Russia is facing an unprecedented escalation in Western sanctions following its invasion of Ukraine on February 24. Russia has already been subject to a number of sanctions since the 2014 annexation of Crimea, but has managed to withstand their impact, and indeed it recovered investment-grade status in 2018.
However, amid the international outcry over the Ukraine invasion, Russia has quickly bypassed Iran to become the most sanctioned nation in the world, with recovery prospects highly uncertain.
bne IntelliNews details the new wave of Western sanctions, based on the reports by RBC business portal, Reuters and the US, UK, and EU official announcements, with the focus on sanctions from the UK, US, and EU.
Notably, on February 28 Switzerland said it would will adopt all the European Union sanctions on Russian nationals and companies, in sharp deviation from the traditional neutral position of the country. Switzerland continued mirror adotptions of all further EU sanctions on Russia.
Central Bank of Russia
The US and EU announced plans to impose restrictive measures against the Central Bank of Russia (CBR), targeting the use of its international reserves. The aim of these measures is to prevent the CBR from tackling the impact of already imposed sanctions.
The European Union High Representative for Foreign Affairs and Security Policy Josep Borrell said after a meeting of European Union foreign ministers on February 27 that "about half of the Russian Central Bank's financial reserves will be frozen because they are held in banks in G7 countries".
"This measure will severely affect Russia's financial system," he added.
As analysed by bne IntelliNews, Russian President Vladimir Putin has built a “fiscal fortress” to sanction-proof Russia in a long-anticipated clash with the West over security and the possibility of Ukraine’s eventual membership of Nato. The huge reserves – equivalent to 17 months of import cover, well beyond the three months economists say is the minimum needed to ensure the stability of the ruble – have been at the heart of that fortress.
The sanctions could now effectively freeze around 40-60% of Russia's $643.2bn of international reserves, affecting the CBR's ability to support the ruble rate and the liquidity in the banking sector.
Sovereign debt, investment, and deposits
The US Treasury expanded sanctions on Russian government debt after Russia's recognition of the separatist self-proclaimed Donetsk and Luhansk republics in eastern Ukraine. As a result, the US financial institutions are banned from any transactions (on the primary and secondary markets) with Russian ruble-denominated federal loan bonds (OFZ) or foreign currency sovereign eurobonds issued after 1 March, 2022.
The finance ministry responded by rehashing all OFZ issues as of February 22, ending additional placements of OFZs issues that were registered before February 2022, providing foreign investors with an option to comply with the sanctions regime.
The EU has imposed restrictions on deposits in European banks for wealthy Russians (€0.1mn per one bank) and Russian companies, and banned the sale and purchase of euro-denominated financial instruments for the benefit of Russian clients, both individuals and legal entities. The UK has banned Russians from holding deposits in British banks exceeding GBP50,000 ($67,000).
At the same time, European depositories have been prohibited from providing any services to Russian individuals and organisations for sales of securities that will be issued after April 12, 2022.
Exports and imports
The EU and the US have expanded sectoral sanctions that affect exports and imports. RBC business portal notes that the US imposed the most severe trade sanctions in history. The sanctions are aimed at the crucial technological components for the military-industrial complex, aircraft and shipbuilding. The White House estimates that the new restrictions will more than halve Russian imports of high-tech products, ranging from electronics and computers to avionics and aerospace components.
The EU has also imposed an embargo on exports of goods and technology used in the aviation and space sectors in Russia. In addition, insurance and maintenance of goods related to these sectors have been banned. Among other things, the EU banned the sale of new aircraft to Russia, such as Airbus jetliners.
bne IntelliNews has specifically analysed how the prohibitions on the supply of equipment and technologies for Russian refineries would undermine the country’s refinery modernisation programme.
The UK has also announced the withdrawal of export licences for high-tech goods to Russia, such as electronic components that can be used to produce military trucks, semiconductors, oil production equipment and Rolls-Royce aircraft engines.
In addition, the US sectoral sanctions on any financing for more than 14 days have been imposed on a number of Russian companies, including Rosneft and Gazprom Neft oil majors, Transneft oil pipeline transportation company, Novatek gas major, Rostec state technology agency and Alrosa diamond major.
