Explainer: Russian banks face debarment in new round of sanctions

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LONDON/NEW YORK, Feb 24 (Reuters) – Britain and the United States targeted Russian banks on Thursday as part of a new sanctions package following Moscow’s invasion of Ukraine.

The European Union should follow suit.

Here is an overview of the impact of the announced sanctions on banks and investors:

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WHAT HAS BEEN ANNOUNCED SO FAR?

The US Treasury Department said it was targeting the “basic infrastructure” of Russia’s financial system, sanctioning two of the country’s biggest banks – Sberbank (SBER.MM) and VTB (VTBR.MM), backed by the state. Also on the sanctions list are Otkritie, Sovcombank and Novikombank as well as some senior executives of public banks.

US banks must sever their correspondent banking links – which allow banks to make payments to each other and move money around the world – with Russia’s biggest lender, Sberbank, within 30 days.

Washington officials have also used the US government’s most powerful sanctioning tool, adding VTB, Otkritie, Novikombank and Sovcombank to the list of specially designated nationals (SDN). The move effectively kicks the banks out of the US financial system, prohibits their trade with Americans, and freezes their US assets. Read more

US sanctions also target two Belarusian state-owned banks – Belinvestbank and Bank Dabrabyt – for that country’s support for Moscow’s attack.

The US sanctions came shortly after the UK government said it would impose an asset freeze on all major Russian banks, including VTB, and prevent major Russian companies from raising funds in Britain.

Russian banks would be cut off from sterling markets and clearing payments, Johnson said.

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

More than 100 people, entities and subsidiaries will eventually be sanctioned, the government said.

Britain had previously imposed sanctions on just three billionaires closely linked to Russian President Vladimir Putin and five relatively small moneylenders. Read more

Earlier in the week, European foreign ministers agreed to sanction 27 individuals and entities, including banks funding Russian policymakers and operations in Ukraine’s breakaway territories, but not the biggest lenders.

Washington had imposed sanctions on Promsvyazbank and VEB Bank.

The United States has also tightened bans on Russian sovereign debt, which US President Joe Biden said would cut off the Russian government from Western funding. Read more

WHAT COULD COME NEXT?

Russia’s big banks are deeply integrated into the global financial system, meaning any sanctions against the biggest institutions could reverberate far beyond its borders.

The U.S. Treasury said Thursday’s sanctions would disrupt billions of dollars of daily foreign exchange transactions by Russian financial institutions. Together, these institutions conduct approximately $46 billion in foreign exchange transactions, 80% of which are in dollars. “The vast majority of these transactions will now be halted,” he said.

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

Sberbank said it was ready for any development. Read more

VTB said he prepared for the most serious scenario. “We have developed several plans to counter the sanctions so as to minimize the negative consequences for our customers,” he said in a statement.

Sovcombank, Otkritie and Novikombank did not immediately respond to requests for comment. The Russian Embassy in the United States also did not immediately respond to a request for comment.

New sanctions being prepared by European Union leaders include freezing Russia’s assets, cutting off its banks’ access to financial markets and targeting “Kremlin interests”. Read more

WHAT WILL HIT THE HARDEST?

What Western banks and creditors fear most is that Russia will be banned from the global payment system, SWIFT, which is used by more than 11,000 financial institutions in more than 200 countries. Read more

Such a move would hit Russian banks hard, but the consequences are complex. Banning SWIFT would make it difficult for European creditors to get their money back. Read more

Britain’s Johnson said he intended to work with allies to block Russia’s access to SWIFT.

But several EU sources said earlier on Thursday it was unlikely Russia’s foreclosure of SWIFT would be agreed at this stage.

Analysts said Russian institutions are better able to weather the sanctions than eight years earlier, though that doesn’t mean they wouldn’t hurt.

The Institute of International Finance, the largest international banking group, said US sanctions against Russia would have a huge impact on Russia’s economy and citizens and could trigger a recession.

WHICH FOREIGN BANKS ARE THE MOST EXPOSED?

Many foreign banks have significantly reduced their exposure to Russia since 2014, but several Western banks have been involved in transactions and have other relationships.

There were sharp falls in European bank stocks on Thursday, with a European bank stock index (.SX7P) closing down 8.1%.

Banks with large operations in Russia were particularly hard hit, with Austria’s Raiffeisen Bank International (RBIV.VI) losing 23% and France’s Societe Generale (SOGN.PA) losing 12%.

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

Austrian banks had $17.5 billion. This compares to $14.7 billion for the United States.

Bank exposures to Russia
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Additional reporting by Tom Sims in Frankfurt, Iain Withers and Karin Strohecker in London, Michelle Price in Washington and John McCrank, Megan Davies and Paritosh Bansal in New York; Editing by Jane Merriman, John O’Donnell and Daniel Wallis

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