Old-fashioned but effective, why are experts optimistic about sanctions on Russian banks?

The United States, Britain and the European Union have imposed a series of sanctions on Moscow after U.S. President Joe Biden set the tone for Russia’s incursion into Ukraine, and targeted several Russian banks to hamper their ability to raise funds in financial markets. Experts believe that bank sanctions, although old-fashioned and common, are the most powerful measure the United States can implement in the short term.

Internationally used sanctions
The Ukrainian crisis is heating up. After Russia announced that it recognized the two separated areas of eastern Ukraine as independent states and signed an agreement to give the Russian army the right to establish military bases, US President Biden has set the tone for Russia to start invading Ukraine and coordinating partners such as the United Kingdom and the European Union. , announced sanctions against Russia. Among them, Washington completely blocked Russia’s state-owned Development Bank (VEB) and the military bank PSB (Promsvyazbank), London locked up five banks including Bank of Russia (Bank Rossiya), and Brussels also offered to restrict Russia’s access to EU capital and financial markets s method.

Indeed, sanctions appear to have become the West’s main weapon in response to Russia’s aggression against Ukraine. According to the legal professional body LexisNexis, since the United Nations Security Council established the first sanctions regime in Southern Rhodesia, today Zimbabwe, global sanctions actions have become increasingly complex. The purpose of sanctions is mainly to prevent the escalation of conflicts, resolve conflicts, curb nuclear proliferation, or combat terrorism and human rights violations.

Killer trump to block dollar transactions
In the face of a pushy Russia, experts believe that restricting the use of the dollar by Russian state-owned banks is the most powerful sanction; that is, bank sanctions are the most influential measure the U.S. can impose in the short term. Brian O’Toole, a former senior adviser to the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), said such sanctions would prohibit Russian banks from conducting any transactions in U.S. dollars, essentially freezing any dollar-denominated bank transactions at home and abroad. assets or liabilities.

The purpose of the bank sanctions is to block international payments between locked Russian banks and U.S. banks, in order to hit the Russian economy. Kay Georgi, an international trade lawyer, said that since most global trade transactions are conducted through the U.S. dollar, once the currency exchange is cut off, it may make it difficult for the target bank to conduct U.S. dollar transactions, which is an effective sanction.

Risk of financial instability
In fact, part of the purpose of the bank sanctions was to force Russia’s central bank to use its strong currency reserves to get out of trouble. Chris Weafer, head of Macro Advisory, believes that Russia has some defensive weapons against foreign attacks on financial stability in the face of sanctions: strong currency reserves, high oil prices, and 2021 With only 18% of its debt-to-GDP ratio in 2018, Russia is well-positioned to withstand tightening of existing sanctions.

But while Russia has large reserves of a strong currency, currently worth $635 billion, that could help counteract potential shocks, Elina Ribakova, an economist at the Institute of International Finance, said that even if Russia had enough Reserves, sanctions could still lead to a run, which would definitely have a severe impact on the domestic financial system, which would raise the risk of financial instability, including widening spreads and a sell-off in the ruble.

Whether it works or not depends on history
However, Igor Yurgens, vice-president of the Russian Union of Industrialists and Entrepreneurs, a powerful lobbying group, said the Russian central bank has been working on a current account program in China through which Converting cash would help mitigate the impact of sanctions, and while the situation is difficult, authorities have conducted technical stress tests and should be able to cope for a while. Sergey Aleksashenko, a former deputy governor of the Russian Central Bank, believes that the threat of Western sanctions is nothing more than an escalating virtual or information war between Russia and the West. In this confrontation, Putin’s weapon is the chariot, and the West is the sanctions.

So can bank sanctions really work? The Brookings Institution, a Washington-based think tank, draws some conclusions from the history of U.S. economic sanctions, which is that sanctions alone are unlikely to have the desired effect if the goals are large or short-lived. Even if sanctions are comprehensive and have almost universal international support, they may not achieve their goals. The Persian Gulf War is an example, until the U.S.-led coalition launched Operation Desert Storm in 1991. Sanctions alone did not bring Iraqi dictator Saddam Hussein out of invading Kuwait. .

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