Western banks were the hardest hit sector on international stock exchanges last week. The Russian invasion of Ukraine and the sanctions that followed could cause huge losses – or at the very least great uncertainty about the fate of the money they have outstanding in Russia. While British, Italian and French banks are heaviest in Russia, Austria is actually the most involved relative to its economic size. The Austrian Raiffeisenbank lost almost a third of its stock market value last week, despite a small recovery on Friday. In the Netherlands, ING lost a tenth of its value last week. Many major banks in France, Italy and Germany met the same fate.
Still, the damage on the western stock markets seems clear. As the bank UBS summarized on Friday: it will be difficult to do business with Russia, consumers and companies are spending more money on energy and other raw materials and can therefore spend less on other things. And cyber-attacks can do quite a bit of damage. But the energy still flows. And: many of the sanctions hit Russia itself, but cause less damage outside of it. Essentially, the market believes it has passed a ‘tail risk’ – a small chance of something devastating – now that the foray into Ukraine is a fact. And that is, rather cynically, good for the prices.
Stock market reaction cool
All of that, of course, remains to be seen, if only because it is still unclear what President Putin’s ultimate goal is. But it ‘sell the rumour, buy the fact‘ was a common explanation on Friday for the fact that the stock markets were dealing with the enormous historical significance of Russia’s invasion. A 3 percent fall in the AEX index in the past week is minor in that regard, especially because ING alone was responsible for a seventh part of it.
In the prelude to the invasion of Ukraine and the increasingly concrete talks about possible sanctions, it has become clear that Russia has built a financial and economic ‘fort’ in which the country can last for a long time. That sounds like a master plan, but much of it is the effect of the previous round of sanctions following Russia’s 2014 invasion of Crimea. Western banks have since sharply reduced their activity. Half of all Western bank claims against Russia at the time are now left, and only one eighth of all Dutch claims. The state, Russian banks and companies, as access to the foreign market was made more difficult by sanctions, cut their foreign debts by almost half to $478 billion (426 billion euros), according to the International Institute of Finance ( IIF). Russian financial reserves have risen to a formidable $631 billion, according to IIF figures, of which the dollar itself is only one-sixth, from 40 percent in 2014. The reserves now contain more gold than dollars. 40 percent of the reserves are euros, mostly in the form of government bonds from euro countries. Including, spicy detail, 70 billion in French government bonds and 60 billion in German.
An impregnable fortress?
The foreign reserves, according to the Russian Central Bank, are equivalent to 18 months of imports – so a year and a half. So Russia will keep it up for a while, even without any export income. In practice, those exports simply remain: gas and oil continue to flow, and even generate a lot of extra income at today’s high prices. That’s irony: Putin’s aggression drives high energy prices, which in turn co-finance that aggression themselves. Bloomberg economic commentator Javier Blas recently wrote sharply: in the 24 hours after Putin’s decree on Monday evening recognizing the self-proclaimed republics of Donetsk and Luhansk as independent states, the EU, the UK and the US jointly bought 3.5 million barrels of Russian oil. – at today’s oil price, that cost more than $350 million. In addition, in those 24 hours, the West bought an estimated $250 million in gas, plus several tens of millions of dollars in aluminum, coal, nickel, titanium, gold, and other commodities. The bill that the West paid to Russia in one day: more than 700 million dollars.
So is Russia an impregnable financial-economic fortress? Swift, the international bank payment identification system, is slowly being replaced by its own SPFS system. That was completely absent in 2016, but already accounts for 16 percent of interbank payments. That doesn’t mean that untying Swift, the ultimate sanction against Russia that circulated in Western circles this week, would be without consequences. But Europe, the United States and the United Kingdom did not go that far. Although the Swift sanction was still in the air on Friday evening, the US, EU and UK are already keeping individual Russian banks further and further away from the Western financial markets that those banks like to use. Washington, Brussels and London use big words for their financial sanctions, such as ‘unprecedented’, ‘severe’ and ‘maximum’. It remains to be seen how serious the measures will be in practice.
Two largest banks tackled
In any case, the Americans are tackling the two largest banks in Russia: Sberbank and VTB. All transactions through American parties of Sberbank, which in terms of balance sheet total accounts for 38.8 percent of the entire Russian banking sector, are blocked. American banks and companies that do business with Sberbank must sever their relations with the bank – where the Russian government is the majority shareholder – within a month. VTB, which accounts for 19.8 percent of Russia’s banking sector, applies “full blocking sanctions”: all assets are “instantly frozen and inaccessible to the Kremlin,” according to the US Treasury Department. Some smaller Russian banks are also blocked.
Also read: Scarcity of raw materials and higher gas prices: how sanctions hurt the EU itself
Here, despite Russia’s march toward dollar independence, America’s long arm of dollar power is firmly at work. According to the US Treasury Department, Russian banks conduct $46 billion in foreign exchange transactions every day, 80 percent of which are in US dollars. “The vast majority of these transactions are now disrupted,” the ministry said.
The vast majority – not all. Because what is striking: there is also an exception list in the sanctions. Transactions in the energy sector and in the raw materials sector are excluded. Precisely the sectors where Russia earns its money, largely through the West. The US may have exempted energy from the financial sanctions after pressure from European allies: countries like Germany and Italy in particular fear an explosion in gas prices – which is why these countries are also reportedly shied away from banning the Russians from Swift. Then payments for gas would be seriously disrupted. But the Biden administration has itself repeatedly shown in recent months that it wants to keep energy bills low for American consumers. Although the US hardly buys Russian energy, there is a risk of a rise in global energy prices if Russia as a supplier is severely affected.
The Russian central bank said on Thursday that it would assist Russian banks in absorbing Western sanctions. At the same time, the central bank seems to be somewhat concerned about the impact of the sanctions. Russian banks were warned on Friday not to pay a dividend for the time being. Because things are not going well: Sberbank lost 37 percent of its stock market value in the past week, VTB even 41 percent.
For example, the banking sector in both the EU and Russia itself is suffering from the invasion of Ukraine. Can Fort Russia withstand that? The 2014 sanctions have accelerated Russia’s financial autonomy. But according to an analysis by the Atlantic Council, an American think tank, they have also acted as a brake on the Russian economy. Foreign investment in the country declined as the Russian investor market became more risky. Public investment slumped due to the need to reduce public debt – which, at just 18 percent of GDP, was to make Russia less vulnerable to the outside world. GDP grew more slowly than that of other emerging markets and slower than that of neighboring Eastern European countries.
The hope of Western governments is that the same effect, but more intense, with the sanctions now occurs, to corner Putin financially and economically. But given Russia’s accelerated pursuit of financial autonomy since 2014, this could also be the last time such sanctions will have any effect.
A version of this article also appeared in NRC Handelsblad on 26 February 2022
A version of this article also appeared in NRC on the morning of February 26, 2022