US Sanctions Against Russian Banks Are The West’s Most Powerful Economic Threat

U.S. President Joe Biden and Russian President Vladimir Putin arrive for the U.S.-Russia Summit at Villa la Grange in Geneva, Switzerland June 16, 2021. Saul Loeb/Pool via REUTERS

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LONDON, Feb 16 (Reuters) – For NATO members, the most potent measure against Russia if it invades Ukraine would be U.S. sanctions cutting Russian state banks off the dollar, according to Russian leaders, bankers and former senior US sanctions officials. The United States has warned that Russia could invade as early as this week. Moscow denies having such plans, but says the West must take its concerns about NATO expansion seriously. read more Washington and its allies in Europe are finalizing a sweeping sanctions package should Russia launch an invasion, according to US and European officials. read more The US package would expand a technology export ban to include all goods made with US components or software, as well as proposed sanctions against specific Russian billionaires. But sanctions experts say that more than any other measure, aggressive action against Russian state banks would hit its economy the hardest. “Banking sanctions are the most impactful action the United States can take in the short term,” said Brian O’Toole, former senior adviser to the director of the Office of Foreign Assets Control, or OFAC, at the U.S. Treasury Department, that designs and manages the implementation of sanctions. Proposed sanctions against Russian banks would prevent them from transacting in US dollars, essentially freezing any dollar-denominated assets or liabilities held by banks at home and abroad. Russian Finance Minister Anton Siluanov said on Wednesday that sanctions against Russian banks would be “unpleasant” and lead to a spike in volatility, but said the state would ensure that all deposits with banks and all transactions, including in foreign currencies, are secure. Russia’s abundant hard currency reserves – which currently stand at $635 billion – would help protect against the potential hit, he said. Asked about possible sanctions against Russian state banks, Kremlin spokesman Dmitry Peskov told Reuters that Russia was “preparing for unpredictable actions” by the United States “by protecting itself against any risk “.

He said: “We might get the impression that all this information noise and all these claims that Russia is about to attack Ukraine are made to contain Russia further and create a reason to impose new sanctions – and so they talk about these hellish sanctions.” Elina Ribakova, deputy chief economist at the Institute of International Finance in Washington, said that even if Russia has enough reserves, the potential measures “could cause a run on deposits. This will certainly have a strong impact on the national financial system. This will increase the risk of financial instability, including widening spreads and a sell-off of the ruble. U.S. sanctions far exceed the power of any other jurisdiction, as the White House can potentially impose secondary sanctions on any foreign bank that continues to do business with these institutions, said O’Toole and finance and security expert Tom Keatinge at the Royal United Services Institute, a London-based think tank. The White House did not respond to requests for comment on secondary sanctions. Shares of banking giant Sberbank (SBER.MM) and smaller rival VTB (VTBR.MM) both fell last week ahead of sanctions, although they recouped some losses after Russia said on Tuesday that some troops stationed near the borders with Ukraine were back at base after completing drills, Sberbank holds almost half of Russia’s 21 trillion rubles in deposits and, along with state lenders VTB, Gazprombank and Rosselkhozbank , accounts for nearly 60% of the country’s banking assets. GOING HEAVY Sberbank, VTB and the Russian Central Bank declined to comment. Gazprombank and Rosselkhozbank did not respond to requests for comment. “Abolishing Sberbank would have massive ramifications,” O’Toole added. The nature of the sanctions would likely depend on the scale of a Russian invasion. A Russian invasion limited to an incursion into the rebel Donbass region of eastern Ukraine, for example, could mean the US has scaled its targeting of Russian state banks to maintain greater deterrence. , potentially keeping Sberbank to the end, said Daniel Fried, a former State Department coordinator for sanctions policy in the Obama administration. But “if the Kremlin goes big, we might as well, and we might go big anyway,” Fried said. Sanctions on the banks would in part be aimed at forcing Russia’s central bank to dip into its hard currency reserves in order to bail out banks and keep them afloat, O’Toole and Fried said. The central bank declined to comment on hard currency reserves and sanctions. Russia has few defenses to withstand a US-led attack on its financial stability. Strong currency reserves, high oil prices and a low debt-to-GDP ratio of 18% in 2021 put it in a good position to face further tightening of existing sanctions, said Chris Weafer, director of MacroAdvisory, a firm consultancy based in Moscow.

In addition, Russian state banks reduced their exposure to Western markets when the US and EU imposed limited sanctions on VTB and Sberbank in retaliation for Russia’s annexation of Crimea in 2014. , which limited their ability to take on debt.

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Today, proposed sanctions against state banks would include a system of waivers, licenses and liquidation periods to ensure that payments for dollar-denominated commodity contracts and debt payments can be made. , sanctions experts said.

Russian officials have largely focused on threats to cut Russia off from the SWIFT financial messaging system in the event of war. But US and European officials said last week the move was now off the table amid concerns from European lenders that it could mean billions of dollars in outstanding loans they have in Russia would not be repaid. . Read more

DOLLARS THE KEY Sberbank chief executive German Gref has previously brushed off reports that US sanctions could prevent Moscow from converting rubles into dollars on the grounds that he believed it was “impossible to execute”. Two senior Russian bankers interviewed by Reuters said they expected any targeted bank to escape the worst of the impact by converting their dollar holdings into euros. Former senior US sanctions officials, however, said that confidence was misplaced, as dollars would still have to pass through a US clearing bank for conversion. “Anything denominated in dollars has to go through the United States and once you do it’s blocked,” O’Toole said. These sanctions, he said, could also lead to the freezing of dollar accounts held abroad by Russian state banks in the correspondent. Igor Yurgens, vice president of the Russian Union of Industrialists and Entrepreneurs, a powerful lobby group for Russian businesses, told Reuters that Russia’s central bank was working on a correspondent account program. with China to convert cash that could help mitigate the impact of sanctions. “Everything would be difficult, but it won’t fall apart,” he said. The Russian authorities “have conducted technological stress tests and believe that they will be fine for a while”. Sergey Aleksashenko, a former vice president of the Russian central bank currently living in exile in the United States, said he believed the sanctions threats from the West were nothing more than an escalation of virtual war or information between Russia and the West. In this standoff, “Putin’s weapon is (the movement of) tanks and the West’s is about sanctions. It’s all part of a big game,” he said. But one of Russia’s top 50 billionaires interviewed by Reuters warned that political maneuvering between Moscow and Washington could lead to conflict and economic retaliation. “Everyone has played a virtual game… But then all of these virtual events can become facts of life.” “The sanctions will have serious economic consequences,” he said.

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Reporting by Catherine Belton Additional reporting by Katya Golubkova in Moscow Editing by Jonathan Boyle and Alistair Bell

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