Russia’s expulsion from SWIFT, the global banking system that facilitates financial transactions around the world, has been described as the “nuclear option” for possible sanctions against Moscow over the invasion of Ukraine. But will European countries that risk not being able to recover billions of euros of Russian debt return to these measures?.
Global banks are bracing for the ripple effects of harsh new financial and economic sanctions against Russia intended to hobble its economy and restrict its access to foreign capital.
On Tuesday, President Biden announced that the United States would impose sanctions on Russia’s main development bank, VEB, and its military bank, Promsvyazbank, and enact comprehensive curbs on Russia’s sovereign debt, effectively cutting the country off from Western financing. He said the United States was also preparing to impose sanctions on Russian elites and their family members.
The sanctions will sever the state-backed banks from the United States financial system and make it tougher for Russia to raise money in foreign markets for large domestic infrastructure projects, most likely hampering growth. The actions were a taste of what is in store for Russia’s economy.
“We will continue to escalate sanctions if Russia escalates,” Mr. Biden said.
Prime Minister Boris Johnson of Britain on Tuesday also imposed sanctions on several Russian banks and three Russian billionaires. And Chancellor Olaf Scholz of Germany said he would halt certification of the Nord Stream 2 natural gas pipeline that would expand energy imports from Russia.
The collective Western response is aimed at punishing Russia for escalating its aggressions toward Ukraine. On Monday, Russia issued a decree sending troops to two regions of Ukraine, a move widely construed in the West as a first step toward a full invasion.
Over the past decade, the United States has increasingly used sanctions to address diplomatic tussles, including in North Korea and Iran. It has been able to do so because the dollar is the world’s reserve currency and is the most widely used for payments. However, the repercussions of sanctions are far from clear-cut or precise. In the case of Russia, it’s likely that much of the global financial system could also take a hit because of the intertwined nature of global trade — even if the impact is small.