At the forefront of their targets: Russian banks and their ability to operate internationally.
Still, the impact of the new sanctions should be minimal. Western governments – for now – prefer to hold back the much larger sanctions packages they have planned in case the crisis escalates.
This means that Russian bankers or their Western counterparts exposed to the country will not lose much sleep.
Indeed, U.S. banks do not expect global sanctions to have a major impact on U.S. banking or trigger contagion risk, given that lenders have little exposure to the Russian economy, three said. leaders familiar with industry thinking.
Here’s how banks are being targeted and which measures could hit the hardest:
WHAT HAS BEEN ANNOUNCED SO FAR?
EU foreign ministers have agreed to sanction 27 individuals and entities, including banks funding Russian policymakers and operations in breakaway territories.
The sanctions package also includes all members of the lower house of the Russian parliament who voted in favor of recognizing the breakaway regions.
Britain imposed sanctions on Gennady Timchenko and two other billionaires closely linked to Russian President Vladimir Putin, as well as five banks – Rossiya, IS Bank, GenBank, Promsvyazbank and Black Sea Bank.
The lenders are relatively small and only the military bank Promsvyazbank is on the list of systemically important credit institutions compiled by the Russian central bank.
Bank Rossiya has already been under US sanctions since 2014 for its close ties to Kremlin officials.
Washington imposed sanctions on Promsvyazbank and VEB Bank.
He also tightened bans on Russian sovereign debt, which US President Joe Biden said meant the Russian government would be cut off from Western funding. The US Treasury said it was expanding current prohibitions to cover secondary market participation in bonds issued after March 1 by Russia’s Central Bank and other entities.
Russian-dollar bonds extended their losses after the US sanctions announcement, with longer-term issues slipping to record highs in the mid-1990s, the data showed. The premium demanded by investors to hold Russian debt over safe US Treasuries has exploded to 329 basis points, the widest since the COVID market rout in the spring of 2020.
WHAT WILL BE THE IMPACT?
For now – minimal.
Russia’s big banks are deeply integrated into the global financial system, meaning sanctions against the biggest institutions could reverberate far beyond its borders.
But the new penalties focus on small lenders.
The measures targeting banks are not yet as extensive as those imposed after Russia’s annexation of Crimea in 2014, although many of these sanctions are still in place.
Then the West blacklisted specific individuals, sought to limit the access of Russian state-owned financial institutions to Western capital markets, targeted the largest state lenders, and imposed widespread limits on the trading of technology.
The new British measures refrained from imposing limits on the biggest state banks, cutting the capital of Russian companies or ejecting other so-called Russian oligarchs from Britain.
Shares of Russia’s biggest banks, Sberbank and VTB, soared after state-controlled groups escaped sanctions.
Analysts say Russian institutions are better able to weather limited sanctions than eight years ago, and Russian state banks have reduced their exposure to Western markets.
Since 2014, Russia has diversified away from US Treasuries and the dollar – the euro and gold account for a larger share of Russian reserves than the dollar, according to a January report from the Institute of International Finance .
Russia also has strong macroeconomic defenses, including abundant hard currency reserves of $635 billion, oil prices close to $100 a barrel, and a low debt-to-GDP ratio of 18% in 2021.
“The ones today weren’t that important,” Samuel Charap, a senior political scientist at the nonprofit, nonpartisan RAND Corporation, said of the US sanctions.
“The question is where do we go from here,” he said. “I am increasingly pessimistic, and I think there is a high probability of further significant Russian military action and I think that in this case we will probably see some of the really qualitatively more devastating measures than in the past. .”
WHAT COULD COME NEXT?
The EU said it was ready to impose ‘massive consequences’ on the Russian economy, but also warned that, given the close energy and trade ties between the EU and Russia, it wanted to tighten sanctions in stages.
Officials view Tuesday’s measures as a first round.
Beyond the lenders who do business directly with the breakaway regions, it is not yet clear when or if the EU will hit the biggest banks.
Washington has prepared a series of measures, including banning U.S. financial institutions from processing transactions for major Russian banks by cutting “correspondent” banking relationships, sources told Reuters last week.
Disabling international payments would be a serious blow.
However, these measures can be kept in reserve.
Russia’s Sberbank and VTB would face US sanctions if Moscow continues its invasion of Ukraine, a senior US administration official has told reporters.
If these banks were targeted, US banks could face retaliation, said Charap, who pointed to cyberattacks as a potential weapon that could be used.
WHAT WILL HIT THE HARDEST?
What Western banks and creditors in the region fear most is the possibility of Russia being banned from a widely used global payment system, 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. Banning SWIFT would make it difficult for European creditors to get their money back and Russia has introduced an alternative payment system.
Data from the Bank for International Settlements (BIS) shows that European lenders hold the lion’s share of the nearly $30 billion in foreign bank exposure to Russia.
WHICH FOREIGN BANKS ARE THE MOST EXPOSED?
European banks – especially those in Austria, Italy and France – have the world’s most exposure to Russia and are on high alert if governments impose new sanctions.
Graphic: Bank exposures to Russia – https://fingfx.thomsonreuters.com/gfx/mkt/myvmnxmabpr/banks%20russia.PNG
Italian and French banks each had outstanding claims of some $25 billion on Russia in the third quarter of 2021, according to BIS figures. Austrian banks had $17.5 billion. This compares to $14.7 billion for the United States.
Among the most exposed lenders is Austria’s RBI, which has large operations in Russia and Ukraine. He said “crisis plans” would come into effect if things got worse. Its shares closed down 7.5% on Tuesday.
Many foreign banks have significantly reduced their exposure to Russia since 2014, however, making some bankers less concerned about the threat of sanctions.
(Additional reporting by Tom Sims in Frankfurt, Iain Withers and Karin Strohecker in London, Michelle Price in Washington and John McCrank and Megan Davies in New York; Editing by Kevin Liffey, Rosalba O’Brien and Tim Ahmann)
By Tommy Wilkes and John McCrank