01.03.2022 Finance International

War in Ukraine: Unprecedented financial sanctions against Russia

The EU and Western countries have in recent days widened the range of its sanctions against Russia in response to Vladimir Putin’s invasion of Ukraine. The European Commission, US, France, Germany, Italy, UK, Canada announced that “selected” Russian banks would be removed from SWIFT, and that the Russian Central Bank would be prevented from deploying international reserves.

The measures are designed to cripple Russia’s economy and punish its government for taking military action.

In a joint statement published on February 26th, the European Commission, US, France, Germany, Italy, UK, Canada declared: “First, we (…) commit to ensuring that selected Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally.

Second, we commit to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions.”

Targeting a central bank of a G20 nation is unprecedented. After its currency, the rouble, slumped by 30% against the US dollar, Russia has more than doubled its key interest rate in an attempt to stem the decline. Foreign currency outflows are banned and Russian exporters have been ordered to convert 80% of their foreign currency earnings into roubles.

SWIFT (Society for Worldwide Interbank Financial Telecommunications) is a messaging network that financial institutions use to securely transmit information and instructions through a standardized system of codes. Although SWIFT has become a crucial part of global financial infrastructure, it is not a financial institution itself: SWIFT does not hold or transfer assets. Rather, its utility lies in its power to facilitate secure, efficient communication between member institutions.

The names and number of banks involved are not yet known. It is therefore likely that a few selected banks will retain their access to SWIFT, if only to allow gas trading with countries that are dependent on it, such as Germany or Italy. It will be interesting to see whether Gazprombank, the banking subsidiary of the Russian energy giant, is “de-SWIFTed”. The same questions apply to the country’s two largest financial institutions: VTB and Sberbank, whose assets are already frozen in the United States.

Other sanctions

In the same statement, other economic and financial sanctions are announced: “Third, we commit to acting against the people and entities who facilitate the war in Ukraine and the harmful activities of the Russian government. Specifically, we commit to taking measures to limit the sale of citizenship—so called golden passports—that let wealthy Russians connected to the Russian government become citizens of our countries and gain access to our financial systems.

Fourth, we commit to launching this coming week a transatlantic task force that will ensure the effective implementation of our financial sanctions by identifying and freezing the assets of sanctioned individuals and companies that exist within our jurisdictions. As a part of this effort we are committed to employing sanctions and other financial and enforcement measures on additional Russian officials and elites close to the Russian government, as well as their families, and their enablers to identify and freeze the assets they hold in our jurisdictions. We will also engage other governments and work to detect and disrupt the movement of ill-gotten gains, and to deny these individuals the ability to hide their assets in jurisdictions across the world.”

The list of sanctioned individuals includes Russian President Vladimir Putin and his Foreign Minister Sergei Lavrov.

The West has also decided to impose further restrictions on exports of dual-use goods and technology and on the provision of related services, as well as restrictions on exports of certain goods and technology which might contribute to Russia’s technological enhancement of its defence and security sector. It also introduces restrictions on the provision of related services and to prohibit the sale, supply, transfer or export to Russia of specific goods and technologies for use in oil refining, together with restrictions on the provision of related services.

Dual-use goods, which are items that could have both a civilian and military use, like high-tech items, chemicals or lasers.

The EU has also announced a blanket ban on Russian flights. Russian aircraft are unable to land in, take off from or fly over any EU nation, meaning longer journey times, and have also been barred from UK airspace

The EU is also going to ban Russia’s state-owned news outlets Sputnik and Russia Today and Germany has put on hold permission for the Nord Stream 2 gas pipeline from Russia to Germany to open.

Russia sanctions over Ukraine largely spare energy sector, vital to Europe

Energy exports are Russia’s main source of revenue. Refusing to buy its oil and gas would be a very tough sanction, but it would also be damaging to Western nations that rely on it. Russia supplies 26% of the EU’s crude oil and 38% of its gas. Even a brief cut in gas supply would raise energy prices.

Two former Luxembourg ministers give up their Russian mandates

In a press release, the two former LSAP Ministers of Economy Jeannot Krecké and Étienne Schneider inform about their resignation from the boards of directors of Russian entities. Jeannot Krecké was a member of the East West United Bank and Etienne Schneider was involved with the owners of the Bank, the Sistema Financial Corporation.

In a press release, East-West-United-Bank (EWUB) in Luxembourg states that it is an independent Luxembourg banking institution and that it is not affiliated with the Russian government or any other banking group. However, its sole shareholder is Sistema Financial Corporation, one of the largest private shareholders in Russia. The bank stresses that no direct or indirect shareholders are subject to international sanctions.