Western Sanctions On Russian Banks Have Limited Impact

The United States, the European Union, and Britain announced new sanctions on Russia on Tuesday after Moscow's recognition of two separatist regions in Ukraine as independent entities. Chief among their targets: Russian banks and their ability to operate internationally, Tommy Wilkes and John Mccrank reported for Reuters.

Photo Insert: Sovcombank is one of Russia's biggest banks.

Yet the impact of the new sanctions is likely to be minimal. Western governments - for now - are preferring to keep the much larger sanctions packages that they have planned in reserve should the crisis escalate.

It means Russian bankers or their Western counterparts with exposures to the country won't be losing much sleep. Indeed, US banks are not expecting global sanctions to have a major impact on American bank businesses or spark contagion risk, given lenders have little exposure to the Russian economy, said three executives familiar with industry thinking. The Russian economy is only as big as that of the state of New York.

European foreign ministers agreed to sanction 27 individuals and entities, including banks financing Russian decision-makers and operations in the breakaway territories. The package of sanctions also includes all members of the lower house of the Russian parliament who voted in favor of the recognition of the breakaway regions.

Britain imposed sanctions on Gennady Timchenko and two other billionaires with close links to Russian President Vladimir Putin, and on five banks - Rossiya, IS Bank, GenBank, Promsvyazbank, and the Black Sea Bank.

The lenders are relatively small and only military bank Promsvyazbank is on the Russian central bank's list of systemically important credit institutions. Bank Rossiya is already under US sanctions from 2014 for its close ties to Kremlin officials.

Washington imposed sanctions on Promsvyazbank and VEB bank. It also ramped up prohibitions on Russian sovereign debt, which US President Joe Biden said meant the Russian government would be cut off from Western financing.

The US Treasury said it was extending current prohibitions to cover participation in the secondary market for bonds issued after March 1 by Russia's Central Bank and other entities.

Russian dollar bonds extended their losses after the announcement on US sanctions, with longer-dated issues slipping to record lows trading in the mid-90s, data showed. The premium demanded by investors to hold Russian debt over safe-have US Treasuries blew out to 329 basis points, the widest since the COVID market rout in spring 2020.

Russia has since 2014 diversified away from US Treasuries and dollars - the euro and gold account for a bigger share of Russia's reserves than do dollars, according to a January report from the Institute of International Finance. Russia has some strong macroeconomic defenses too, including abundant hard currency reserves of $635 billion, oil prices near $100 a barrel, and a low debt-to-GDP ratio of 18% in 2021.

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