Explainer-How Western sanctions will target Russia

By Karin Strohecker

(Reuters) – The United States and its allies have vowed to hit Russia with harsh sanctions after Russian forces invaded Ukraine on Thursday in a massed assault by land, sea and air – the biggest by one state against another in Europe since World War Two.

Western capitals introduced an initial round of sanctions after Russian President Vladimir Putin recognised two breakaway regions in eastern Ukraine on Monday.

U.S. President Joe Biden said Washington and its allies will announce “severe sanctions” with further measures later on Thursday.

British Prime Minister Boris Johnson is expected to outline a new package of measures to parliament at 1700 GMT.

The European Union, also set to announce fresh curbs later in the day, said the sanctions package will hit Russia’s economy severely, increase capital outflow, raise inflation and gradually erode the country’s industrial base.

South Korea, Norway and other countries have also pledged to join measures.

Below are details on the curbs proposed so far and what other sanctions could target Russia:

BANKS & FINANCIAL FIRMS

Britain has already announced sanctions on five banks – Bank Rossiya, Black Sea Bank, Genbank, IS Bank and Promsvyazbank. All are smaller lenders, with only Promsvyazbank on the central bank’s list of systematically important lenders.

President Biden has already announced sanctions on VEB bank and Russia’s military bank, referring to Promsvyazbank, which does defence deals.

The U.S. Treasury Department said: “All assets under U.S. jurisdiction will be immediately frozen and U.S. individuals and entities are prohibited from doing business.”

A senior U.S. administration official added that Sberbank, and VTB Bank would face sanctions if the Russian invasion proceeds.

Bank Rossiya is already under U.S. sanctions from 2014 for its close ties to Kremlin officials.

The European Union has agreed to blacklist banks involved in financing separatist activities in eastern Ukraine.

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 for International Settlements (BIS) shows European lenders hold the lion’s share of the nearly $30 billion in foreign banks’ exposure to Russia.

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

SOVEREIGN DEBT & CAPITAL MARKETS

The coming package of measures from the EU will “target the ability of the Russian state and government to access the EU’s capital and financial markets and services, to limit the financing of escalatory and aggressive policies,” the bloc said.

It will ban EU investors from trading in Russian state bonds.

Washington announced fresh restrictions on dealings in Russia sovereign debt this week. Americans, who were already barred from investing in Russian sovereign debt directly, will be banned from purchasing it in the secondary market after March 1.

Britain threatened last week to block Russian companies from raising capital in London, Europe’s financial centre for such transactions, though stopped short of doing so in its announcements on Tuesday.

Even before the latest events, access to Russian bonds had become increasingly restricted.

U.S. sanctions imposed in 2015 made future Russian dollar debt ineligible for many investors and key indexes. In April 2021, Biden barred U.S. investors from buying new Russian rouble bonds over accusations of Russian meddling in the U.S. election.

The curbs have cut Russia’s external debt by 33% since early 2014 – from $733 billion to $489 billion in the third quarter of 2021. 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.

INDIVIDUALS

The United States, the EU and Britain have already imposed asset freezes, travel bans and other curbs on a number of Russian individuals.

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

On Tuesday, the bloc said it would blacklist all lawmakers in the lower house of the Russian parliament who voted in favour of the recognition of the breakaway regions, freeze any assets they have in the EU and ban them from travelling to the bloc.

Meanwhile Britain has imposed sanctions on three men, Gennady Timchenko and billionaires Igor and Boris Rotenberg – all of whom are allies of President Vladimir Putin from St. Petersburg whose personal fortunes grew precipitously following Putin’s rise to the presidency. All three men are already sanctioned by the United States.

The United States also imposed sanctions on Tuesday on Russian elites close to Putin, including Alexander Bortnikov, the head of the Federal Security Service, Russia’s powerful domestic security and counterintelligence service.

His son, Denis Bortnikov, the deputy president of Russian-state owned financial institution VTB Bank Public Joint Stock Company and a chairman of the bank’s management company, was also targeted in Tuesday’s move.

Also designated was Putin’s first deputy chief of staff and former Russian Prime Minister, Sergei Kiriyenko. He was previously targeted by the United States, EU and Britain in response to the poisoning of Russian opposition leader Alexei Navalny. His son, Vladimir Kiriyenko, was also designated on Tuesday.

The chairman and chief executive of Promsvyazbank was also targeted. The Treasury accused Petr Fradkov of working to transform the bank into one that serves the defence industry.

The United States has used the Specially Designated Nationals (SDN) tool – which effectively kicks individuals and companies out of the U.S. banking system, bans their trade with Americans and freezes their U.S. assets – in the past to sanction oligarchs.

However, it has become more cautious in recent years after 2018 sanctions on the owner of Rusal saw aluminium prices skyrocket and forced Washington to backtrack.

A bill unveiled by U.S. Senate Democrats in January aimed for sweeping sanctions against top Russian government and military officials, including Putin, and President 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 him personally but would prove “politically destructive”.

ENERGY CORPORATES & NORD STREAM 2

The United States and the EU already have sanctions in place on Russia’s energy and defence 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.

The U.S. on Wednesday imposed sanctions on the company in charge of building Russia’s Nord Stream 2 gas pipeline.

CURBING CHIPS

The EU has vowed to introduce measures to crimp Russia’s technological position in key areas – from high-tech components to cutting-edge software.

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.

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

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 more than 200 countries.

A senior U.S. official said they are not taking SWIFT sanctions off the table.

In 2012, SWIFT disconnected Iranian banks as international sanctions tightened against Tehran over its nuclear programme. Iran lost half its oil export revenue and 30% of its foreign trade, the Carnegie Moscow Center 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 Center.

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

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% in 2023. However, SPFS has struggled to establish itself in international transactions.

(Reporting by Karin Strohecker and Catherine Belton in London, Katya Golubkova and Andrey Ostroukh in Moscow; Editing by Jason Neely, Mark Potter, Lisa Shumaker and Andrew Heavens)