In terms of international trade, the world’s two biggest container lines, Swiss-headquartered MSC and Danish Maersk, have suspended cargo shipments to and from Russia as of March 1. In addition, the UK, Spain and Canada have officially banned access to Russian vessels to their sea ports, while Germany, the Netherlands, and Belgium are expected to follow suit. The European Parliament on March 1 adopted a resolution urging all European ports to close access to Russian vessels.
Industry and commodities
The first heavy industry to be affected by the sanctions is car manufacturing, with multiple foreign car majors announcing either stopping assembly in Russia, or halting sales in the country. Mercedes-Benz Group is reportedly looking into legal options to divest its 15% stake in Kamaz heavy vehicle producer.
As analysed by bne IntelliNews, French Renault said it would suspend some operations at its car assembly plants in Russia. In the worst-case scenario of Renault having to pull out its capital from the joint venture with AvtoVaz, this would cause great harm to Russia's largest carmaker.
The Russian banking sector has been hit the hardest in the first wave of the UK and US sanctions post the Ukraine invasion on February 24.
Russia's second-largest state-controlled bank VTB, Otkritie (former financial corporation Otkritie bailed out by the CBR, restructured and primed for an IPO), one of the largest private banks Sovcombank, Promsvyazbank (bailed and restructured by the CBR into a "military bank") and another bank affiliated with the military, Novikombank, have been hit hardest by US sanctions and put on the SDN list.
The inclusion on the SDN list effectively blocks US dollar assets and accounts and isolates the banks from the US dollar payment system. Apple Pay and Google Pay payment services will no longer work for the cards of these five banks.
Russia's largest lender, state-controlled Sberbank (Sber), faces milder sanctions from the US under the CAPTA act, as its assets in the US jurisdiction are not frozen, and financial institutions have 30 days to close any Sberbank correspondent accounts and start rejecting any transactions involving the bank or its subsidiaries.
However, despite milder sanctions, Sberbank had to cut loose its European operations on March 2.
Sectoral sanctions have been imposed on Gazprom-affiliated Gazprombank, RosSelkhozBank (Russian agricultural bank), private Alfa Bank and Moscow Credit Bank. This implies restrictions on the provision of financing and other transactions with new debt with a maturity of more than 14 days, as well as on new share offerings.
On February 28 Mastercard had disconnected several Russian banks and financial institutions from its payment system "as a result of sanction orders".
On February 27 the European Union announced that it would disconnect a "selected number" of Russian banks from the SWIFT interbank payment system, noting that the decision was co-ordinated with the US, the UK, Canada and Japan. It is expected that previously sanctioned banks would be the ones disconnected from SWIFT.
The denial of access to SWIFT would make it very difficult for Russian banks to communicate with peers internationally. As detailed by bne IntelliNews, it was previously viewed as an extremely unlikely measure, a "nuclear" sanction, partly due to its high costs to the West and the possible disruptions to international energy markets.
Air travel, airlines, and aircraft building
The EU, Canada and the UK have imposed a ban on Russian aircraft flying over their entire territory. For the EU, specifically, the ban has been elaborated to include all aircraft owned by Russia, registered in Russia or controlled by Russia. This applies also to private jets.
In response, Russia has imposed flight restrictions on UK, Bulgarian, Polish and Czech airlines, including a ban on transit flights through the country's airspace.
In addition, as analysed by bne IntelliNews, Russian airlines are expected to be hit by a triple whammy of airspace shutting down, sectoral sanctions targeting buying and leasing foreign jets and the restrictions on supplies components for producing domestic alternatives. Boeing and Airbus have announced they would comply with the sanctions, as did the largest global aircraft leasing companies.
Personal sanctions on Russian officials
The US, Canada, the EU and the UK have imposed unprecedented, if symbolic, sanctions on President Vladimir Putin, Foreign Minister Sergei Lavrov and Defence Minister Sergei Shoigu, freezing their assets, if any, in the respective countries.
The EU sanctions list now includes 98 Russian individuals, including Prime Minister Mikhail Mishustin, Deputy Head of the Security Council and ex-PM/ex-President Dmitry Medvedev and Interior Minister Vladimir Kolokoltsev. Earlier, 351 members of the State Duma from among those who voted for the recognition of the Donetsk and Luhansk republics were sanctioned.
