LONDON/NEW YORK (REUTERS) - The punishing sanctions that the United States, Britain and the European Union have so far announced against Russia for its invasion of Ukraine are set to have a sizeable impact on Russia’s economy.
These sanctions, which including shutting the government and banks out of global financial markets and restricting technology exports, might even cause a recession, according to the world’s largest international banking group, The Institute of International Finance.
But Russia’s big banks are so integrated into the global financial system and its big businesses so intertwined with the global economy that the sanctions will likely be felt far beyond its borders.
What are the key sanctions announced so far?
The US Treasury Department said it was targeting the “core infrastructure” of Russia’s financial system, sanctioning two of its largest banks – state-backed Sberbank and VTB – as well as Otkritie, Sovcombank, Novikombank. US banks must sever their correspondent banking ties with Sberbank within 30 days.
VTB, Otkritie, Novikombank and Sovcombank were also added to the Specially Designated Nationals (SDN) list, which kicks the banks out of the US financial system, bans their trade with Americans, and freezes their US assets.
The British government has imposed an asset freeze on all major Russian banks and stopped major Russian firms from raising finance in Britain. Russian banks would be cut off from sterling markets and clearing payments.
Britain also announced asset freezes and travel bans on members of Russia’s political and financial elite. More than 100 individuals, entities and subsidiaries will ultimately be sanctioned.
EU leaders have banned issuance of bonds, shares and loans in the EU for refinancing Alfa Bank and Bank Otkritie, and frozen assets at Rossiya Bank, Promsvyazbank and VEB.
(But the top three Russian banks Sberbank, VTB and Gazprombank do not face an EU asset freeze.)
The bloc has set a cap of 100,000 euros (S$152,500) for EU bank accounts of Russian citizens, who will not be allowed to buy euro-denominated shares.
Refinancing in the EU of Russian state-owned enterprises is forbidden, with the exception of some utilities, and EU securities settlement houses are also not allowed to serve Russian counterparties.
How will sanctions hit Russia and the global economy?
The United States says the sanctions so far – which target nearly 80 per cent of all banking assets in Russia – will disrupt billions of dollars worth of daily foreign exchange transactions conducted by Russian financial institutions.
These institutions conduct about US$46 billion (S$62 billion) worth of forex transactions, 80 per cent of which are in US dollars.
Analysts say that while Russian institutions are now better able to cope with international sanctions than they were during the 2014 Crimean crisis when the West also imposed wide-ranging sanctions against Russia, the current punitive measures will still hurt.
But with Russia being a major energy-exporting nation, economists say the situation could cause oil and gas prices to surge so much that the global economy – still struggling to recover from the effects of the Covid-19 pandemic – could well be tipped into a second recession in three years.
“Consumer sentiment everywhere will weaken further... That has to mean slower economic growth than would otherwise have been expected in Europe, the US and most emerging markets,” Pantheon Macroeconomics chief economist Ian Shepherdson told FT.
What's the 'nuclear' option that will hit the hardest?
The West could ban Russia from the Swift global payment system, which is used by more than 11,000 financial institutions in over 200 countries to send trillions of dollars worth of money around the world each day.
Such a move would hit Russian banks hard, but the consequences are complex and wide-ranging.
Such is the global reliance on Swift - the Society for Worldwide Interbank Financial Telecommunications - that analysts have described cutting off Russian access to the system as a “financial nuclear weapon” that the West can wield against Moscow.
But it will hurt Western nations and others as well.
Access to Swift matters to Russia mainly because it enables its energy firms to get paid for selling their oil and gas globally.
Russia’s 291 Swift members rank sixth in terms of payment messages sent on the system, an estimated equivalent of US$800 billion worth of payments, the Financial Times reported.
This compares with Russia’s gross domestic product of US$1.5 trillion in 2020.
Alongside the current sanctions that the West has already imposed on various Russian banks, if Russia were indeed barred from using Swift, it would become almost impossible for Russian exporters to do business internationally at all. (The vast majority of transactions for energy products are made in US dollars.)
But that would also undermine other countries’ and institutions’ capacity to pay for Russian energy – raising oil and gas prices as a result. It would be tough for creditors to get their money back from Russian firms as well.
In the longer term, such a move may also lead to a waning of Swift’s importance as a key communications line for worldwide commerce as Russia and other nations like China speed up their shift to alternative platforms to avoid similar moves being used against them.