The Paypers' full analysis of the Russian financial sanctions: EU and US measures, SWIFT ban, economic and commercial outcomes

In any recent moment in history when the world was in political, military, and especially humanitarian turmoil, the financial space was not far behind. This is the case for the Russian-Ukrainian War, beginning over two weeks ago on Ukrainian soil, which left the rest of the world aghast –  with NATO, the EU, the UN, and the whole of Western society employing diplomatic, humanitarian, and financial strategies to stop the Russian aggression. 

We’ve seen, in the last two weeks, a constant back and forth between the West and Russia, both from state financial institutions and private ones. So we researched official records, institutional press releases, interviews, and op-eds from reputed sources, and put together all the data available to cover the following pivotal topics, as follows:

Full list of sanctions aimed at banks and financial institutions in Russia

Previous sanctions: 2014 - present

Starting with the annexation of Crimeea in 2014, the US and EU imposed financial sanctions on Russian individuals and businesses, with the scope of the sanctions increasing after the War in Donbas, in the same year. Apart from travel bans and freezing of US assets, a ban on business transactions within US territory on seven Russian officials was imposed, the EU rallying with these efforts to extend the ban on big energy firms, and two major Russian banks – Gazprombank and Vnesheconombank –, the list extending to over 20 entities by July 2014. Countries such as Canada, Norway, and Switzerland joined the list imposing similar financial restrictions. 

The efforts continued well into 2015, when Canada, Australia joined with the EU to increase the scope of the targeted financial entities and individuals. The sanctions imposed between 2014 and 2019 refer to several aspects, such as access restriction to Western financial markets and services for designated Russian state-owned enterprises in the banking, energy, and defence sectors, export embargos, and bans on exporting military goods.

Edward Hunter Christie, NATO’s Defence Economist, argued in 2015 that ‘the sanctions on access to financing forced the Russian state to use part of its foreign exchange reserves to shore up the sanctioned entities. These developments forced the hand of the Central Bank of Russia, which abruptly ceased to defend the value of the Rouble and hike interest rates in December 2014.’ Essentially, the global effort culminated with accelerating Russia’s descent into economic recession, an ongoing and significant fall of the Rouble, inflation, and a year-by-year decrease in GDP growth.

2022 – Where are we now?

With the invasion of Ukraine on 24 February 2022, the EU, UK, US, Switzerland, Japan, Canada, and many more promptly adopted sanctions aimed at freezing the assets of top tier Russian statesmen, along with prominent financial sanctions on the Russian Central Bank, all culminating with removing relevant Russian banks from the SWIFT global payments system. Western pressure to constrain Russia from accelerating war efforts in Ukraine have so far not been successful, although their effects on the Russian population, economy, and state-owned and private institutions were not late to appear. 

From the start of the aggression, the EU expanded the existing financial restrictions against Russia, cutting access to the most important capital markets. It also prohibited the listing and provision of services in relation to shares of Russian state-owned entities on EU trading venues. The EU prohibited the acceptance of deposits exceeding certain values from Russian nationals or residents, the holding of accounts of Russian clients by the EU Central Securities Depositories, as well as the selling of euro-denominated securities to Russian clients.

As EU officials explained in their statements, the purpose of the sanctions is to increase Russia's borrowing costs, raise inflation, and gradually erode Russia's industrial base, with additional measures taken to prevent the Russian elite's fortunes from being hidden in safe havens in Europe.

Other financial sanctions imposed on Russia by the EU to this day include bans on:

So far, according to the BBC, Western leaders have limited Russia’s central bank from accessing USD 630 billion in frozen assets. The EU also said, as cited by the BBC, that it would target 70% of the Russian banking market and key state-owned firms, including defence firms.

SWIFT ban and the so-far impact of the sanctions

One of the first effects of the sanctions refers to The National Bank of Russia raising its key interest rate to the highest point in the past two decades, reaching a new historic high of 20% from former 9.5%. 

After a couple of days of deliberation, the EU excluded 7 major Russian banks - Bank Otkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank, Vnesheconombank (VEB), and VTB Bank – from The Society for Worldwide Interbank Financial Telecommunication (SWIFT), a secure messaging system for banks, which facilitates rapid cross-border payments.

