# Explainer-Western sanctions on banks only scratch surface of Fortress Russia
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-02-23
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: New Western Sanctions minimal impact on Russian banks
Meta Description: Stay informed on the latest sanctions imposed on Russian banks by the US, EU, and Britain after recent events in Ukraine. Find out how these measures could
URL: https://financedigest.com/explainer-western-sanctions-on-banks-only-scratch-surface-of-fortress-russiahtml

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By Tommy Wilkes and John McCrank

LONDON/NEW YORK (Reuters) – The United States, the European Union and Britain announced new sanctions on Russia on Tuesday after Moscow’s recognition of two separatist regions in Ukraine as independent entities.

Chief among their targets: Russian banks and their ability to operate internationally.

Yet the impact of the new sanctions is likely to be minimal. Western governments – for now – are preferring to keep the much larger sanctions packages that they have planned in reserve should the crisis escalate.

It means Russian bankers or their Western counterparts with exposures to the country won’t be losing much sleep.

Indeed, U.S. banks are not expecting [global](https://www.financedigest.com/global-shares-jump-but-bank-whack-a-mole-not-over.html "Global shares jump but bank ‘whack-a-mole’ not over") sanctions to have a major impact on American bank businesses or spark contagion risk, given lenders have little exposure to the Russian economy, said three executives familiar with industry thinking. \[nL8N2UX2PZ\]

Here’s how the banks are being targeted and which measures might hit harder:

WHAT HAS BEEN ANNOUNCED SO FAR?

European foreign ministers agreed to sanction 27 individuals and entities, including [banks financing](https://www.financedigest.com/why-finance-professionals-must-bank-on-a-journey-to-the-cloud.html "Why finance professionals must bank on a journey to the cloud") Russian decision-makers and operations in the breakaway territories.

The package of sanctions also includes all members of the lower house of the Russian parliament who voted in favour of the recognition of the breakaway regions.

Britain imposed sanctions on Gennady Timchenko and two other [billionaires with close links to Russian](https://www.financedigest.com/billionaire-investor-yuri-milner-relinquishes-russian-citizenship.html "Billionaire investor Yuri Milner relinquishes Russian citizenship") President Vladimir Putin, and on five banks – Rossiya, IS Bank, GenBank, Promsvyazbank and the Black Sea Bank.

The lenders are relatively small and only military bank Promsvyazbank is on the Russian central [bank’s list of systemically important credit](https://www.financedigest.com/explainer-what-are-credit-default-swaps-and-why-are-they-causing-trouble-for-europes-banks.html "Explainer-What are credit default swaps and why are they causing trouble for Europe’s banks?") institutions.

Bank Rossiya is already under U.S. sanctions from 2014 for its close ties to Kremlin officials.

Washington imposed sanctions on Promsvyazbank and VEB bank.

It also ramped up prohibitions on Russian [sovereign debt](https://www.financedigest.com/analysis-no-china-no-deal-bid-to-break-sovereign-debt-logjams-gets-weary-thumbs-up.html "Analysis-No China, no deal: Bid to break sovereign debt logjams gets weary thumbs up"), which U.S. President Joe Biden said meant the Russian [government would be cut](https://www.financedigest.com/carrefour-unveils-30-euro-shopping-basket-in-spain-after-government-price-cut-proposal.html "Carrefour unveils 30 euro shopping basket in Spain after government price cut proposal") off from Western financing. The U.S. Treasury said it was extending current prohibitions to cover participation in the secondary [market for bonds issued after March 1 by Russia’s Central Bank](https://www.financedigest.com/oil-markets-steady-as-investors-weigh-banking-crisis-russia.html "Oil markets steady as investors weigh banking crisis, Russia") and other entities.

