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West probing new sanctions on Russia amid Ukraine tensions. Here’s what could happen

Click to play video: 'Putin orders ‘peacekeeping operation’ in two breakaway regions of Ukraine he recognizes as independent'
Putin orders ‘peacekeeping operation’ in two breakaway regions of Ukraine he recognizes as independent
WATCH: Putin orders 'peacekeeping operation' in two breakaway regions of Ukraine he recognizes as independent – Feb 21, 2022

The United States and its allies are coordinating new sanctions on Russia after Moscow recognized two regions in eastern Ukraine as independent, officials said.

European Union member states are also considering sanctions, including Germany, where Chancellor Olaf Scholz in response to Moscow’s actions halted the certification of the Russia-led Nord Stream 2 gas pipeline.

Here are some of the ways sanctions could target Russia:

BANKS AND FINANCIAL FIRMS

Some smaller Russian state-owned banks are already under sanctions: Washington imposed curbs on Bank Rossiya in 2014 for its close ties to Kremlin officials.

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According to sources, the Biden administration has prepared a sweeping measure to hurt the Russian economy which would cut the “correspondent” banking relationships between targeted Russian banks and U.S. banks that enable international payments.

Washington also will wield its most powerful sanctioning tool against certain Russian individuals and companies by placing them on the Specially Designated Nationals (SDN) list, effectively kicking them out of the U.S. banking system, banning their trade with Americans and freezing their U.S. assets.

Click to play video: 'Lviv, dubbed Ukraine’s safe haven, braces for conflict ahead of potential Russian invasion'
Lviv, dubbed Ukraine’s safe haven, braces for conflict ahead of potential Russian invasion

Sources familiar with the planned measures said VTB Bank VTBR.MM, Sberbank SBER.MM, VEB, and Gazprombank GZPRI.MM are possible targets. It is unclear whether Russian banks would be added to the SDN list, but both types of sanctions could hit Russia hard and make it difficult to transact in U.S. dollars.

Russia’s large banks are deeply integrated into the global financial system, meaning sanctions could be felt far beyond its borders. Data from the Bank of International Settlements (BIS) shows that European lenders hold the lion’s share of the nearly US$30 billion in foreign banks’ exposure to Russia.

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According to data from Russia’s central bank, total Russian banking foreign assets and liabilities stood at US$200.6 billion and US$134.5 billion respectively with the U.S. dollar share amounting to around 53 per cent of both, down from 76 to 81 per cent two decades ago.

Britain threatened last week to block Russian companies from raising capital in London, Europe’s financial centre for such transactions, with Prime Minister Boris Johnson saying the government would target Russian banks and Russian companies.

INDIVIDUALS

Sanctioning persons via asset freezes and travel bans is a commonly used tool and the United States, the EU and Britain already have such sanctions in place against a number of Russian individuals.

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The EU on Monday imposed sanctions on five people who were involved in a Russian parliamentary election in annexed Crimea in September 2021.

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While the United States has used the SDN designation to sanction oligarchs deemed to be “bad actors” in the past, it has become more cautious in recent years after 2018 sanctions on the owner of Rusal saw aluminum prices skyrocket and force Washington to backtrack.

A bill unveiled by U.S. Senate Democrats in January aims for sweeping sanctions against top Russian government and military officials, including Putin, and President Joe Biden has said he would be ready to consider personal sanctions on the Russian president.

Moscow has said any move to impose sanctions on Putin himself would not harm the Russian president personally but would prove “politically destructive.”

Britain – home to many wealthy Russians – has threatened to expose property and company ownership on its soil if Russia invades Ukraine, with Johnson saying there was “an issue with Russian money in the city (of London).”

CURBING CHIPS

The White House has told the U.S. chip industry to be ready for new restrictions on exports to Russia if Moscow attacks Ukraine, including potentially blocking Russia’s access to global electronics supplies.

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Similar measures were deployed during the Cold War, when technology sanctions kept the Soviet Union technologically backward and crimped economic growth.

ENERGY CORPORATES AND NORD STREAM 2

The United States and the EU already have sanctions in place on Russia’s energy and defense sectors, with state-owned gas company Gazprom, its oil arm Gazpromneft and oil producers Lukoil, Rosneft and Surgutneftegaz facing various types of curbs on exports/imports and debt-raising.

Sanctions could be widened and deepened, with one possible option being to prevent companies settling in U.S. dollars.

Nord Stream 2, a recently completed pipeline from Russia to Germany, was awaiting regulatory approval by EU and German authorities before Berlin put its certification on ice.

Click to play video: 'Putin’s recognition of breakaway Ukraine regions ‘clear break of international law’: Boris Johnson'
Putin’s recognition of breakaway Ukraine regions ‘clear break of international law’: Boris Johnson

Europe’s dependence on Russian energy supplies weakens the West’s hand when considering sanctions in this sector.

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SWITCHING OFF SWIFT

One of the harshest measures would be to disconnect the Russian financial system from SWIFT, which handles international financial transfers and is used by more than 11,000 financial institutions in over 200 countries.

In 2012, SWIFT disconnected Iranian banks as international sanctions tightened against Tehran over its nuclear program. Iran lost half its oil export revenues and 30 per cent of foreign trade, the Carnegie Moscow Centre think tank said.

Among Western countries, the United States and Germany would stand to lose the most from such a move, as their banks are the most frequent SWIFT users with Russian banks, said Maria Shagina at the Carnegie Moscow Centre.

Calls to cut Russia’s SWIFT access were mooted in 2014 when Moscow annexed Crimea, prompting Moscow to develop an alternative messaging system, SPFS.

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The number of messages sent via SPFS was about one fifth of Russian internal traffic in 2020, according to the central bank, which aims to increase this to 30 per cent in 2023. However, SPFS has struggled to establish itself in international transactions.

SOVEREIGN DEBT

Access to Russian bonds has become increasingly restricted and sanctions could be tightened further, with a ban on secondary market trading of both new Eurobond and new Russian rouble bonds known as OFZs floated as an option.

In April 2021, Biden barred U.S. investors from buying new Russian rouble bonds over the accusations of election meddling.

Sanctions imposed in 2015 made future Russian dollar debt ineligible for many investors and key indexes. Those measures have cut Russia’s external debt by 33 per cent since early 2014 — from US$733 billion to US$489 billion in the third quarter of 2021.

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Lower debt improves a country’s balance sheet on the surface, but deprives it of financing sources that could contribute to economic growth and development.

(Reporting by Karin Strohecker in London, Katya Golubkova and Andrey Ostroukh in Moscow; Editing by Timothy Heritage and Jason Neely)

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