Russian banks face exclusion as allies deploy ‘financial nuclear weapon’

FILE PHOTO: An illustration shows rolled Russian ruble banknotes on a table in Warsaw, Poland January 22, 2016. REUTERS/Kacper Pempel Reuters_tickers

This content was published on February 27, 2022 – 00:25

By Tommy Wilkes, John McCrank and Huw Jones

LONDON/NEW YORK (Reuters) – The United States, Britain and the European Union on Saturday tightened sanctions against Moscow as Russia continued its assault on Ukraine, saying they would block access to the SWIFT international payment system.

Here is an overview of the impact of the sanctions already announced on banks and investors:

WHAT HAS BEEN ANNOUNCED SO FAR?

The United States, Britain, Europe and Canada pledged on Saturday to remove some Russian banks from the SWIFT payment system, deploying what France’s finance minister previously called a “financial nuclear weapon.” because of the damage it would cause to Russia and its trading partners.

The latest round of sanctions came after the US Treasury Department said it was targeting the “core infrastructure” of Russia’s financial system, sanctioning two of its biggest banks – state-backed Sberbank and VTB. Also on the sanctions list are Otkritie, Sovcombank and Novikombank as well as some senior executives of public banks.

US banks must sever their correspondent banking links – which allow banks to make payments to each other and move money around the world – with Russia’s biggest lender, Sberbank, within 30 days.

Washington officials also used the government’s strongest sanctioning tool, adding VTB, Otkritie, Novikombank and Sovcombank to the list of specially designated nationals (SDN). The move effectively kicks the banks out of the US financial system, prohibits their trade with Americans, and freezes their US assets.

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

The US sanctions came shortly after the UK government said it would impose an asset freeze on all major Russian banks, including VTB, and prevent major Russian companies from raising funds in Britain.

Russian banks would be cut off from sterling markets and clearing payments, British Prime Minister Boris Johnson has said.

Britain has also announced asset freezes and travel bans for members of Russia’s political and financial elite, including those who have long enjoyed a frenzied London lifestyle.

More than 100 people, entities and subsidiaries will ultimately be sanctioned.

European leaders have agreed to sanctions against Moscow that target 70% of the Russian banking market, European Commission President Ursula von der Leyen said on Friday.

The bloc imposed a ban on issuing bonds, shares or loans in the EU to refinance Alfa Bank and Bank Otkritie, after freezing the assets of Rossiya Bank, Promsvyazbank and VEB earlier in the week.

The three main Russian banks Sberbank, VTB and Gazprombank do not, however, face an EU asset freeze.

The bloc also set a cap of 100,000 euros ($112,700.00) 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 also prohibited, with the exception of certain public services. EU securities settlement companies will not be allowed to serve Russian counterparties.

AND AFTER ?

Russia’s big banks are deeply integrated into the global financial system, meaning any sanctions against the biggest institutions could reverberate far beyond its borders. Cutting them from SWIFT would make transactions harder and more expensive.

But it is also expected to hurt the country’s trading partners in Europe and elsewhere. While further details are awaited, Germany hinted on Saturday that allies were seeking a “targeted and functional restriction of SWIFT” to limit collateral damage.

A ban on SWIFT would come on top of other sanctions that limit the ability of some of Russia’s biggest banks to do business internationally.

The U.S. Treasury said Thursday’s sanctions would disrupt billions of dollars in daily foreign exchange transactions by Russian financial institutions. Together, these institutions conduct about $46 billion in foreign exchange transactions, 80% of which are in dollars. “The vast majority of these transactions will now be halted,” he said.

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

Sberbank said it was ready for any development.

VTB said he prepared for the most serious scenario.

Sovcombank, Otkritie and Novikombank did not respond to requests for comment. The Russian Embassy in the United States also did not immediately respond to a request for comment.

WHAT WILL HIT THE HARDEST?

Western banks and creditors fear Russia could be locked out of SWIFT, which is used by more than 11,000 financial institutions in more than 200 countries.

Such a move would hit Russian banks hard, but the consequences are complex. Western officials said blocking Russia was technically difficult and would hurt trading partners. There have been concerns, for example, about how payments for Russian energy imports would be made and whether foreign creditors would be paid.

Analysts said Russian institutions are better able to weather the sanctions than eight years earlier, though that doesn’t mean they wouldn’t hurt.

WHICH FOREIGN BANKS ARE THE MOST EXPOSED?

Many foreign banks have significantly reduced their exposure to Russia since its annexation of Crimea in 2014, but several Western banks have been involved in deals and have other relationships.

Shares of banks with significant operations in Russia, such as Raiffeisen Bank International in Austria and Société Générale in France, were hit hard last week.

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

Austrian banks had $17.5 billion. This compares to $14.7 billion for the United States.

($1 = 0.8873 euros)

(Additional reporting by Tom Sims in Frankfurt, Iain Withers, Karin Strohecker and Huw Jones in London, Michelle Price in Washington and John McCrank, Megan Davies and Paritosh Bansal in New York; Editing by Jane Merriman, John O’Donnell, Daniel Wallis, Alexander Smith, Marguerita Choy and Cynthia Osterman)

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