What sanctions has the West imposed – and how are they hurting Russia?

Archbishop Jerome Lloyd OSJVPosted by

Foreign Secretary Liz Truss says the measures are aimed at “cutting off funding for Putin’s war machine”

What sanctions has the West imposed – and how are they hurting Russia?
The Russian central bank headquarters in Moscow
The Russian central bank headquarters in Moscow

Western powers are hitting back against Russia’s invasion of Ukraine with a widening range of economic and financial sanctions against the nation’s leaders, businesses and public institutions.

The aim is to cripple the Russian economy, undermining the financial resources required for the Kremlin’s military assault and imposing personal damage on the President and those close to him.

Liz Truss, the Foreign Secretary, said “we are cutting off funding for Putin’s war machine”, calling the measures “the largest package of sanctions in our history”.

Here are the sanctions, what they do and what could happen next.

Individuals

Vladimir Putin and his foreign minister Sergey Lavrov were hit by personal asset freezes on Friday, across the UK, US and EU.

Sergei Lavrov
Russian foreign minister Sergei Lavrov

A range of top bankers, industrialists and Putin cronies have been added to the lists of sanctioned individuals in February. In the UK’s case, this now stretches to 190 Russians.

It is unusual for a head of state to be treated this way, and puts Putin on a par with exceptionally blood-soaked dictators including Syria’s Bashar Al-Asad.

The net is stretching wider than only top officials – no Russian national will be allowed to hold more than £50,000 in a UK bank account. The EU has imposed a similar restriction, and blocked the country’s citizens from putting their money into EU securities, such as bonds and shares.

Companies

Businesses are also in the firing line as a range of banks and companies serving Russia’s military machine have had their assets frozen while the country’s airlines are being denied access to European airspace.

Banks will be blocked from clearing payments in dollars or sterling, with banks and businesses banned from raising debt in London.

Russian planes are being barred from much western airspace.

Goods with potential military uses will be blocked from export to Russia.

Perhaps most powerfully, the banks’ access to the Swift messaging system is being severely curtailed.

It is key to making international payments, thus banks are effectively cut off from the global financial system.

A few exemptions will be allowed as European countries want to be able to keep buying energy from Russia, which supplies 40pc of its natural gas.

State entities

Russia’s central bank has also been sanctioned. This is crucial as Putin was believed to be relying on its $650bn war chest of foreign exchange reserves to cushion the blow to the economy and financial system.  As well as the central bank, the US has blocked transactions with Russia’s finance ministry and wealth fund.

Are the sanctions working?

The clearest immediate impact is the crash in Russia’s currency, a collapse in the share price of exposed banks and potential early signs of a bank run.

The rouble has plunged by about 30pc in the past fortnight, piling pressure on the central bank and raising the prospect of inflation surging as high as 20pc.

Russia’s central bank has more than doubled interest rates to 20pc. Economists now anticipate a substantial recession.

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Bank stocks have crashed, there are reports of long queues at branches and cash points as customers seek to withdraw their deposits, particularly in foreign currencies.

Credit default swaps, a type of insurance, indicate investors believe there is a more than 50pc chance the Russian government will default on its debts.

Moscow had anticipated some of the fallou, reducing its reliance on dollar investments in recent years. But in part this resulted in more euro exposure and the EU has joined this round of sanctions.

Moscow has reacted with new efforts either to retaliate or to try to soften the blow.

This will be difficult as analysts estimate the central bank may now have lost access to more than half of the mountain of reserves gathered to prop up the currency, banks and trading businesses.

As a result the authorities are seeking to stem the flow of cash out of the country. Foreign investors are barred from selling Russian securities. Residents with foreign debts have been told not to pay what they owe. 

What could happen next?

Roping more countries into the sanctions would help stop Russia skirting the restrictions by dealing with a select few remaining allies.

Tobias Ellwood, chairman of the Commons defence select committee, called for China to be ensnared as well.

“Any sanctions we impose will be mopped up by Russia’s new long-term friend China … I urge the UK to put in a resolution on sanctions that means China is obliged to follow them as well as everyone else,” he said.

Russia’s Gazprom is set to build a new gas pipeline to the world’s second-largest economy, while in 2014, following the seizure of Crimea, the two powers signed another supply deal.

The Institute of International Finance says there are further steps which can be taken in the west to ramp up the pressure on Russia.

“These could include removing energy transactions-related exceptions from sanctions against the Russian banking system, shutting down further euro-based transactions, and prohibiting transactions in the secondary market for existing Russian debt,” said the IIF.

This comes with the risk of economic pain in the west as Europe gets 40pc of its gas from Russia, making it heavily reliant on imports, particularly in winter.

Meanwhile just a fifth of Moscow’s revenues come from commodities sales, so it is similarly dependent on foreign demand.

Truss promises more sanctions against Russia, its oligarchs and its enablers in Belarus despite the cost.

“The UK and our allies will have to undergo some economic hardship as a result of our sanctions. But our hardships are nothing compared to those endured by the people of Ukraine,” she told MPs.

“We are determined to go much much further. We want a situation where they can’t access their funds, their trade can’t flow, their ships can’t dock and their planes can’t land.”

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