The US authorities yesterday announced a new round of sanctions against Russia – their action will be extended to large banks that will face an asset freeze, and a ban on the supply of high-tech products will also be introduced. In addition, together with the G7 countries, Washington will limit “the ability of the Russian Federation to do business in dollars, euros, pounds, yen,” said US President Joe Biden. We are talking, among other things, about limiting transactions in US dollars of the largest bank in the Russian Federation – Sberbank.
US President Joe Biden yesterday announced a new package of sanctions against Russia, adding to the restrictions announced on Tuesday. “Sanctions maximize the long-term negative impact on Russia and minimize the impact on the US and allies,” he said, saying the measures would “limit Russia’s ability to do business in dollars, euros, pounds, yen,” and would also affect half of Russia’s high-tech imports. “On Tuesday, we stopped the ability for the Russian state to receive money from US and European investors. Now we will take the same restrictions against the largest Russian companies,” the US President explained. We are talking about the fact that 14 banks and companies with assets of $1.4 trillion will not be able to attract funding for more than two weeks. The sanctions will also affect large banks, including VTB. “This means that all the assets that they have in America will be frozen,” Joe Biden added. At the same time, the disconnection from the SWIFT international payment system was not supported by European partners, he said. A little later, confirmation came that the restrictions apply, among other things, to Sberbank and 25 of its subsidiaries, are introduced in relation to correspondent accounts, the exact nature of the restrictions is still unknown, it is only indicated that Sberbank and its group fell under the “restrictions” on settlements in dollars USA.
Recall that the package, adopted on Tuesday, expanded the restrictions on Russian debt, extending them to purchases of government bonds in the secondary market (this measure applies only to new debt that will be issued after March 1, previously the sanctions covered the purchase of Eurobonds and OFZs, but only for the primary placement). He also included restrictions on the work of two state-owned banks – VEB.RF and Promsvyazbank – and 42 of their subsidiaries. Then the American White House pointed out that now any Russian financial institution is under the threat of sanctions, since 80% of international transactions are made in US dollars, and half of Russian trade is also made in them.
An emergency meeting of the European Council was also held yesterday in Brussels, at which a new round of sanctions against Russia was discussed, at the time of writing its results were not yet known, while on the agenda, as Reuters reported with reference to the draft document, measures were announced that will entail “large and serious consequences”. The EU also called for the preparation of an additional package that would also cover Belarus.
The UK has already unveiled a new package of sanctions: as part of this package, all assets of VTB Bank will be frozen, sanctions will be imposed against Aeroflot, UAC, USC and Rostec, limits will be set on the amounts that Russians can hold on accounts in the UK, and export to Russia of high-tech dual-use products. The individual sanctions list includes VTB Vice President Denis Bortnikov, Promsvyazbank CEO Petr Fradkov, SIBUR shareholder Kirill Shamalov, UAC CEO Yuri Slyusar, and Novikombank CEO Elena Georgieva.
Also, as Boris Johnson said, the UK authorities will prohibit Russian public and private companies from raising funds in the country, and a ban will be introduced on transactions with their securities and the issuance of loans. “We will be able to completely exclude Russian banks from the UK financial system, which, of course, is the largest in Europe by a wide margin. We will prevent them from accessing the pound and UK clearing [финансовые структуры]. With half of Russian trade currently carried out in dollars and pounds, I am pleased to announce that the US House of Representatives is taking similar action. Probably, we are talking about the ban on Russian banks to work through pound correspondent accounts in the country.
Boris Johnson also did not rule out the disconnection of Russian banks from the SWIFT international payment system, however, according to the Financial Times, this measure did not find support in Germany (it is the European Union that gives the authorization to disconnect from the system). The head of the International Monetary Fund, Kristalina Georgieva, said yesterday that what is happening in Ukraine “adds significant economic risk to the region and the world.” The fund is assessing the consequences and is ready to provide support to member countries if necessary, she said. The IMF estimates that previous rounds of sanctions have, on average, reduced Russian economic growth by an average of 0.2 percentage points in 2014-2018.
Restrictions on the work of banks will cost the Russian economy 1% of GDP, while the Central Bank rate will be increased from 9.5% to 12%, Capital Economics predicts. But it is precisely the disconnection from SWIFT, coupled with a restriction on the export of energy resources, that would have the most pronounced effect on the economy with a reduction in GDP by 4–5% of GDP (taking into account the fact that energy exports amount to $ 240 billion – 15% of GDP), the center estimates. In Iran, in 2019, the imposition of such sanctions (an embargo on oil exports that almost halved production and a shutdown from SWIFT with a freeze on accounts) led to a reduction in GDP by almost 7%. For the Russian economy, given the possibility of using the financial messaging system of the Bank of Russia and a better balance of payments, this effect would be somewhat less pronounced, but would also be accompanied by chaos in the financial markets and support for commercial banks by the Central Bank.
Oleg Solntsev from TsMASF believes that from the point of view of crisis management, it is easier to deal with two state-owned banks than with 300 banks. At the same time, according to him, foreign exchange settlements that accounted for them can be carried out through the Bank of Russia, which has enough foreign exchange reserves – and they are unlikely to fall under sanctions. “If this happens, it will turn out to be a shot in the leg,” concluded Mr. Solntsev. It should be noted that other experts do not mention the possibility of payments in foreign currency in the banking system of the Russian Federation in a “closed loop”, but insist that the subtleties of various kinds of statuses in SDN lists and in restrictions in different jurisdictions need to be assessed. Nevertheless, they do not express any particular optimism in overcoming the consequences of what is happening. Restrictions on any currency payments one way or another will require an emergency restructuring of all external settlements of the Russian Federation and companies in Russian jurisdiction, and regardless of whether SWIFT is disabled, the latter will only complicate the task, but fundamentally change little.
Wartime Sanctions
According to Anton Samokhvalov, a partner at the KIAP Law Office, when assessing the risks of a business with persons on the sanctions lists, it is important which list the sanctioned person is on. So, in the USA there are several lists. SDN contains a list of persons subject to personal sanctions, with such persons it is impossible to have any business, conclude any contracts, or even start negotiations. “For example, PSB and VEB were included in such a list. If a Russian company has placed depositary receipts on the US market, then, remaining a client of a bank located in the SDN, it risks being held liable in the US. At a minimum, this is a monetary fine, and at a maximum, criminal liability, depending on the circumstances of the violation and the company’s independent disclosure of the fact of the violation. There are also a number of non-SDN lists, including the SSI list, which are sectoral sanctions that prohibit only certain transactions. In such a list, for example, VTB and Sberbank. Being a client of such a bank is not a violation in itself, but receiving a “long” subordinated loan can already be considered a violation from the point of view of a foreign regulator,” says Mr. Samokhvalov. For foreign currency loans of Russian companies from banks that are at risk of being on the sanctions lists, the problem is even more acute. “Yes, a foreign currency payment in favor of a sanctioned person can be blocked in a country that has imposed sanctions if the payment goes through their banks,” the lawyer admits.
“As a rule, the parties stipulate in the loan agreement that if any economic sanctions are introduced that restrict the activities of the bank or the borrower, then the lender (bank) has the right to demand immediate repayment of the total amount of debt within a certain timeframe (according to yesterday’s sanctions, this is March 24, 2022) ”, says Ekaterina Orlova, head of legal practice at CM Grace Consulting. According to her, options for solving the problem may be a mechanism for assignment or return of borrowed funds using escrow accounts in other credit institutions. “It is likely that in the new wave of sanctions there will be Russian banks ready to replace the sanctioned party in the contract or implement a loan repayment structure through escrow accounts,” she believes.