Tommy Wilkes, John McCrank

LONDON/NEW YORK – On Tuesday, the United States and Britain announced additional sanctions against Russia after Moscow recognized two independent regions of Ukraine.

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

The new sanctions are unlikely to have much impact. For now, the Western countries prefer to hold the larger sanction packages they had in reserve for a crisis.

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

According to three industry experts, U.S. bank executives don’t expect sanctions to have an impact on American banks or cause contagion risks. Since lenders are not exposed to Russian economies, they do not anticipate that global sanctions will have any major effect on American businesses. [nL8N2UX2PZ]

This is how banks can be targeted, and what might make it more difficult:

WHAT HAS BEEN ADVERTISED SO FAR

European foreign ministers made an agreement to sanction 27 entities and individuals, which included banks funding Russian decision makers and activities in the separatist territories.

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

Britain has imposed sanctions against Gennady and Gennady Tychenko, as well as two other billionaires, who are close to Russian President Vladimir Putin. The same applies to five banks, Rossiya and IS Bank, GenBank and Promsvyazbank.

These lenders are small, and the only Russian military bank Promsvyazbank appears on the list of important systemically significant credit institutions.

Bank Rossiya has been under U.S. sanction since 2014 due to its close connections with Kremlin officials.

Washington placed sanctions against Promsvyazbank, VEB bank and VEB.

The U.S. President Joe Biden stated that Russia would lose access to Western finance if it increased its prohibitions of Russian sovereign debt. U.S. Treasury stated that it would extend current restrictions to include participation in secondary market bonds for those issued after March 1, by Russia’s Central Bank and other entities.

Russian dollars bonds suffered further losses following the U.S. sanction announcement. Longer-dated securities traded at record lows in the mid-90s. Data showed this. Investors demanded a premium to own Russian debt instead of safe-have U.S. Treasuries. This was the highest since the COVID Market rout in spring 2020.

What will the IMPACT BE?

For the time being, minimal.

Russia’s banks of large size are well-integrated into the international financial system. This means that sanctions against the largest institutions may be felt beyond Russia.

The new sanctions are focused on lenders that are smaller.

While the bank sanctions have not been as broad as those inflicted after Russia annexed Crimea in 2014 in Russia, they are much more extensive than those in 2014.

First the West blacklisted certain individuals and sought to block Russia’s financial institutions from accessing Western capital markets. Then it targeted bigger state lenders. Finally, it imposed broad limits 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 and 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 a larger share of Russia’s reserves than the dollars according to the January Institute of International Finance report.

Russia’s macroeconomic defenses are strong too. They include large hard currency reserves worth $635 trillion, low oil prices of near $100/barrel, and a low ratio of debt to GDP of 18% by 2021.

Samuel Charap (a senior political scientist at RAND Corporation) said that the U.S. sanction were “not that important”.

“The question is where we go from here,” he said. “I’m becoming more pessimistic. There is a good chance of Russian military action. In that case I believe we could see some really devastating actions than in the past.

What’s next?

While the EU said that they are ready to impose massive consequences on Russia’s economic, it cautioned it has not yet decided if it will do so, due to its close relationship with Russia in energy and trade.

Officials view Tuesday’s actions as the first round.

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.

According to sources, Washington prepared a slew of steps that would prohibit U.S. financial institutions processing Russian banking transactions. This was done by cutting the “correspondent’ bank relationships.

It would be very difficult to disable international payments.

However, these measures can be reserved.

A senior U.S. government official stated to reporters that Russia’s Sberbank or VTB could be sanctioned if Moscow invades Ukraine.

Charap said that if such banks were targeted, U.S. bank could suffer retaliation. He pointed out cyber attacks as an option.

WHAT IS THE FINEST WAY TO WIN?

The biggest fear of the banks in the region and Western creditors is that Russia may be banned from the widely-used global payment system SWIFT. This is 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. European creditors would find it difficult to recover their money if SWIFT is banned. Russia, however has already established a new payment system.

According to data from the Bank of International Settlements, European banks hold nearly $30 billion of Russia’s exposure.

WHERE ARE FOREIGN BRANKS THE MOST EXPOSED TO RISK?

Europe’s banks, particularly in France, Italy, Austria, and Italy are among the most at risk from Russia. They have always been alerted should new sanctions be imposed.

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 held $17.5 billion. This compares to $14.7 billion in the United States.

Austria’s RBI is one of the most vulnerable lenders, with large operations in Russia as well as Ukraine. If things get worse, it has stated that “crisis plan” will be in effect. The shares of the company closed at 7.5% Tuesday.

The exposure of many foreign banks to Russia has been reduced by many since 2014 and some bankers are less concerned about possible sanctions.