 — from $733 billion to $489 billion in the third quarter of 2021. Lower debt improves a country’s balance sheet on the surface but deprives it of financing sources that could contribute to economic growth and development.

Individuals

Sanctioning persons via asset freezes and travel bans is a commonly used tool and the United States, the EU, and Britain already have such sanctions in place against a number of Russian individuals.

The EU on Monday imposed sanctions on five people who were involved in a Russian parliamentary election in annexed Crimea in September 2021.

The package drafted by the EU on Tuesday could see curbs on those who were involved in the decision to recognize the breakaway regions – which could mean all members of the lower house of the Russian parliament who voted in favor of the recognition, according to one official.

Meanwhile, Britain has imposed sanctions on three men, Gennady Timchenko and billionaires Igor and Boris Rotenberg — all of whom are allies of President Vladimir Putin from St Petersburg whose personal fortunes grew precipitously following Putin’s rise to the presidency. All three men are already sanctioned by the United States.

Detailed measures from Washington are yet to come. While the US has used the SDN designation in the past to sanction oligarchs deemed to be “bad actors”, it has become more cautious in recent years after 2018 sanctions on the owner of Rusal saw aluminum prices skyrocket and forced Washington to backtrack.

A bill unveiled by US Senate Democrats in January aimed for sweeping sanctions against top Russian government and military officials, including Putin, and President Biden has said he would be ready to consider personal sanctions on the Russian president.

Moscow has said any move to impose sanctions on Putin himself would not harm the Russian president personally but would prove “politically destructive”.

Energy corporates and Nord Stream 2

The United States and the EU already have sanctions in place on Russia’s energy and defense sectors, with state-owned gas company Gazprom, its oil arm Gazpromneft and oil producers Lukoil, Rosneft, and Surgutneftegaz facing various types of curbs on exports/imports and debt-raising.

Sanctions could be widened and deepened, with one possible option being to prevent companies from settling in US dollars.

Nord Stream 2, a recently completed pipeline from Russia to Germany, was awaiting regulatory approval by EU and German authorities before Berlin put its certification on ice.

Europe’s dependence on Russian energy supplies weakens the West’s hand when considering sanctions in this sector.

Curbing chips

The White House has told the US chip industry to be ready for new restrictions on exports to Russia if Moscow attacks Ukraine, including potentially blocking Russia’s access to global electronics supplies.

Similar measures were deployed during the Cold War when technology sanctions kept the Soviet Union technologically backward and crimped economic growth.

Switching off SWIFT

One of the harshest measures would be to disconnect the Russian financial system from SWIFT, which handles international financial transfers and is used by more than 11,000 financial institutions in over 200 countries.

In 2012, SWIFT disconnected Iranian banks as international sanctions tightened against Tehran over its nuclear program. Iran lost half its oil export revenue and 30% of its foreign trade, the Carnegie Moscow Center think tank said.

Among Western countries, the United States and Germany would stand to lose the most from such a move, as their banks are the most frequent SWIFT users with Russian banks, said Maria Shagina at the Carnegie Moscow Center.

Calls to cut Russia’s SWIFT access were mooted in 2014 when Moscow annexed Crimea, prompting Moscow to develop an alternative messaging system, SPFS.

The number of messages sent via SPFS was about one-fifth of Russian internal traffic in 2020, according to the central bank, which aims to increase this to 30% in 2023. However, SPFS has struggled to establish itself in international transactions.

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