SWIFT official statement on the Russian banks ban by the EU

In return, while VTB has investment banking arms operating in UK and a retail bank in Germany, it announced it will be unable to operate outside Russia, thus backing out of the European market. The move follows the coattails of Sberbank, which was warned by the ECB that the European arm of Sberbank faces failure, after a run on its deposits sparked by the backlash from Russia's invasion of Ukraine.

Owen Walker, European banking correspondent for Financial Times, explains that their withdrawals from Europe in effect ended ‘a 20-year strategy among Russian banks to establish a global presence, which was severely impaired by the sanctions imposed following Russia’s annexation of Crimea in 2014’. Additionally, the US Office of Foreign Assets Control (OFAC) also imposed a full embargo on trade in US dollars with Russia for the two banks, among other institutions, narrowing the playing field even more. 

What are the major alternatives to SWIFT?

The major topic of discussion around this move is, at the present, what will be the most relevant and withstanding alternatives that Russia can fall back on and how much will these alternatives compensate for this blow.

Alistair Milne, professor of financial economics at Loughborough University, suggests that ‘Russian banks might, for example, instead arrange payments using the System for Transfer of Financial Messages (SPFS), which was established after the 2014 invasion of Crimea by the Russian central bank. This is currently used by a handful of international banks in Germany and Switzerland linked to Russian banks. Or they could use the CIPS network, which was created by the People’s Bank of China for the purpose of cross-border payments in renminbi with indirect participants in many countries. They could even use WhatsApp to instruct the necessary transactions.’.

There are important limitations for both these alternatives, with the SPFS being prominently limited in international connectivity and the CIPS network only operating payments settlements in CNY.

One other alternative for the Russian banks is, of course, crypto. Voices from major crypto FX operators and networks were discouraging, while still keeping a healthy tone of precaution when assessing the prospect of Russia finding a backdoor channel to move money through crypto. Cryptocurrency exchange Binance cited by Reuters states that cardholders of sanctioned Russian banks would not be able to use them on their platform and confirmed that sanctioned individuals have had their access restricted.

Asheesh Birla, general manager for RippleNet at Ripple, a blockchain-based digital payment network, was cited by Fortune saying that ‘There simply isn’t enough global [crypto] liquidity to support Russia’s needs’. According to Fortune, Birla estimates Russia conducts USD 50 billion in foreign exchange transactions/day, equal to the entire value of all Bitcoin transactions worldwide even when volumes hit peak levels, suggesting that Russia’ needs would encompass BTC and more. 

It is still unclear what the path that Russia will take will be or how it will manage to sustain an ongoing war with Ukraine, with severe blows to its international trade and domestic economic turmoil. The fact is that the climate within Russia right now is at a boiling point and the temperature is exacerbated by the myriad of institutions ceasing economic and commercial relationships with the country – which must offer encouragement for Western officials hoping to leverage the sanctions towards an eventual ceasefire and peace negotiations.

The Great Exodus

Private companies and financial institutions fleeing the Russian market

In the span of just a few days, the global economic outlook has darkened due to the war. As the measures taken are tougher than those previously imposed in the aftermath of the annexation of Crimea and the start of the war in Eastern Ukraine in 2014, in just two weeks, the sanctions created a mass exodus – from banks, fintechs, and all major Western card schemes ceasing business relations with Russia, to a plethora of private companies suspending their business in the country.

Global Supply Chain

With the eyes of the world fixated on the war between Russia and Ukraine, companies are beginning to feel the sting of economic barriers implemented by the US and other nations and start pulling out of the region.

It is possible that some of the companies exiting the market to be driven by the fear of not wanting to be caught on the wrong side of US and Western sanctions. Even so, the severity of the financial sanctions is amplified by the boycott of Russia by global companies.

Therefore, as the ruble is collapsing and the banking system is becoming more and more unstable, companies stop shipping containers to and from Russia, banks stop lending to traders to buy Russian oil, and insurance companies are increasing their rates for transporting it by sea.

Shipping giants like Maersk, MSC Mediterranean Shipping, Hapag-Lloyd, and Asia’s Ocean Network Express, have temporarily halted bookings for Russia, along with operations for Ukraine, on a temporary basis. This demonstrates that the war has an economic impact on global supply chains, as almost half of the world’s container ships will no longer go to and from Russia, roiling trade in everything from food and metals to clothes and electronic goods.

