Explainer: Russian banks out in the cold as EU unveils SWIFT sanctions

A view shows a Russian ruble coin and a US dollar banknote in this picture illustration taken Oct. 26, 2018. REUTERS / MXIM SHEMENTOV)

LONDON — The European Union is excluding seven Russian banks from the SWIFT messaging system that underpins global payment transactions as the West ratchets up sanctions on Russia over its attack against Ukraine.

Here is a rundown of how sanctions already announced impact banks and investors:

What has been announced so far?

The United States, Britain, Europe, and Canada committed on Saturday to removing some Russian banks from the SWIFT payments system, potentially damaging Russia as well as its trading partners.

The EU on Wednesday named the banks it was excluding: Russia’s second-largest bank VTB, along with Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank and VEB. It is giving them 10 days to wind-down their SWIFT operations.

Sberbank, Russia’s largest lender, and Gazprombank have not been included in the list because they are the main channels for payments for Russian oil and gas, which EU countries are still buying. The two banks are subject to other measures, an EU official said.

EU leaders on Friday had agreed sanctions on Moscow that they said targeted 70% of the Russian banking market.

The bloc also imposed a ban on issuing bonds, shares or loans in the EU for refinancing Alfa Bank and Bank Otkritie, after freezing assets at Rossiya Bank, Promsvyazbank and VEB earlier last week.

Sberbank, VTB and Gazprombank do not face the EU asset freeze.

Refinancing in the EU of Russian state-owned enterprises is also forbidden, with the exception of some utilities. Securities settlement houses in the EU will not be allowed to serve Russian counterparties, with Euroclear and Clearstream saying they will not accept transactions in roubles.

The US Treasury Department last week said it was targeting the “core infrastructure” of Russia’s financial system and sanctioning Sberbank and VTB. Also on the U.S. sanctions list are Otkritie, Sovcombank, and Novikombank and some senior executives at state-owned banks.

US banks must sever their correspondent banking ties with Russia’s largest lender, Sberbank, within 30 days. These links allow banks to make payments between one another and move money around the world.

Officials in Washington also wielded the government’s most powerful sanctioning tool, adding VTB, Otkritie, Novikombank, and Sovcombank to the Specially Designated Nationals (SDN) list. The move effectively kicks the banks out of the US financial system, bans their trade with Americans, and freezes their US assets.

The US sanctions also target two Belarusian state-owned banks – Belinvestbank and Bank Dabrabyt – over the country’s support for Moscow’s attack.

The British government last week said it would impose an asset freeze on all major Russian banks, including VTB, and stop major Russian companies from raising finance in Britain.

What’s next?

Russia’s large banks are deeply integrated into the global financial system, and sanctions on the biggest institutions are already being felt far beyond its borders — the European arm of Sberbank has been forced to close after a run on the bank.

The US Treasury said its sanctions would disrupt billions of dollars worth of daily foreign exchange transactions conducted by Russian financial institutions. Overall, these institutions conduct about $46 billion worth of forex transactions, 80% of which are in dollars.

The sanctions target nearly 80% of all banking assets in Russia.

Banks and Western creditors have feared Russia being shut out of SWIFT, which is used by more than 11,000 financial institutions in over 200 countries.

After the EU’s announcement on Wednesday, the next shoe to drop would be widening those bans to all Russian banks including those that are heavily involved in energy-related transactions.

The consequences of that are complex, however, especially for Russia’s trading partners. There are concerns about how payments for Russian energy imports would be made and whether foreign creditors would get paid.

Analysts have said that while Russian institutions are better able to cope with sanctions than eight years earlier after Russia annexed Crimea, their unprecedented scale and the coordination of current measures will hit hard.

Shares in Sberbank and VTB tumbled before Russian authorities halted trading to prevent capital outflows. Sberbank’s depositary receipts in London fell more than 90% on Wednesday.

Sberbank has previously said that it was prepared for any developments. VTB said last week it had prepared for the most severe scenario.

The Russian embassy in the United States has not replied to requests for comment.

Which foreign banks are most exposed?

Many foreign banks have significantly reduced their exposure to Russia since 2014 but several Western lenders have been involved in deals and have other relationships.

Shares of banks with significant operations in Russia such as Austria’s Raiffeisen Bank International and France’s Societe Generale have fallen sharply. A European bank stocks index is down 15% since Thursday.

Raiffeisen is looking into leaving Russia, two people with knowledge of the matter told Reuters this week. An RBI spokesperson said it had no plans to leave Russia.

Italian and French banks each had outstanding claims of some $25 billion on Russia in the third quarter of 2021, based on Bank of International Settlement figures.

Austrian banks had $17.5 billion. That compares with $14.7 billion for the United States.

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