What Western nations could do to punish Moscow

The US and its allies are co-ordinating new sanctions against Russia after Moscow recognised two regions in eastern Ukraine as independent, officials said.

EU member states are also considering sanctions, including Germany, where Chancellor Olaf Scholz in response to Moscow’s actions halted the certification of the Russia-led Nord Stream 2 gas pipeline.

Here are some of the 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, the Biden administration has prepared a sweeping measure to hurt the Russian economy that 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.

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 $30bn in foreign banks’ exposure to Russia.

According to data from Russia’s central bank, total Russian banking foreign assets and liabilities stood at $200.6bn and $134.5bn respectively, with the US dollar share amounting to about 53% of both, down from 76%-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 Russian companies.

Individuals

Sanctioning persons via asset freezes and travel bans is a commonly used tool and the US, 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.

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 forced Washington to backtrack.

A bill unveiled by US Senate Democrats in January aims for sweeping sanctions against top Russian government and military officials, including President Vladimir Putin, and President Joe 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”.

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 the 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, 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.

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, the Carnegie Moscow Center think-tank said.

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, 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.

Sovereign debt 

Access to Russian bonds has become increasingly restricted and sanctions could be tightened further, with a ban on secondary market trading of both 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 over accusations of election meddling.

Sanctions imposed in 2015 made future Russian dollar debt ineligible for many investors and key indices. Those measures have cut Russia’s external debt 33% since early 2014 — from $733bn to $489bn 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