Executives at U.S. banks indicate that they expect to face a little risk for major disruptions as a result of international sanctions levied against Russia in the wake of its invasion of Ukraine. The reason is that they have pulled back from Russia in recent years. According to the Bank for International Settlements (BIS), as of the third quarter of 2021, lenders in the U.S. collectively had claims against Russia that totaled only $14.7 billion.
However, European banks—especially those located in Austria, Italy, and France—are the lending institutions with the largest exposures to Russia. As a result, they already have been concerned for weeks about the potential impact of governmental sanctions that might follow a Russian invasion.
Overview of Sanctions Against Russia
In the aftermath of Russia's annexation of Crimea in 2014, both the U.S. and the European Union (EU) have blacklisted specific individuals, tried to limit the ability of state-owned financial institutions in Russia to tap capital markets in the West, banned weapons sales, and limited technology transfers, including technology related to the oil sector.
After the Russian invasion of Ukraine on Feb. 22, 2022, the United Kingdom was the first to impose new sanctions, taking measures against five Russian banks and three individuals. Prime Minister Boris Johnson said that he will "reserve further powerful sanctions."
The EU will blacklist more Russian politicians, lawmakers, and officials, ban EU investors from trading in Russian state bonds, and target imports and exports to or from the pro-Moscow separatist regions in Ukraine that Russia has invaded. "This package of sanctions ... will hurt Russia, and it will hurt a lot," said EU foreign policy chief Josep Borrell in a news conference.
Meanwhile, German Chancellor Olaf Scholz is halting certification of the Nord Stream 2 gas pipeline, an important future energy source for his country, which is Europe's largest economy. U.S. President Joe Biden announced sanctions against two Russian banks, Russia's sovereign debt, and members of Russian elites, while also warning that Russia would face even more pain if its aggression against Ukraine continued.
Worries About Contagion
Noel Quinn, CEO of HSBC Holdings, PLC (HSBC), one of Europe's largest banks, expressed worries about "wider contagion" for global markets, even if his own bank's direct exposure was limited. "It's clear that there is a likelihood of contagion or some second-order effect, but it will depend on the severity of the conflict and the severity of the retaliation if there is a conflict," Quinn told Reuters.
U.S. Banks See Limited Risk
The previous sanctions against Russia caused banks, especially in the U.S., to reduce their exposure to Russia. As a result, U.S. banks generally do not expect the latest global sanctions to have a major impact on their businesses or to spark contagion in the U.S., according to four unidentified executives who spoke to Reuters.
These sources indicate that the Biden administration had been meeting with key figures in the banking and financial industry to discuss potential sanctions and that these briefings may have begun before Christmas. One said that, in the 24 hours before Biden's announcement, banks had been identifying potential targets of the sanctions so they could move quickly.
Risks of Cutting Russia Off SWIFT
One of Reuters' sources noted that an area of potential concern was the disruption that could result if the U.S. restricts Russia's access to the SWIFT international payment network. However, the source added that this is unlikely in the near future. Specifically, barring Russia from the international payments network could inflict severe damage on its economy, thus hurting ordinary citizens. It also would create huge complexities and compliance risks for the global banking industry.
Rising Cyberattack Risk
Minutes after President Biden announced sanctions, a senior FBI cybersecurity official held a telephone briefing in which he advised U.S. businesses and state and local governments to be on the alert for possible ransomware attacks as the Ukraine crisis deepens and to consider how ransomware attacks could disrupt the provision of critical services.
On the call, David Ring of the FBI stated that Russia is a "permissive operating environment" for cybercriminals that "is not going to get any smaller" as the Ukraine crisis continues and further sanctions are imposed. That phone call was part of a series of briefings that FBI and Department of Homeland Security officials have held in the past two months against a backdrop of rising tensions between the U.S. and Russia over Ukraine.
While U.S. officials say that there are "no specific, credible" threats to the U.S. homeland resulting from tensions with Russia over Ukraine, they advise vigilance. In the week before the invasion, cyberattacks targeted the Ukrainian government and banking websites. The Biden administration blamed the Russian military, and U.S. officials expect Russian cyber operations to accompany any further military actions against Ukraine.
Details on Biden's Sanctions
On Feb. 22, 2022, the Biden administration announced a "first tranche of sanctions that go far beyond 2014, in coordination with allies and partners in the European Union, United Kingdom, Canada, Japan, and Australia." These sanctions include four "measures," as summarized below.
Full blocking sanctions on two significant Russian financial institutions. The announcement states that two large state-owned Russian financial institutions that finance the Kremlin and the Russian military, Vnesheconombank and Promsvyazbank, and their subsidiaries, collectively hold more than $80 billion in assets. These measures will freeze their assets in the United States, prohibit U.S. individuals and businesses from transacting with them, shut them out of the global financial system, and foreclose their access to the U.S. dollar. Restricting U.S. individuals and firms from trading in new debt issued by Russia. This denies Russia access to key U.S. markets and investors. Full blocking sanctions on five Russian elites and their family members
These are Aleksandr Bortnikov (and his son, Denis), Sergei Kiriyenko (and his son, Vladimir), and Promsvyazbank CEO Petr Fradkov. These individuals and their relatives directly benefit from their connections with the Kremlin. Other Russian elites and their family members are placed on notice that additional actions could be taken against them.
Any institution in Russia's financial services sector is a target for further sanctions. The announcement notes that over 80% of Russia's daily foreign exchange transactions globally are in U.S. dollars and roughly half of Russia's international trade is conducted in dollars. As a result of this action, the administration asserts that no Russian financial institution is safe from U.S. measures, including the largest banks.