Russian dollar [bonds extended](https://www.financedigest.com/stocks-bonds-extend-rally-on-hopes-rate-hikes-ease.html "Stocks, bonds extend rally on hopes rate hikes ease") their losses after the announcement on U.S. sanctions, with longer-dated issues slipping to record lows trading in the mid-90s, data showed. The premium [demanded by investors to hold](https://www.financedigest.com/ibm-beats-first-quarter-profit-estimates-signals-demand-holding-up.html "IBM beats first-quarter profit estimates, signals demand holding up") Russian debt over safe-have U.S. Treasuries blew out to 329 basis points, the widest since the COVID market rout in spring 2020.

WHAT WILL THE IMPACT BE?

For now – minimal.

Russia’s large [banks are deeply integrated into the global financial](https://www.financedigest.com/why-banks-could-stand-to-learn-a-thing-or-two-about-financial-inclusion-from-fintechs.html "Why banks could stand to learn a thing or two about financial inclusion from fintechs") system, meaning sanctions on the biggest institutions could be felt far beyond its borders.

But the new sanctions focus on smaller lenders.

The measures targeting [banks are not yet](https://www.financedigest.com/swiss-national-bank-says-inflation-battle-not-yet-won.html "Swiss National Bank says inflation battle not yet won") as extensive as those imposed after Russia’s annexation of Crimea in 2014, although many of those sanctions remain in place.

Then the West blacklisted specific individuals, sought to limit Russia’s state-owned [financial institutions’ access to Western capital markets](https://www.financedigest.com/marketing-in-a-new-financial-frontier.html "Marketing in a new financial frontier "), targeted the bigger state lenders, and imposed widespread limits on the trade of technology.

[Britain’s new measures refrained from imposing limits on the biggest state banks](https://www.financedigest.com/britain-seeks-to-boost-banking-services-from-fintechs.html "Britain seeks to boost banking services from fintechs"), cutting off capital for Russian companies, or ejecting other prominent so-called Russian oligarchs from Britain.

[Shares in Russia’s biggest banks](https://www.financedigest.com/bank-shares-rise-after-credit-suisse-rescue-eases-crisis.html "Bank shares rise after Credit Suisse rescue eases crisis"), Sberbank and VTB soared after the state-controlled groups escaped the sanctions.

Analysts [say Russian institutions are better able to cope with limited](https://www.financedigest.com/digital-euro-will-be-free-but-limited-in-scope-ecb-says.html "Digital euro will be free but limited in scope, ECB says") sanctions than eight years earlier, and Russian state banks have cut their exposure to Western markets.

Russia has since 2014 diversified away from U.S. Treasuries and dollars – the euro and gold [account for a bigger share](https://www.financedigest.com/the-sharing-economy-whats-in-it-for-accountants.html "THE SHARING ECONOMY: WHAT’S IN IT FOR ACCOUNTANTS?") of Russia’s reserves than do dollars, according to a January report from the Institute of International Finance.

Russia has some strong macroeconomic defences too, including abundant hard currency reserves of $635 billion, [oil prices near](https://www.financedigest.com/oil-spills-and-near-misses-more-ghost-tankers-ship-sanctioned-fuel.html "Oil spills and near misses: more ghost tankers ship sanctioned fuel") $100 a barrel and a low debt-to-GDP ratio of 18% in 2021.

“The ones today were not that significant,” said Samuel Charap, a senior political scientist at the nonprofit, nonpartisan RAND Corporation, about the U.S. sanctions.

“The question is where we go from here,” he said. “I am increasingly pessimistic, and I think there is a high probability of significant further Russian military action and I think in that case, we are likely to see some of the really qualitatively more devastating measures than in the past.”

WHAT MIGHT COME NEXT?

The EU has said it is ready to impose “massive consequences” on Russia’s economy but has also cautioned that, given the EU’s close energy and trade ties to Russia, it wants to ratchet up sanctions in stages.

Officials consider Tuesday’s measures as a first round.

Beyond lenders that do business directly with the breakaway regions, it’s not clear yet when or whether the EU will hit the [biggest banks](https://www.financedigest.com/the-recent-bank-of-england-meeting-the-biggest-rate-hike-recession-warning-and-the-fallout.html "The recent Bank of England meeting, the biggest rate hike, recession warning and the fallout").

