The sanctions placed on Russia by the West in response to its aggression in Ukraine represent the biggest, most complex sanctions ever placed on a country. Measures from the United States alone are painful and include a host of different tools that target Russian banks, Russian exports, and some Russian individuals. When combined with sanction efforts from the U.K., EU, and others, Russia and hundreds of its oligarchs will find it almost impossible to access their money.
There are a lot of moving parts. To break it down neatly, the U.S. sanctions against Russia fall into three broad categories: asset freezes, export controls, and severe financial restrictions. European and U.K. sanctions follow the U.S. sanctions very closely.
Here’s how they’ll work.
Asset Freezes
The most immediate sanctions target Russian assets held in the United States. These measures were instantaneous because the objective was to prevent Russians from removing their assets from U.S. jurisdiction.
Using asset freezes, the United States and its partners have essentially cut off Russia from money held in a U.S. or European bank. The asset freezes extend to VTB, the second-largest bank in Russia, along with three other major Russian financial institutions and more than 50 of their subsidiaries. Some Russian families associated with the country’s largest financial institutions and energy companies have also had their assets frozen. Furthermore, the U.S. sanctioned the Nord Stream 2 pipeline, which was meant to bring Russian natural gas to Europe, and one individual associated with it, effectively taking one of Russia’s geopolitical levers off the table.
Export Controls
Import and export controls will take a little more time to implement, and they will target Russian defense, aviation, and maritime sectors.
On the import side, the U.S. has imposed new military end-use restrictions, which means that any U.S. item destined for a military purpose in Russia will be restricted. That includes goods or items produced in foreign countries that use certain U.S.-origin software technology or equipment. On the export side, Russia will be denied a wide range exports for sensitive technology, which affects Russian military sectors.
The European Union, Australia, Japan, Canada, New Zealand, and the U.K. have all said they will implement parallel restrictions.
Financial Restrictions
Though not immediate, the financial restrictions placed on Russia represent the most potent measures unleashed by the U.S. and its partners. These measures will be fully implemented in about 30 days and have the potential to increase.
In a nutshell, the financial restrictions eliminate Russia’s ability to access any currency outside of Russia.
There are roughly four types of financial restrictions going into place. One targets Russian sovereign debt or bonds, and reaches beyond the Russian central bank into secondary markets. Russian-issued bonds cannot be bought or sold.
The financial restrictions also aim to cut off Sberbank, the country’s largest bank, from U.S. financial markets. The Sberbank action affects 25 of its subsidiaries as well.
Another category of restrictions targets critical Russian companies and entities by prohibiting them from gaining new equity or taking on new debt that has a maturity date of longer than 14 days. These restrictions apply to major Russian companies like Alpha Bank, Credit Bank of Moscow, Sberbank, Gazprom, and Rostelecom, among others.
In perhaps its most aggressive action, Washington has also outlawed any U.S. persons from engaging in any transactions with the Central Bank of Russia.
Finally, the coordinated decision between the U.S. and other financial capitals to cut out a handful of Russian banks from SWIFT (Society for Worldwide Interbank Financial Telecommunication) will make it impossible for Russian banks to operate on a global stage. SWIFT is the predominant way in which banks communicate international transactions, and no bank is interested in trying to communicate bank transfers via fax or other means.
All of these moves have isolated Russia in a big way.
Impacts on Russia
Russia desperately needs access to its foreign currency reserves in order to deal with international pressure. That’s what makes these penalties from the U.S., EU, U.K., and elsewhere so significant and impressive.
Since 2014, Russian President Vladimir Putin and his partners have maximized foreign currency reserves so that they could be used to offset or counterbalance the impact of sanctions on the Russian economy.
Russia’s deep foreign currency reserves have been viewed as a measure of insurance against financial collapse within the country. Now that those reserves are cut off because U.S. persons are prohibited from engaging in transactions with the Central Bank, the impact of the sanctions will be much more readily felt, and Russia is far more vulnerable to collapse.
The sum total of the sanctions prevents Russia from accessing around $492 billion in foreign currency reserves that are held in central banks in the U.S. and EU and China.
The effects were almost immediate and will continue. Russians started lining up at ATMs almost as soon as the sanctions went into place. The European Central Bank declared a subsidiary of Sberbank as failing and proceeded to freeze its assets.
The ferocity of these sanctions, coupled with the significant size of Russia’s economy, likely makes this the largest sanctions effort ever undertaken. But it could still get worse for Russia because these sanctions can intensify.
Russia hasn’t yet been completely shut out of the global financial system. That will happen if and when Russia’s Central Bank and every other Russian financial institution are added to the Specially Designated National List, which is maintained by the U.S. Department of Treasury’s Office of Foreign Assets Control. Putting the Central Bank on the SDN list would effectively freeze all assets of any Russian financial institution outside the U.S. and block every single transaction.
About Stephanie Rice
Stephanie Rice is an economic sanctions and financial crimes advisor with extensive public and private sector experience in financial investigations, sanctions, and anti-money laundering. She has held senior sanctions compliance roles with several large, global financial institutions, including JPMorgan Chase, Commerzbank, and Bank of Tokyo Mitsubishi. Prior to these positions, Stephanie served as an Investigator with the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC). In this role, Stephanie worked on large multiagency investigations involving sanctions-evasion networks, terrorism financing, organized crime, and money laundering, and she brought enforcement actions against banks, exporters, technology companies, and transportation companies for sanctions misconduct. Stephanie also provided training to prosecutors, foreign delegations, and industry groups on U.S. sanctions regulations and enforcement. She has lived abroad in Germany, Lebanon, and Hong Kong.
This global economy article was adapted from the GLG Roundtable “Russia/Ukraine Sanctions.” If you would like access to events like this or would like to speak with global economy experts like Stephanie Rice or any of our approximately 1 million industry experts, please contact us.