Actions taken by the international companies

Companies’ commitment to environmental, social, and corporate governance (ESG) is now being tested, as the global business community tries protecting the freedom and democracy as part of their ESG responsibility. 

Since the war started, it seems like any connection to Russia, no matter how small or indirect, has become toxic. As a solidarity response, big players of the financial industry have stopped their operations in the country. 

A few days after the SWIFT ban was announced, US-based payment card firms Visa, Mastercard, and American Express, along with mobile payment providers Apple Pay and Google Pay, have blocked multiple Russian financial institutions due these sanctions. 

Besides, PayPal also stopped accepting new users in Russia, after already blocking some users and some of the country’s biggest banks. In a similar move, Wise and Remitly have halted their money transfer services in Russia. Wise has also capped transfers to Ukraine, citing increasing difficulties operating its service in the country.

Isolated by the rest of the world and piling on the burden on the SWIFT ban and major card schemes leaving the financial space, Russian banks are turning towards new ways of operating, looking at the possibility of issuing cards using their own payments system Mir and China’s UnionPay, as this solution would allow them to make payments overseas, with UnionPay operating in 180 countries and regions. 

Sberbank and Tinkoff Bank already declared that they are considering this possibility, as users are only able to use Visa and Mastercard for transactions within Russia.

As a consequence, Russian banks’ adoption of Mir’s own cards is expected to accelerate, as it has already passed government mandates requiring public sector employees receiving state funds and welfare benefits to migrate to Mir payment cards.

Ecommerce sector

Online sales in Russia fell by 53% at the end of February 2022, as more and more retail giants are taking steps to exit the market. Apple, which has a 15% share of the mobile phone market in Russia, announced it was halting all sales of its products in the country.

Nike has also cut off sales, but the brand blamed logistics, claiming that it ‘cannot guarantee delivery of goods to customers in Russia’. IKEA, on the other hand, is closing its stores and pausing all sourcing in the country and ally Belarus. These steps come naturally as the payments system is in chaos, leaving only Mir as a currently active payment option.

Even though some of these are more symbolic sanctions, they increase the feeling of international isolation that the country will suffer because of the war. Nicholas Mulder, historian at Cornell University, explains in an interview for The Atlantic that ‘it’s a divestment wave. To some degree, that process is people overreacting to sanctions, or acting beyond the scope of the sanctions. The fact that we have these combined state and private-sector sanctions means that they are hitting not only the Russian government, but Russian civil society and the private economy as well. It’s a major shock for them. It makes the discussions about whether the sanctions are working or are going to work much more difficult, because we are seeing the economic effects being caused by private actors, not just by governments anymore. I am sure that there are people who think this adds to the total pressure, but it is hitting the people who we would want to be a backbone of the anti-war position in Russia.’

The full rollout of the process is yet to be determined, but it does seem imperative to closely follow the evolution of the complex financial, logistical, and commercial impact of Russian’s aggression towards Ukraine and the Western response, as it already affects global economic indicators as well. The International Monetary Fund issued a statement detailing the double-sided coin that the war is both on a humanitarian and infrastructural level for Ukraine, for the Russian economy, as well as the global economy and financial markets, with significant spillovers to other countries.

Conclusions for an ongoing crisis

As the war continues, big names across all sectors of the economy exit Russia with speed, struggling to respond to the pressure from Western employees, consumers, and investors, while doing the right thing by their Russian workers and customers.

The corporate migration continues, as doing business in Russia has become simply too difficult due to practical concerns around payments, shipping, and insurance, as even the companies that initially balked at quitting the country have been heading for the exits.

About Claudia Pincovski

Claudia is a content editor at The Paypers working on the Banking & Fintech team at The Paypers. Holding a bachelor’s degree in Journalism, she is very passionate about exploring the latest news on financial inclusion, financial literacy, digital banking, and Open Finance. Claudia is a diligent researcher, a meticulous editor, and an active advocate for diversity and inclusion.

About Alexandra Constantinovici

Alexandra is Senior News Editor at The Paypers. A passionate writer, Alexandra has an extensive background in journalism – as a graduate of Journalism and Communication studies –, as well as editing, publishing, and marketing. She coordinates the news coverage at The Paypers and, together with the team of editors, she strives to bring forward the latest trends for our readers, while investigating and sharing with our community the upcoming innovative industry shifts.