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

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

February 26, 2022

By Tommy Wilkes, John McCrank and Huw Jones

LONDON/NEW YORK (Reuters) – The United States, Britain and the European Union stepped up sanctions against Moscow on Saturday as Russia continued to attack Ukraine, saying it would block access to the international payments system SWIFT.

Here is a summary of how the sanctions that have been announced have impacted banks and investors:

WHAT HAS BEEN ANNOUNCED?

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

The latest round of sanctions comes after the US Treasury Department said it was targeting the “core infrastructure” of the Russian financial system, sanctioning the country’s two largest banks – Sberbank and Sberbank. VTB is state-backed. Also on the sanctions list are Otkritie, Sovcombank and Novikombank, and a number of senior leaders at state-owned banks.

US banks must sever their correspondent banking relationship – which allows banks to make payments between each other and transfer money globally – with Russia’s largest lender, Sberbank, within 30 day.

Officials in Washington also used the government’s most powerful sanctions tool, adding VTB, Otkritie, Novikombank and Sovcombank to the list of Special Designated Citizens (SDN). The move effectively pushed banks out of the US financial system, banned transactions with Americans and froze their US assets.

The US sanctions also target two of Belarus’ state-owned banks – Belinvestbank and Bank Dabrabyt – for their support of the Moscow attack.

The US sanctions came shortly after the British government said it would impose asset freezes on all major Russian banks, including VTB, and block major Russian companies. Russia raised finance in the UK.

British Prime Minister Boris Johnson said Russian banks would be cut off from the pound sterling and clearing markets.

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

More than 100 individuals, organizations and subsidiaries will eventually be sanctioned.

European Commission President Ursula von der Leyen said EU leaders had agreed to sanctions against Moscow targeting 70% of the Russian banking market.

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

However, Russia’s top three banks, Sberbank, VTB and Gazprombank, do not face an EU asset freeze.

The bloc also places a limit of 100,000 euros ($112,700) on EU bank accounts of Russian citizens, who will not be allowed to buy shares denominated in euros.

EU refinancing of Russian state-owned enterprises is also prohibited, with the exception of some utilities. Securities clearinghouses in the EU will not be allowed to serve Russian counterparts.

WHAT IS NEXT?

Russia’s major banks are already deeply integrated into the global financial system, meaning any sanctions against the largest institutions could extend far beyond its borders. Cutting them off from SWIFT would make transactions more difficult and expensive.

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

The ban from SWIFT will be accompanied by other sanctions that limit the ability of some of Russia’s biggest banks to do international business.

The US Treasury Department said Thursday’s sanctions would disrupt billions of dollars worth of daily foreign exchange transactions conducted by Russian financial institutions. Collectively, these institutions conduct about $46 billion in foreign exchange transactions, 80% of which are in dollars. “The majority of those transactions will now be disrupted,” it said.

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

Sberbank says it is prepared for any developments.

VTB said it was prepared for the most extreme situation.

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 IS HARD?

Western banks and creditors fear Russia being blocked from 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 say containing Russia is technically difficult and will hurt trading partners. For example, there have been concerns about how Russian energy imports will be paid for and whether foreign creditors will be paid.

Russia’s institutions are better able to deal with sanctions than eight years ago, analysts say, although that doesn’t mean they won’t be hurt.

WHAT FOREIGN BANK IS THE MOST CONTACTED?

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

Shares of banks with significant operations in Russia such as Austria’s Raiffeisen Bank International and France’s Societe Generale were hit hard last week.

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

Austrian banks have $17.5 billion. That compares with $14.7 billion for the United States.

(1 dollar = 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)

https://www.oann.com/explainer-russian-banks-face-exclusion-as-allies-deploy-financial-nuclear-weapon/?utm_source=rss&utm_medium=rss&utm_campaign=explainer-russian-banks-face-exclusion-as-allies-deploy-financial-nuclear-weapon Russian banks face exclusion as allies deploy ‘financial nuclear weapons’

Bobby Allyn

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