Global Sanctions Dashboard: Special Edition for Russia

In our previous edition of Global Sanctions Dashboard, we warned that Russia’s potential invasion of Ukraine would lead to a wave of rapidly escalating sanctions. A little over a month later, the unfortunate event that we all dreaded took place. It was not the first time that Russia had unleashed an unjust war against a neighbor, but it was the first time that the West had sanctioned Russia with the aim of crippling the Russian economy and financial system.

As Ukrainians fight for their freedom, Western countries are imposing new sanctions on entities and individuals supporting the invasion of Ukraine. It is an evolving story that changes day by day. It remains to be seen whether the sanctions can hinder or even stop the invasion of Ukraine, but they are devastating the Russian banking and financial system and pushing Russia towards the risk of default. These are penalties on steroids. In this special edition of the Global Sanctions Dashboard, we take you through those tumultuous weeks spent sanctioning Russian oligarchs and central bank reserves, excluding Russia’s SWIFT and some of Russia’s options to protect its economy from sanctions.

Sanction the Russian central bank and cut SWIFT to Russia

The most impactful and surprising development was the sanctioning of the Central Bank of Russia (CBR) by the US, EU and UK. By freezing the bank’s assets in their jurisdictions, the Western allies hope to deprive Moscow of one of the key elements of its “Fortress Russian” self-sufficiency strategy: the CBR’s $630 billion in reserves.

The CBR did not expect to be penalized so heavily and so soon. Indeed, Western unity over this bold new move to target a G20 central bank surprised everyone last weekend. The CBR was quick to innovate to keep monetary policy tools, including foreign exchange reserves, at its disposal. But it also forced her to break taboos – capital controls, closed stock markets, allowing banks to delay updating asset values. Breaking these taboos can have a long-term price. The CBR has taken years to build credibility as a credible international player and, until now, capital controls have not been part of Russian policy since the 1990s.

The main concern that seems to be driving the behavior of the CBR and the government is the supply of accessible hard currency. With 53% of reserves frozen and no Western or even Chinese banks willing to provide swap lines, the CBR may not be able to meet the liquidity needs of banks and indebted companies. They reacted by forcing the conversion of 80% of export earnings into roubles, introducing loose capital controls and even missing interest payments on some debts.

Export earnings suffered significantly as large energy companies and brokers began to see reputational risk associated with their association with Russia. Nevertheless, several hundred million dollars in export earnings continue to flow in every day. This confirms the view of the GeoEconomics Center on the exclusion of Russian banks from the SWIFT system. Transactions can still take place as long as both parties are willing to find courier service alternatives. This does not rule out disruption for small trades and will add to the list of reasons why investors are avoiding Russian assets.

US sanctions cripple operations of major Russian banks

Looking at this visual of sanctioned Russian entities, you will notice the large number of US sanctioned banks and financial institutions. The reason for this is that when the United States designates a company, it goes after all the subsidiaries that are at least 50% owned by the original target. In accordance with this rule, OFAC designated four major Russian banks and their subsidiaries on February 24: Sberbank (25 subsidiaries), VTB Bank (20 subsidiaries), Otkritie (12 subsidiaries) and Sovcombank (22 subsidiaries). This is another unprecedented measure intended to drain the Kremlin’s ability to finance the war. Although the sanctions have so far failed to stop Russian troops, they have permanently crippled the operations of Russia’s major banks and sent the economy as a whole into a tailspin.

For example, the two main Russian banks, Sberbank and VTB, will be practically unable to transact in dollars. Sberbank is Russia’s largest financial institution, holding the largest deposit market share in the country. However, if Sberbank tries to process dollar payments, the transaction will be rejected once it reaches US financial institutions. Likewise, the assets of VTB Bank, which is the second largest financial institution and majority owned by the Russian government, are already frozen and inaccessible to the Kremlin. As the Russian state loses access to its reserves to support the local financial system and the ruble continues to lose ground, major Russian financial institutions are at risk of bankruptcy.

