FAQ
Status: 02/28/2022 12:54 p.m
The West’s new economic sanctions over Russia’s war in Ukraine are having an effect. What does that mean for banks, corporations, investors – and are even stricter measures conceivable? An overview.
What does the West want to achieve?
The new round of even tougher sanctions by western states against Russia over the war in Ukraine are aimed at largely separating the country from the international financial system. At the same time, it should be made more difficult for Moscow to offset the economic consequences of its enormous foreign exchange reserves. The economic costs of the war for Russia are to increase massively by deliberately weakening the Russian economy.
What is it about?
At the weekend, the EU, together with the USA, Canada and Great Britain, decided on extensive sanctions against the Russian central bank. Transactions with the central bank should no longer be allowed in the future. All central bank assets in Western countries are said to be frozen in the future. In addition, some Russian banks are to be excluded from the international payment system SWIFT, which would make practically all transactions with western countries impossible. It is still unclear which banks are involved.
Why is the central bank becoming the target of the sanctions?
Russia has foreign exchange reserves of an estimated 630 billion dollars – largely income from the country’s gas and oil export business, including with Germany as a buyer. However, a significant part of these reserves are located abroad – among others in the USA, Germany, France, Great Britain and Austria. The sanctions are intended to withdraw the money from the access of the Russian central bank so that it can no longer support the national currency, the ruble, by selling foreign currencies such as dollars or euros.
Have there been such sanctions before?
Sanctions against central banks and currency reserves are among the toughest economic sanctions against states. The US has taken similar steps against Venezuela, Iran and Afghanistan in the past. Sanctions passed by the US government in 2018 resulted in Iran’s exclusion from the SWIFT payment system. The consequence was that Western trade relations with the country and investments in Iran were practically impossible.
What are the consequences of the new sanctions in Russia?
The massively restricted possibilities of the central bank to support the national currency caused the ruble to fall sharply again. In turn, the US dollar rose temporarily by almost 42 percent today to a record high of 119 rubles. The ruble had already fallen sharply in the past week. Concerns among many Russians about their savings have reportedly already led to queues at ATMs across the country.
How does the central bank in Moscow react?
As a first step, the Russian central bank tried to counteract this by drastically raising the key interest rate from 9.5 percent to 20 percent. This is intended to stop capital flight and make foreign currency deposits in rubles more attractive. At the same time, Moscow’s central bank decided on capital controls. Brokers were ordered to suspend short selling in the Russian market and to stop fulfilling orders from foreign investors to sell Russian securities. Trading on the stock market was suspended in the morning.
Can Russia stop the ruble from falling?
Experts doubt that the Russian central bank can slow down the downward trend in the national currency. “This will hardly succeed. With the comprehensive sanctions, the ruble has ceased to be a freely convertible currency,” says economist Friedrich Heinemann from the Center for European Economic Research (ZEW). Securities in rubles on the international financial markets “suddenly became junk after the Russian attack on Ukraine”.
It is now conceivable that Russia’s central bank would ask for help in China. About 14 percent of the country’s foreign exchange reserves are located there. However, Chinese banks themselves would have to fear Western sanctions if they agreed to financial transactions with Moscow. It would also be possible for Russia to try to sell its enormous gold holdings. According to the central bank, it has domestic stocks of more than 2,000 tons of gold. But selling abroad might be difficult.
What does this mean for Russian banks?
If the ruble is no longer a currency that can be used internationally, this could also massively shake confidence in the financial system in Russia – with a possible serious banking crisis in the country as a result. Targeted sanctions by the EU and the US against certain major Russian banks are already having a significant impact on their foreign subsidiaries. The ECB banking supervisory authority announced during the night that Vienna-based Sberbank Europe AG and its two subsidiaries Sberbank dd in Croatia and Sberbank banka dd in Slovenia were probably no longer viable. The bank will probably soon no longer be able to service its debts. Sberbank is Russia’s largest bank. Like VTB Bank, it has so far been closely intertwined with the western financial system. Now the institutes are being cut off from international financial transactions.
How are foreign investors reacting?
The war against Ukraine and Russia’s international isolation, including on the financial market, have already caused several large Western corporations and investment companies to react. The energy company BP announced that it would sell its 20 percent stake in the Russian state oil company Rosneft. Norway’s sovereign wealth fund – one of the world’s largest pension funds – announced that it would freeze all investments in Russian assets and withdraw from doing business with the country.
Are even tougher economic sanctions against Russia possible?
Even after the most recent tightening of sanctions, the West has not yet exhausted all conceivable options for hitting Russia economically. The country would be particularly hard hit by a gas embargo, for example – a stop to natural gas or oil imports into the European Union. Germany alone obtains around 55 percent of its natural gas from Russia. Apparently, those Russian banks through which energy transactions are processed are also to be spared from being excluded from the SWIFT payment system. Several EU countries fear that Russia will otherwise stop its gas supplies completely.