The US has imposed sanctions against the children of the influential state officials: Andrei Patrushev (son of Security Council Secretary Nikolai Patrushev); Sergei Ivanov (son of Security Council member Sergei Ivanov); Ivan Sechin (son of Rosneft head Igor Sechin); Vladimir Kiriyenko (son of First Deputy Head of Presidential Administration Sergei Kiriyenko); Denis Bortnikov (son of FSS head Alexander Bortnikov) and Peter Fradkov (son of former foreign intelligence service head Mikhail Fradkov).
RBC business portal notes that their fathers were put on the sanctions lists even before the Ukraine military invasion. Denis Bortnikov came under the British sanctions as deputy chairman of VTB Bank, and Pyotr Fradkov as head of Promsvyazbank.
Sanctions on Russian oligarchs
It is expected that a number of top executives from Russian banks and companies, as well as Russia's richest men, will come under sanctions by the EU and UK. Wealthy Russians linked to the Russian government will not be able to obtain so-called golden passports (obtaining citizenship in exchange for investments) in EU countries. Portugal separately announced the suspension of issuing of "golden" (investment) visas to Russian nationals.
Sanctions and other financial measures, such as asset freezing, will apply to members of the elite close to the Russian government, their families and associates, with the list determined by a special task force that has been set up by the EU.
On February 28, the EU has released the list that included 26 Russian nationals, including six of Russia's most prominent oligarchs with close ties to the Kremlin and President Vladimir Putin.
The oligarchs that were hit by the new EU sanctions include Mikhail Fridman, the founder of Alfa Group and LetterOne, his fellow shareholder Petr Aven, the head of the USM Group, financier and tech investor Alisher Usmanov, the influential head of Rosneft and one of Putin's oldest allies, Igor "Oil Czar" Sechin, and the head of the state oil pipeline operator, Nikolai Tokarev, Gennady Timchenko, the founder and shareholder of Volga Group and Novatek gas major, steel tycoon Alexei Mordashev, and the head of Promsvyazbank Pyotr Fradkov.
Media and the internet
Meta, the company that owns Facebook, has banned Russian state media from publishing ads on the social network and monetising those. In retaliation, Roskomnadzor announced a partial restriction on Russian users' access to Facebook. Google has made a similar decision regarding its services.
Russia Today and Sputnik have been banned in EU countries, while numerous countries are restricting the broadcast of other Russian TV channels. In addition, Russia will not participate in this year's "Eurovision", according to the decision of the competition organisers.
Visas and diplomatic relations
So far Ukraine has completely halted diplomatic relations with Russia. Several European countries have stopped issuing visas to Russians, such as the Czech Republic, Latvia and Lithuania. New Zealand and Japan have announced selective suspension of entry permits.
The simplified visa regime between the European Union and Russia which applied to members of official delegations, government and parliament, courts, holders of diplomatic passports and businessmen ceased to be valid on February 28, RBC business portal notes. This concerns short-stay visas with a right to stay for a maximum of 90 days within 180 days.
The foreign ministries of the Czech Republic, Finland and Germany have urged their citizens to leave Russia and Belarus. The US embassy has advised US citizens to leave Russia immediately.
Business ties and investment
A mass exodus of foreigners leaving the boards of directors and supervisory boards of Russian companies has started after Russia's invasion of Ukraine. For example, independent directors Esko Aho (former Finnish prime minister) as well as Nadia Wells and Nathalie Brahinski Mounier have left Sberbank. Former Italian Prime Minister Matteo Renzi has left the board of Delimobil car sharing company and former Austrian Chancellor Christian Kern has left Russian Railways.
British Petroleum (BP) has announced that it intends to sell its stake (19.75%) in Rosneft. Bernard Looney, the CEO of the oil major, and his former boss Robert Dudley are stepping down from the board of directors of the Russian company. As detailed by bne IntelliNews, the exodus of the foreign oil majors continued with Equinor and Shell.
"Russia's attack on Ukraine is an act of aggression that has tragic consequences for the entire region," BP chairman Helge Lund said. "The company has been operating in Russia for more than 30 years. But this military action represents a fundamental change. It has led BP's board of directors to conclude after careful consideration that our co-operation with Rosneft, a state-owned company, simply cannot continue," Lund added, as cited by RBC.
Reuters reported that the Norway's sovereign wealth fund, the world's largest sovereign fund, had decided to divest its assets in Russia valued at $2.8bn at the end of 2021.
Car-sharing service company Uber has announced that it will accelerate the sale of its 29% stake in a joint taxi service venture with Russian internet giant and the most valuable tech company in Europe Yandex.