Belarusian involvement in the invasion of Ukraine

Notably, OFAC’s list of sanctioned entities includes Belarusian companies alongside Russian companies. Belarus is the only country actively supporting Russia’s invasion of Ukraine. According to Treasury Department, a significant part of the Belarusian financial system is now subject to US sanctions, after designating two public banks (Belinvestbank and Bank Dabrabyt). The UK joined the US in sanctioning Belarusian entities and designated two state-owned enterprises – JSC Aircraft Repair Plant and JSC Integral, a manufacturer of military semiconductors. Lukashenko is Putin’s only regional military ally, the only active leader help his war.

Punish Russian oligarchs and kleptocrats

Another highlight of the latest Western sanctions is the targeting of Russia’s highest elites – starting with President Putin himself – and extending to the sons of his close allies who run state-owned companies. Interesting examples of sanctioned family members include the son of FSB director Alexander Bortnikov, Denis Bortnikov, who is chairman of the board of directors of VTB Bank; as well as Sergei S. Ivanov, who runs the state-owned diamond company Alrosa and whose father happens to be a close ally of Putin. All the assets of these kleptocrats, including Putin’s, have frozen in EU, US and UK and they are prohibited from traveling to sanctioning countries. We expect more oligarchs to find themselves on sanctions lists in the days and weeks to come.

However, when it comes to sanctioning the assets of oligarchs and kleptocrats, the hardest part is enforcement. Recognizing this, the Biden administration is launch of a new “KleptoCapture” task force, made up of agents from the FBI, IRS, Homeland Security Investigations, and other agencies. The task force will be responsible for tracing black money from Russian kleptocrats and tracking down Russians who evade sanctions through the Western financial system.

Can Russia sanction its economy?

Neither cryptocurrencies nor the digital ruble can punish the Russian economy. There are two concurrent conversations about Russia’s use of digital currencies for sanctions: (1) the use of commercial cryptocurrencies to evade financial sector sanctions and (2) the potential use of the digital ruble, the digital currency of the central bank of Russia. The first option is not viable as all US-based cryptocurrency exchanges will comply with US sanctions and block the wallets of Russian individuals subject to sanctions. Additionally, cryptocurrencies have tracking capabilities, making illicit use easy to find and punish, as shown in OFAC sanctions against SUEX last September.

Likewise, the Russian CBDC cannot shield the Russian economy from Western sanctions, as the digital ruble is in its infancy and is focused only on a national retail CBDC. The project is not part of any bank-to-bank CBDC development, making it impossible to move any digital rubles outside of Russia. Equally important, as a CBDC is a fiat currency, any potential use of the digital ruble would suffer from ruble devaluation effects, making it very unattractive to hold or accept. Thus, digital currencies cannot remedy the Russian economy, at least in the short term.

De-dollarization is also not an option to mitigate the effects of sanctions, at least not in the short or even medium term. Russia has been working on dedollarization since the United States imposed sanctions in 2014, including Rosneft replacing dollars with euros for export invoicing in 2019. However, with increased use of the Euro, Russia has become more exposed to EU sanctions and, as we have seen, the EU is currently just as keen on sanctioning Russia as the US, if not, more. The West’s coordinated sanctions policy is undermining Russia’s efforts to shield its economy from sanctions through dedollarization.

On the radar

While you’ve probably heard the word “unprecedented” a number of times recently, it’s the best word you can think of to describe the sanctions packages Western countries are announcing daily against Russia. According to White House press release, more than 30 countries, representing more than half of the global economy, have sanctioned Russia and made Moscow a global economic pariah. Another notable circumstance is that Western countries are ready to accept the negative effects of sanctions on their economies and are looking for energy alternatives in anticipation of Russia’s gas cuts. March will likely see more sanctions from the United States and its allies, but it remains to be seen whether the sanctions can substantially affect the situation on the ground in Ukraine. As of this writing, it remains unclear whether the United States and its partners will touch the third rail – Russian energy exports.

Global Sanctions Dashboard

The Global Sanctions Dashboard provides a comprehensive overview of the various sanctions regimes and lists. Each month you will find an update on the most recent registrations and deregistrations and an overview of the motivations behind them.

Geoeconomics Center

At the intersection of economics, finance and foreign policy, the GeoEconomics Center is a translation center whose goal is to help shape a better global economic future.

Associate specialists:
Julia Friedlander,
Maya Nikoladze,
Charles Lichfieldand
Ananya Kumar

Image: Russian ruble currency chart financial crisis

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