Turning Words into Action: Russia, Ukraine and Financial Sanctions Options

Western leaders have made much of the severe economic cost that they would inflict on Russia should President Vladimir Putin order any sort of offensive action against Ukraine. Details have been scarce so far. Admittedly, maintaining an element of surprise is often central to the use of sanctions. At the same time, making clear to the Kremlin what is at stake might act as much needed deterrence. This article therefore takes a closer look at the options for strengthening a key piece of the Western sanctions arsenal, namely, restrictions targeting Russia’s financial sector.

Closing Gaps in the Current Framework

The US, EU and UK first introduced sanctions against Russia’s financial sector in 2014, in response to Russia’s annexation of Crimea. These measures were designed to limit Russian banks’ access to international capital markets and increase pressure on the domestic economy. Concretely, banks operating in the US, EU or UK are prohibited from dealing in certain financial instruments (including equity and bonds of a certain maturity) issued by major Russian state-owned banks and their subsidiaries.

While the sanctions were intended as a sign of Western unity in response to the Crimean crisis, RUSI’s side-by-side analysis of the relevant provisions and official guidance (see below) reveals a range of differences between the sanctions regimes, which can reduce their collective impact. For example:

• The maturity threshold for financing instruments varies across regimes (14 days in the US vs. 30 days in the EU and UK).
• Sanctions apply to derivatives trading in the EU but not in the US.
• EU and UK sanctions do not apply to subsidiaries of sanctioned banks if these subsidiaries are incorporated in the EU or UK. No equivalent exception exists in the US.
• Since 2019, the US has imposed restrictions on the issuance and trading of Russian sovereign debt. No similar restrictions exist in the EU and UK.
• Across all regimes, the list of sanctioned banks consists of only five banks and their subsidiaries, albeit including the major state-owned banks such as Sberbank and VTB.

Based on this, a first option for policymakers in the US, EU and UK seeking to increase the impact of sanctions would be to close various gaps and ensure stronger international alignment. While these existing restrictions offer some barriers to market access for Russia and its key banks, little if any modification has been made to maintain the pressure of these regimes since they were first put in place, and thus the original targets of these sanctions have had ample opportunity to adapt their market access and funding strategies. An alternative to closing the gaps in the current framework could therefore involve more far-reaching measures.

SWIFT: A Nuclear Option?

No discussion of potential sanctions on Russian banking and financial market access is complete without considering the possibility of severing Russian banks’ access to SWIFT (the Society for Worldwide Interbank Financial Telecommunication, the messaging system via which banks communicate international transactions). Many political leaders have touted removing Russian access to this system as ‘the nuclear option’. While removing access to this standard means of communication between banks would undoubtedly be a considerable hindrance, it would not, per se, prevent Russian banks from transacting with other banks around the world. Although SWIFT is a highly efficient messaging system, other ways to communicate payments could provide a substitute for SWIFT, however poor, and payments themselves would not be prohibited. A more likely scenario is that as a result of expanding sanctions on Russian banks, they would be rendered untouchable in the market, regardless of whether SWIFT is functioning or not.

Of course, none of this will come without potentially meaningful costs for the West’s own financial system. The European Central Bank is rightly warning ‘lenders with significant exposure to Russia to ready themselves for the imposition of international sanctions against the country if Moscow invades Ukraine’; and the Biden administration is likewise briefing the largest US banks, noting that ‘Assessing potential spillovers and exploring ways to reduce those spillovers is good governance and standard practice’.

Close followers of the West’s previous efforts to sanction Russian financial institutions at the time of Russia’s incursions into Ukraine in March 2014 will recall the reticence in London to support sanctions that closed ‘London’s financial centre to Russians’. If sanctions are to meet the expectations that Western leaders have raised this time, existing gaps must be tightly sealed, and the reach of financial sanctions must be without limit. As Foreign Secretary Liz Truss said on Sky News on Sunday in response to whether the German Nord Stream 2 project should be stopped, ‘We cannot favour short-term economic interests over the long-term survival of freedom and democracy in Europe’. The same must be true of the UK’s financial crown jewel if the strong words of recent weeks are to be matched with genuine action.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

Have an idea for a Commentary you’d like to write for us? Send a short pitch to commentaries@rusi.org and we’ll get back to you if it fits into our research interests. Full guidelines for contributors can be found here.