Global banks ready for turmoil as West hits Russia with sanctions

Global banks are grappling with the effects of new economic and financial sanctions against Russia that aim to weaken the economy and limit access to foreign capital.

On Tuesday, President Biden announced that the United States would impose sanctions on Russia’s main development bank, VEB, and its military bank, Promsvyazbank, and enact restrictive measures. comprehensive regime on Russia’s sovereign debt, effectively cutting the country off from Western financing. He said the United States was also preparing to impose sanctions on Russian elites and their family members.

Sanctions would cut state-backed banks off the US financial system and make it harder for Russia to raise money in foreign markets for major infrastructure projects at home, much may impede growth. These actions are a test of what is happening for the Russian economy.

“We will continue to escalate sanctions if Russia escalates,” Biden said.

British Prime Minister Boris Johnson on Tuesday also imposed sanctions on several Russian banks and three Russian billionaires. And German Chancellor Olaf Scholz said he would Certification pause of the Nord Stream 2 natural gas pipeline will expand energy imports from Russia.

The general Western response is to punish Russia for escalating its aggression against Ukraine. On Monday, Russia issued a decree sending troops to two regions of Ukraine, a move understood by the West as the first step towards a full-blown invasion.

Over the past decade, the United States has increasingly used sanctions to resolve diplomatic tensions, including in North Korea and Iran. It can do so because the dollar is the world’s reserve currency and the most widely used for payments. However, the consequences of sanctions are still unclear or precise. In the case of Russia, it is likely that much of the global financial system could also be affected due to the intertwined nature of global trade – even if the impact is small.

Since 2014, when the United States imposed sanctions on Russia, after President Vladimir Putin annexed Crimea, American and Western banks have withdrawn from direct transactions in the country. However, the Biden administration’s sanctions could have far-reaching and indirect consequences because Russia is a major exporter of staples such as natural gas and wheat, and conducts business as well. doing business with companies and countries around the world. As middlemen, banks typically process such transactions.

According to the Institute of International Finance, a trade association representing global banks, severe economic penalties could disrupt global trade flows if banks are forced to stop processing loans. payment for goods and services in and out of Russia.

“The problem here is not only the immediate impact on financial markets, but the fact that it will be nearly impossible to eliminate” Russia from global trade in the near term, Elina Ribakova, the institute’s deputy chief economist, said in an interview. “There’s room for contagion.”

For example, if an American company wants to pay for Russian fertilizer with funds from a US bank account and the seller has an account with a sanctioned Russian bank, the US bank will not be able to process the payment. that payment, according to a banking expert on sanctions who spoke on condition of anonymity.

Sanctions could also spread economic uncertainty around the world by raising prices of key Russian-made goods – including oil, gas, fertilizer and palladium – and fueling inflation in countries that import those products, dealing a new blow as soon as the world emerges from the pandemic.

Russia’s own economy can be relatively protected from the effects of sanctions. Economists at Capital Economics note that external debt and relations with other advanced economies have weakened since the 2014 Crimea crisis, preventing the country’s economy from efforts to decouple it. out of the global financial system. They predict that sanctions could most likely reduce Russia’s gross domestic product by about 1%.

The country’s economy has long been dominated by domestic lending institutions, which only grew prominently after the 2014 sanctions. According to the Institute of International Finance, European banks, including the Bank of Raiffeisen Bank and UniCredit Bank, account for most of the 6.3 percent of assets held by foreign lenders in the Russian banking sector, while American banks hold less than 1 percent, according to a report. Institute of International Finance.

That limits the possibility of a systemic banking crisis spreading globally, but it is likely to hamper Russia’s growth.

“Russia has a more isolated and isolated economy today than it did a decade ago,” Clay Lowery, the financial institute’s executive vice president, said in a statement following Biden’s announcement. This makes the country less vulnerable to some types of sanctions, but its growing economic isolationism is hurting the country’s growth prospects in the long term, he said. ,” he said.

Tuesday’s announcement follows weeks of preparation by administration officials, who have been weighing a range of economic penalties. These include freezing the assets of Russian individuals and companies, banning trading in Russian sovereign bonds, and preventing the country from using the dollar for payments.

The Biden administration has signaled that they have no intention of separating Russia from Swift, a Belgian messaging service that connects more than 11,000 financial institutions as they transfer money around the world. Officials reasoned that locking Russia out of Swift would cause too much damage to the global financial system and could also spur the development of rival services.

In recent weeks, Biden administration officials have been in regular communication with the banks about the possibility economic penalty about Russia, according to a bank executive briefed on those discussions, who spoke on condition of anonymity because of the sensitivity of the situation. Those negotiations are intended to prepare lenders and minimize potential disruption to financial markets should broader sanctions be introduced. They also mentioned how the sanctions would work and the potential impact on payment flows, according to another person briefed on the negotiations.

“The eyes of every major global financial institution are glued to the situation,” said Daniel Tannebaum, a partner at Oliver Wyman who advises banks on sanctions.

While financial firms have less exposure to Russia than in 2014, the new sanctions are expected to impose much more significant restrictions on transactions, Mr. Crimea-related sanctions place new financial limits on companies in certain sectors of Russia but do not completely block all transactions.

“This is more of a sniper rifle,” he said of the Biden administration’s moves.

Investors, poised for weeks as tensions between Russia and Ukraine escalated, sold off stocks on Tuesday. The S&P 500 drops more than 1%and the KBW Nasdaq Bank Index fail 0.1 percent for a drop of more than 3 percent over the past five days.

“Geopolitics has replaced Covid-19 as the biggest preoccupation with market fear,” said Paresh Upadhyaya, global bond portfolio manager at Amundi Pioneer, an asset manager. “Russia-Ukraine tensions are likely to dampen investor sentiment for weeks. The markets are waking up to the crude reality of a double-headed monster of inflation and geopolitics.”

Another threat to the global financial system is the risk of a retaliatory Russian cyber attack – something US-based banks are wary of. The Financial Services Information Sharing and Analysis Center, an intelligence-sharing group across the financial industry, said it was looking for such threats.

Ministry of Treasury Meet the bank manager, including Brian Moynihan of Bank of America and Charles W. Scharf of Wells Fargo, last Wednesday for a previously scheduled meeting to discuss safeguards against breaches. The next day, government officials from the White House and several agencies met with executives from major U.S. lenders to discuss their response to the attack threats. latent of Russia, CNN reported.

On Tuesday, Biden said the White House wanted to make sure Americans weren’t burdened by higher gas prices as the energy market was turned by these developments. However, he said the United States was prepared to impose deeper sanctions on Russia.

“Whatever Russia does next, we are ready to respond with unity, clarity and trust,” Biden said.

Adam M. Smith, a former Treasury Department official who is now a partner at the law firm Gibson, Dunn & Crutcher, noted that the sanctions program has become more complex over the past decade, leaving the United States with more opportunity to target Russia without much fear of collateral damage, and international coordination has improved.

“The US has gotten better at handling the big economies and is doing a lot better at actually putting people on the board,” he said. Global banks ready for turmoil as West hits Russia with sanctions

Fry Electronics Team

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