Global banks are bracing for the ripple effects of tough new financial and economic sanctions on Russia designed to stifle its economy and restrict its access to foreign capital.
On Tuesday, President Biden announced that the United States would impose sanctions on Russia’s main development bank, VEB, and its military bank, Promsvyazbank, and adopt comprehensive restrictions on Russian sovereign debt, cutting the country off from financing. western. He said the United States was also preparing to impose sanctions on Russian elites and their family members.
The sanctions will separate state-backed banks from the US financial system and make it harder for Russia to raise funds in foreign markets for major domestic infrastructure projects, which will most likely hamper growth. These actions were a taste of what awaits the Russian economy.
“We will continue to escalate sanctions if Russia steps up,” Biden said.
On Tuesday, British Prime Minister Boris Johnson also imposed sanctions on several Russian banks and three Russian billionaires. And German Chancellor Olaf Scholz said he would end certification of the Nord Stream 2 gas pipeline which would increase energy imports from Russia.
The collective Western response is aimed at punishing Russia for stepping up its aggression against Ukraine. On Monday, Russia issued a decree sending troops to two regions of Ukraine, a decision widely interpreted in the West as a first step towards an all-out invasion.
Over the past decade, the United States has increasingly used sanctions to deal with diplomatic wrangling, including in North Korea and Iran. It was able to do this because the dollar is the world’s reserve currency and the most widely used for payments. However, the impact of sanctions is far from clear or precise. In the case of Russia, it is likely that much of the global financial system could also be affected due to the interconnected nature of global trade, although the impact is small.
Since 2014, when the United States imposed sanctions on Russia, after the annexation of Crimea by President Vladimir V. Putin, American and Western banks have withdrawn from direct transactions in the country. Yet the Biden administration’s sanctions could have far-reaching and indirect consequences, because Russia is a major exporter of commodities like natural gas and wheat, and it does business with companies and countries around the world. . As intermediaries, banks generally manage these transactions.
According to the Institute of International Finance, a trade association that represents global banks, tough economic sanctions could disrupt global trade flows if banks are forced to stop processing payments for goods and services in and out of Russia.
“The problem here is not just the immediate impact on financial markets, but the fact that it is almost impossible in the short term to disentangle” Russia from global trade, Elina Ribakova, the institute’s deputy chief economist, said in an interview. “There is room for contagion.”
For example, if an American company wants to pay for Russian fertilizer using money from its American bank account, and the seller has an account with a Russian bank that is subject to sanctions, the American bank would not be able to process that payment, according to a banking sanctions expert who spoke on condition of anonymity.
Sanctions could also spread economic instability around the world by raising the prices of key commodities Russia produces – including oil, gas, fertilizer and palladium – and spur inflation in importing countries. these products, dealing another blow just as the world emerges from the pandemic.
The Russian economy could be relatively shielded from the full impact of the sanctions. Its external debt and ties with other advanced economies have declined since the 2014 Crimean crisis, insulating its economy from efforts to cut it off from the global financial system, economists at Capital Economics noted. They predicted that the most likely sanctions could reduce Russia’s gross domestic product by around 1%.
The country’s economy has long been dominated by domestic lenders, which only rose to prominence after the 2014 sanctions. European banks, including Raiffeisen Bank and UniCredit Bank, make up the bulk of the 6.3 % of assets held by foreign lenders in the Russian banking sector, while US banks hold less than 1%, according to the Institute of International Finance.
This limits the possibility of a systemic banking crisis spreading globally, but it will likely hamper Russia’s growth.
“Russia has a more insulated and isolated economy today than it did a decade ago,” Clay Lowery, executive vice president of the finance institute, said in a statement after Mr Biden’s announcement. . “This makes it less vulnerable to certain types of sanctions, but its growing economic isolationism is hurting the country’s long-term growth prospects,” he said.
Tuesday’s announcement follows weeks of preparation by administration officials, who weighed a series of economic sanctions. They included freezing the assets of Russian individuals and companies, banning trading in Russian sovereign bonds, and stopping the nation from using the dollar for payments.
The Biden administration has signaled that it has no plans to cut Russia off from Swift, a Belgian courier service that connects more than 11,000 financial institutions when transferring money around the world. Locking Russia out of Swift, officials said, would do too much damage to the global financial system and could also spur the growth of competing services.
Over the past few weeks, Biden administration officials have been in regular contact with banks about the possibility of economic sanctions against Russia, according to a banking official briefed on those discussions who spoke on condition of anonymity in due to the sensitivity of the situation. These talks aim to prepare lenders and minimize potential disruptions to financial markets if broader sanctions are put in place. They also covered how sanctions work and the potential impact on payment flows, according to another person briefed on the talks.
“The eyes of all major global financial institutions are on this situation,” said Daniel Tannebaum, a partner at Oliver Wyman who advises banks on sanctions.
The effect of the Ukrainian crisis on the global economy
Growing concern. A Russian attack on Ukraine could cause spiraling energy and food prices and scare off investors. The economic damage caused by supply disruptions and economic sanctions would be severe in some countries and industries and go unnoticed in others.
While financial firms have less exposure to Russia than they did in 2014, the new sanctions are expected to impose much greater restrictions on transactions, Tannebaum said. Crimea-related sanctions have limited new financing for companies in certain Russian sectors, but have not completely blocked all transactions.
“It’s more like a sniper rifle,” he said of the actions taken by the Biden administration.
Investors, already nervous for weeks as tensions between Russia and Ukraine escalated, sold stocks on Tuesday. The S&P 500 fell more than 1% and the KBW Nasdaq Bank Index slipped 0.1% for a drop of more than 3% in the last five days.
“Geopolitics has replaced Covid-19 as the primary concern of market fear,” said Paresh Upadhyaya, global bond portfolio manager at Amundi US, an asset manager. “Russian-Ukrainian tensions have the potential to dampen investor sentiment for weeks. Markets are waking up to the harsh reality of a two-headed monster of inflation and geopolitics.
Another threat to the global financial system is the danger of retaliatory cyberattacks from Russia – something US-based banks are on high alert for. The Financial Services Information Sharing and Analysis Center, a group that shares intelligence in the financial industry, said it was looking for such threats.
The Treasury Department met bank managers, including Brian Moynihan of Bank of America and Charles W. Scharf of Wells Fargo, last Wednesday for a previously scheduled meeting to discuss breach defenses. The following day, government officials from the White House and several agencies met with heads of major US lenders to discuss their response to potential Russian hack threats, CNN reported.
On Tuesday, Mr Biden said the White House wanted to make sure Americans weren’t burdened with rising gas prices as energy markets rocked by the developments. However, he said the United States was ready to impose tougher sanctions on Russia.
“Whatever Russia does next, we stand ready to respond with unity, clarity and conviction,” Biden said.
Adam M. Smith, a former Treasury Department official who is now a partner at the law firm Gibson, Dunn & Crutcher, noted that the sanctions program has become more sophisticated over the past decade, giving the United States more leeway to target Russia without great fear of collateral damage and that international coordination had improved.
“The United States has gotten better at managing major economies and is doing a much better job of really getting everybody on board,” he said.