After Russian troops moved into the Ukrainian border and reached the Ukrainian capital Kyiv, the United States and the European Union announce tightening economic sanctions on Russia to force Putin to back off.
On Feb. 26, 2022, the U.S. and Europe agreed to cut off some Russian banks from the SWIFT messaging system, which is used to make trillions of dollars worth of transactions every day, an option so devastating it has been called “the nuclear option” of sanctioning.
President Joe Biden’s administration has banned U.S. people and companies from doing business with the central bank of Russia. The U.S. banned transactions with the Russian central bank, the Russian National Wealth Fund, and the Ministry of Finance, Russia’s own data published in January shows that $100 billion of the reserves were held in U.S. dollars as of June.
Prime Minister Boris Johnson announced an asset freeze against all major Russian banks, including an immediate freeze on VTB Russia’s second-largest bank. The U.K. government has also sanctioned five banks: Rossiya, IS Bank, General Bank, Promsvyazbank, and the Black Sea Bank. Legislation to stop all major Russian companies from raising finance on U.K. markets, and also to prohibit the Russian state from raising sovereign debt on U.K. markets.
The EU imposed two sets of sanctions and is preparing further measures that will also include Belarus. It will ban all transactions with the Russian central bank and freeze its assets and shut down EU airspace to all Russian planes, including the private jets of oligarchs, and ban Russian state-owned media companies; Russia Today and Sputnik. They ceased exports from Belarus of products from mineral fuels to tobacco, wood and timber, cement, iron, and steel, as well as banning exports of aircraft, aircraft parts, and related equipment, and a ban on the sale of equipment and technology needed to update Russian oil refineries to modern environmental standards.
The Swiss government announced it will enforce EU sanctions against hundreds of Russian lawmakers and other officials including Putin and Foreign Minister Sergei Lavrov “with immediate effect” and Swiss airspace will also be closed to all aircraft “with Russian markings".
As a result of all these sanctions, the Russian stock market index dropped by 52%. So, the central bank was forced to shut the stock market avoiding more selloffs and it raised benchmark interest rates to 20% from 9.5% to make holding the ruble more attractive and cushion its expected fall. The ruble fell to 116.00 to the U.S. dollar from 83.00 a drop of more than 38%. Bank of Russia Governor Elvira Nabiullina acknowledged for the first time that sanctions imposed on the central bank meant she couldn’t intervene to keep the ruble from collapsing on Monday. In the view of the Institute of International Finance, about 40% to 50% of Russia’s reserves last officially estimated at $643.2 billion in mid-February are potentially out of reach because they are held in Group of Seven countries and will be frozen under new sanctions
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Russia's debt is under huge pressure with CDS 5Y spiking to 915 basis points Out of the $478bn in debt owed by Russians to foreigners at the end of 2021. $276bn in payments are scheduled for 2023 or later. And some of the debt due before the end of 2022 is denominated in RUB that the Bank of Russia can create at will.
Shares of several large Russian companies traded in London fell as well. Sberbank, the country’s largest lender was down 74% as the bank was sanctioned by Western nations. The country’s energy giants also got hit, with Gazprom falling almost 53% and Rosneft declining 42%.
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The Russian banks that aren’t sanctioned include Gazprom bank, Russia’s third-largest bank and a key channel for foreign payments for oil and gas. Those banks provide an alternative channel for those payments.
Russia’s billionaires lost an estimated $71 billion on Feb. 24, and Standard & Poor’s and Fitch Ratings slashed the country’s credit rating to “junk” status.
Elina Ribakova, the deputy chief economist at the IIF, said Monday she expected sanctions to bring about a contraction of at least 10% in Russia’s gross domestic product along with double-digit inflation.
What Russia did in the last few years was basically built buffers that are suited to defend against the kinds of sanctions that came in 2014. But against the sanctions that have come now, there’s simply no proper defense.
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