Alexandra Alper, Karen Freifeld

WASHINGTON/NEW YORK – President Joe Biden’s Administration has prepared an initial package to sanction Russia. This includes preventing U.S. financial institutions processing Russian bank transactions, according to three sources familiar with the matter.

These measures would be taken only if Russia invades Ukraine. They aim to harm the Russian economy by cutting “correspondent banking relations” between the targeted Russian banks, and U.S.-based banks that allow international payments.

The U.S. government has said that bank restrictions will be part of the package of possible sanctions. However, there is no previous reporting on the administration’s plans to eliminate correspondent banking links, which help underpin global cash flows.

The United States will be able to use the most potent sanctioning tool against Russian people and businesses by placing them onto the Specially Designated Nationals list. They effectively kick them out the U.S. bank system and ban their American trade.

Both the Treasury Department and White House declined to comment.

Sources said that the package might change at any time and that it wasn’t clear who would be the target. But, the sources believe VTB Bank is one of the possible targets.

Reuters consulted experts who said while the correspondent bank tool does not have the same punch as an SDN designation which locks a bank, but they can still do a serious blow to the targeted banks by making it hard to transact with U.S. dollar, the global reserve money.

A large part of international trade takes place in dollars.

Although it is not clear whether Russian banks will be included on the SDN List, both sanctions can hit Russia very hard.

Kay Georgi, a Washington attorney who specialises in international trade said that because a large number of trade transactions worldwide are made in U.S. dollar, this sanction has bite. However, it does not include the potentially fatal sanction of being put on the SDN and having any assets or persons in the U.S. frozen.

Sources indicated that certain transactions could be exempted from restrictions by the administration if necessary.

‘UPFRONT COSTS’

Since weeks, the Biden administration has threatened Russia with tough bank sanctions in an attempt to stop Vladimir Putin’s invasion of Ukraine. Moscow is estimated to have 150,000 soldiers on the borders of Ukraine, though Putin denies any plans for an invasion.

Peter Harrell who is on the National Security Council said that last month “heavy-hitting financial sanctions” were part a strategy to damage Russia’s economic but not its citizens.

He stated that the goal of financial sanctions was to put Russia at short-term upfront cost. This would trigger inflation and trigger capital flight. The Russian central bank should bail out its banks.

Some U.S. financial companies are on edge due to the harsh warnings. According to sources, members of both the payments and financial service industries are in constant contact with U.S. Treasury Department Office of Foreign Assets Control (which administers sanctions).

As Russia conducted military exercises in Belarus over the weekend, tensions rose. This raised fears that Russia might invade Ukraine.

France stated that Biden and Putin agreed to summit on Sunday, giving hope for a resolving of conflict.

Boris Johnson (British Prime Minister) stated that the United States of America and Britain will block Russian companies’ access U.S. Dollars and British Pounds if ordered by the Kremlin to invade.

Similar rhetoric has been used by the Biden administration. On Friday, Daleep Singh (Deputy National Security advisor) stated to reporters that Russia’s invasion of Ukraine would have a devastating effect on its economy as well as its position in the global strategic map.