By Tommy Wilkes

LONDON (Reuters – Tuesday’s announcement by the European Union and Britain of new sanctions against Russia was made after Moscow recognized two separate regions of Ukraine as autonomous entities. The United States is expected to soon announce their own measures.

Their main targets were Russian banks, and their international operations.

However, the sanctions will likely have a minimal impact. The West’s governments prefer that the more extensive sanctions they have in place for the event of a crisis to be kept aside.

Russian bankers, or Western counterparts that have exposeds to the country, won’t suffer from this.

These are the tactics used to target banks and what measures may be more effective.

WHAT HAS ARRIVED SO FAR?

European foreign ministers reached an agreement to sanction 27 people and entities. This includes banks that finance Russian decision-makers as well as operations in breakaway regions.

All members of Russia’s lower house who voted for recognition of breakaway areas are included in the package of sanctions.

Britain placed sanctions against Gennady Timothyenko and two billionaires who have close ties to President Vladimir Putin. They also targeted five banks: Rossiya (IS Bank), GenBank, Promsvyazbank, Promsvyazbank, Black Sea Bank and Promsvyazbank

These lenders are very small, and Promsvyazbank only is listed on the Russian central banking’s systemically important credit institution list.

Bank Rossiya was already subject to U.S. sanctions in 2014 because of its close ties with Kremlin officials.

According to experts, the measures are modest.

“This is a limited, targeted start, a shot across the bows,” said Paul Feldberg, a sanctions expert and partner at law firm Jenner & Block, adding that Putin was unlikely to care.

While the United States has a number of steps to strike Russia’s economy in case Moscow invades Ukraine, they have yet to declare sanctions. They will however be announced later, Tuesday.

What will the IMPACT BE?

For the moment, it is minimal.

Russia’s largest banks are heavily integrated in the global financial system. Therefore, sanctions could reach far beyond Russia’s borders.

The new sanctions are focused on lenders that are smaller.

While the bank sanctions have not been as broad as the ones imposed by Russia after its annexation in 2014 of Crimea, they are much more extensive than those in 2014.

The West sought to blacklist specific people, limit Russia’s financial institutions that are state-owned, to prevent them from accessing Western capital markets. It also targeted larger state lenders. And it imposed broad restrictions on trade in technology.

The new British measures did not place limits on Russia’s largest state banks or cut off Russian capital. They also didn’t expel other so-called Russian oligarchs.

Following the escape of the sanctions by the state-controlled organizations, the shares of Russia’s top banks Sberbank to VTB rose dramatically.

Russian banks and state institutions can now withstand limited sanctions better than in the past eight years, according to analysts. They also have less exposure to Western financial markets.

Russia is now diversifying away from U.S. Treasuries, dollars and since 2014 the Euro and Gold account for more of Russia’s Reserves than the dollars according to the Institute of International Finance’s January report.

Russia also has strong macroeconomic defenses, with $635 billion in hard currency, high oil prices at $100 per barrel, and an 18% debt-to GDP ratio for 2021.

What’s next?

While the EU said that they are ready to impose massive consequences on Russia’s economic, they also cautioned about Russia’s energy and trade connections, saying it would be willing to increase sanctions gradually.

Officials see Tuesday’s action as a first round in the series of sanctions.

There are lenders in the region that deal directly with these breakaway areas, but it is not yet clear when or if the EU will affect the major banks.

Sources told Reuters that Washington had prepared a slew of steps to prevent U.S. banks from processing Russian bank transactions, including cutting off “correspondent” banking relationships.

It would be very difficult to disable international payments.

These measures may, however, be held in reserve.

Washington can also use the SDN list to sanction certain Russian people and businesses, effectively kick them out of U.S. banks.

According to sources familiar with the plans, VTB Bank and Sberbank were identified as possible targets. However, it’s not clear whether Russian banks will be included on the SDN List.

WHAT ARE YOU GOING TO DO HAREST?

The biggest fear of the banks in the region and Western creditors is Russia’s exclusion from SWIFT. This global payment system is widely used worldwide by over 11,000 financial institutions across 200 countries.

This would be a devastating move for Russian banks, but it has complex consequences – banning SWIFT would make obtaining money from European creditors difficult. Russia also built up an alternative to SWIFT.

The Bank of International Settlements (BIS), which collects data, shows that European banks account for the largest portion of Russia’s nearly $30 Billion in exposure of foreign banks to Russia.

What FOREIGN Banks are the most exposed?

Europe’s banks, especially those from France, Italy, Austria and Italy, are most vulnerable to Russia and should be on alert for any new sanctions.

GRAPHIC: Bank exposure to Russia – https://fingfx.thomsonreuters.com/gfx/mkt/myvmnxmabpr/banks%20russia.PNG

According to BIS data, each of the French and Italian banks had claims against Russia of around $25 billion for the third quarter. Austrian banks owned $17.5 million. Compare that to the $14.7 Billion for the United States.

Austria’s RBI was one of the largest lenders. The RBI has significant operations in Russia as well as Ukraine. They also stated that “crisis plan” would apply if circumstances worsen. On Tuesday, its shares were down 7.5%.

Some bankers are less concerned by the risk of sanctions because many banks around the world have reduced their Russia exposure.