Washington has prepared a raft of measures including barring U.S. financial institutions from processing transactions for [major Russian banks](https://www.financedigest.com/the-journey-towards-a-digital-bank-five-major-stages-to-successful-banking-digitalisation.html "THE JOURNEY TOWARDS A DIGITAL BANK – FIVE MAJOR STAGES TO SUCCESSFUL BANKING DIGITALISATION") by cutting “correspondent” banking relationships, sources told Reuters last week.

Disabling international payments would hit hard.

Those measures, however, may be kept in reserve.

[Russia’s Sberbank and VTB would face](https://www.financedigest.com/gold-investors-face-bind-over-bars-from-tarnished-russia.html "Gold investors face bind over bars from tarnished Russia") American sanctions if Moscow proceeds with its invasion of Ukraine, a senior U.S. administration official told reporters.

If such banks did get targeted, U.S. banks could face retaliation, said Charap, who [pointed to cyber attacks](https://www.financedigest.com/new-intelligence-points-to-pro-ukraine-group-in-nord-stream-attack-nyt.html "New intelligence points to pro-Ukraine group in Nord Stream attack -NYT") as a potential weapon that could be used.

WHAT WOULD [HIT HARDEST](https://www.financedigest.com/digital-divide-hits-rural-black-americans-hardest.html "‘Digital divide’ hits rural Black Americans hardest")?

What the region’s [banks and Western creditors fear most is the possibility that Russia is banned from a widely used global payment](https://www.financedigest.com/5-ways-banks-can-compete-in-payments.html "5 ways banks can compete in payments") system, SWIFT, which is used by more than 11,000 financial institutions in over 200 countries.

Such a [move would hit Russian banks](https://www.financedigest.com/stock-pickers-reckon-its-time-to-move-on-from-central-banks.html "Stock pickers reckon it’s time to move on from central banks") hard but the consequences are complex. Banning SWIFT would make it tough for European creditors to get their money [back and Russia has been building](https://www.financedigest.com/reckon-one-builds-momentum-with-strong-backing-from-accountants-joining-the-cloud-advisor-programme.html "Reckon One builds momentum with strong backing from accountants joining the Cloud Advisor Programme") up an alternative payment system.

Data from the Bank of International Settlements (BIS) shows that European lenders [hold the lion’s share of the nearly $30 billion in foreign banks’](https://www.financedigest.com/bank-of-canada-seen-on-hold-even-as-economy-accelerates.html "Bank of Canada seen on hold even as economy accelerates") exposure to Russia.

WHICH FOREIGN BANKS ARE MOST EXPOSED?

Europe’s banks – particularly those in Austria, Italy and France – are the world’s most exposed to Russia, and have been on high alert should 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](https://www.financedigest.com/first-abu-dhabi-bank-could-renew-35-billion-offer-for-stanchart-bloomberg-news.html "First Abu Dhabi Bank could renew  billion offer for StanChart -Bloomberg News") on Russia in the third quarter of 2021, according to BIS figures. [Austrian banks](https://www.financedigest.com/austrian-regulator-orders-system-relevant-banks-to-up-capital-buffers.html "Austrian regulator orders system-relevant banks to up capital buffers") had $17.5 billion. That compares with $14.7 billion for the United States.

Among the most exposed lenders is Austria’s RBI, which has big [operations in Russia](https://www.financedigest.com/kfc-franchisees-in-russia-ask-govt-to-halt-sale-of-stores-to-local-operator-ria.html "KFC franchisees in Russia ask govt to halt sale of stores to local operator – RIA") and Ukraine. It has said “crisis plans” would come into effect if things deteriorate. Its [shares closed down 7.5% on Tuesday](https://www.financedigest.com/monte-dei-paschi-to-have-underwriting-consortium-for-share-sale-by-tuesday-source.html "Monte dei Paschi to have underwriting consortium for share sale by Tuesday – source").

Many foreign banks have, however, significantly reduced their exposure to Russia since 2014, 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)


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