Ukraine conflict: sanctions update

“Measures targeting Russia’s Central Bank, its finance ministry and its primary sovereign wealth fund have undermined Russia’s ability to defend the ruble, rendering roughly two thirds of the Central Bank’s $630 billion in foreign reserves unusable.”

The Russian advance into Ukraine has become bogged down amid logistical difficulties and fiercer than expected resistance from the Ukrainian military and civilians. Ukraine’s western allies continue to support Kyiv with shipments of weapons and other war material, but sanctions against Russia are the west’s primary tool in changing the calculus of Russian president Vladimir Putin.

The sanctions steps the US and its allies have taken so far are unprecedented against an economy of Russia’s size and significance. They have had an immediate effect on the Russian economy.

Measures targeting Russia’s Central Bank, its finance ministry and its primary sovereign wealth fund have rendered roughly two thirds of the Central Bank’s $630 billion in foreign reserves unusable.

Cutting off key Russian banks from SWIFT and correspondent banking access will make it more difficult for Russian firms to import, as well as restricting credit availability and domestic investment. Stricter export controls will block imports to Russia of high-tech inputs including semiconductors, degrading its ability to replace advanced munitions as it uses them in Ukraine.

A key question remains over the extent to which the Chinese government and Chinese banks are willing to help sanctioned Russian banks evade US restrictions. It is unlikely that Chinese commercial banks will do much to help their Russian counterparts, since many Chinese lenders already face increased regulatory scrutiny in the US and want to avoid drawing attention from US authorities.

But some arms of the Chinese government could be less cautious, including the Export-Import Bank of China. Russia-China bilateral trade can continue via the two Central Banks, enabled by Russia’s roughly $88 billion in yuan reserves. But if Russia wants to use those reserves outside of China, it would need to convert its yuan holdings into dollars or euros, and it is unlikely Beijing will be willing to risk the wrath of the US to help them do so.

Potential next steps

The US and its allies have additional sanctions measures they could deploy if Russia continues to escalate the war, including:

• Expanding correspondent banking sanctions to cover more Russian commercial banks. Sanctions on Sberbank and VTB are very significant but key Russian banks including Gazprombank and the Russian Agricultural Bank remain unsanctioned. The US could press more of its allies to mirror those banking sanctions, cutting off Russian financial connections with more of the world.

• Existing sanctions on Sberbank could be tightened. The original order gives 30 days until transactions are cut off and does not require blocking Sberbank’s or its subsidiaries’ assets, but US authorities could accelerate and broaden those sanctions.

• European dependence on Russian energy supplies makes natural gas sanctions highly unappealing, though the European Union has targeted Russian oil exports.

• Western banks are still allowed to extend credit to non-designated Russian companies with a maturity of 14 days or less. That window could be reduced or closed.

• The US and its allies could impose new sectoral sanctions on portions of the Russian economy that have not yet been expressly targeted, including metals, mining, shipping and transportation. Banking sanctions will already constrain these industries but targeting them specifically would ensure they have limited access to non-Russian credit or customers.

• Secondary sanctions – which target third country firms and banks that continue to transact with sanctioned Russian banks and companies – remain a last resort. Members of Congress will likely call for them, but the White House is likely to resist those efforts for now, preferring to use quiet diplomacy to reduce Russian trade with third countries rather than threatening secondary sanctions, which are deeply resented. Severe Russian escalation and casualties in Ukraine, however, could create additional political pressure for measures like secondary sanctions.