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Sanctions could badly hurt Russia, but it’s a balancing act for ...

World

Sanctions could badly hurt Russia, but it’s a balancing act for the West

Moscow is throwing stones, leading the White House to announce sanctions of sorts, while the EU considers them

Karin Strohecker
Russian President Vladimir Putin has recognised breakaway regions in Eastern Ukraine as independent.
GAME ON Russian President Vladimir Putin has recognised breakaway regions in Eastern Ukraine as independent.
Image: Sputnik/Mikhail Metzel/Pool via Reuters

The US and its allies are coordinating new financial and economic sanctions on Russia after Moscow recognised two breakaway regions in eastern Ukraine as independent entities, officials said.

President Vladimir Putin also signed a decree on the deployment of Russian troops to the areas. But White House officials said because Russia already had troops there, Moscow’s moves did not trigger a broad package of sanctions Washington and its allies have been working on in the event of a Russian invasion of Ukraine.

The White House announced separate, less severe and more targeted sanctions. EU member states are also considering sanctions.

Russia has been under Western sanctions since its 2014 annexation of Crimea from Ukraine. More punitive measures were added after a former Russian spy was poisoned in Britain in 2018 — Russia denied any involvement — and after an investigation into allegations, denied by Moscow, of Russian meddling in the 2016 US presidential election won by Donald Trump.

Here are some ways sanctions could target Russia:

Banks and financial firms

Some smaller Russian state-owned banks are already under sanctions. Washington imposed curbs on Bank Rossiya in 2014 for its close ties to Kremlin officials.

According to sources, US President Joe Biden’s administration has prepared a sweeping measure to hurt the Russian economy, which would cut the “correspondent” banking relationships between targeted Russian banks and US banks that enable international payments.

Washington will also 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 US banking system, banning their trade with Americans and freezing their US assets.

It is unclear whether Russian banks would be added to the SDN list, but both types of sanctions could hit the country 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 Switzerland-based Bank of International Settlements (BIS) shows European lenders hold the lion’s share of the nearly $30bn (about R455bn) in foreign banks’ exposure to Russia.

Britain threatened last week to block Russian companies from raising capital in London, Europe’s financial centre, for such transactions, with Prime Minister Boris Johnson saying the government would target Russian banks and companies.

According to data from Russia’s central bank, Russian banking foreign assets and liabilities stood at $200.6bn (about R3-trillion) and $134.5bn (about R2-trillion) respectively, with the US dollar share amounting to about 53% of both, down from 76% to 81% two decades ago.

Britain threatened last week to block Russian companies from raising capital in London, Europe’s financial centre, for such transactions, with Prime Minister Boris Johnson saying the government would target Russian banks and companies.

Individuals

Sanctioning people via asset freezes and travel bans is a commonly used tool and the US, EU and UK already have such sanctions in place against a number of Russians.

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

While the US has used the SDN designation to sanction oligarchs deemed to be “bad actors” in the past, it has become more cautious in recent years after 2018 sanctions on the owner of Rusal saw aluminium prices skyrocket and force Washington to backtrack.

A bill unveiled by US Senate Democrats in January aims for sweeping sanctions against top Russian government and military officials, including Putin, and 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 would not harm the Russian president personally, but would prove “politically destructive”.

Britain, home to many wealthy Russians, has threatened to expose property and company ownership on its soil if Russia invades Ukraine, with Johnson saying there was “an issue with Russian money in the city (of London)".

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.

Energy corporates and Nord Stream 2

The US and EU already have sanctions in place on Russia’s energy and defence 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 settling in US dollars.

Nord Stream 2, a recently completed pipeline from Russia to Germany that has yet to win regulatory approval, would also be subject to sanctions by the EU, Austrian Chancellor Karl Nehammer said.

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

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 more than 200 countries.

In 2012 SWIFT disconnected Iranian banks as international sanctions tightened against Tehran over its nuclear programme. Iran lost half its oil export revenues and 30% of foreign trade.

Among Western countries, the US and Germany would stand to lose the most from such a move, as their banks are the most frequent SWIFT users with Russian banks.

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.

Sovereign debt

Access to Russian bonds has become increasingly restricted and sanctions could be tightened further, with a ban on secondary market trading of new Eurobond and new Russian rouble bonds, known as OFZs, floated as an option.

In April 2021 Biden barred US investors from buying new Russian rouble bonds because of accusations of election meddling.

Sanctions imposed in 2015 made future Russian dollar debt ineligible for many investors and key indexes. Those measures have cut Russia’s external debt by 33% since early 2014 – from $733bn (about R11-trillion) to $489bn (about R7.4-trillion) 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.

— Reuters

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