How does the latest US imposed ‘first tranche of sanctions affect Russia?

By Joseph P Chacko

The United States has imposed new sanctions against Russia, which will affect the sovereign public debt and cut off Moscow from Western funding, the U.S. President Joe Biden said in a special address on Tuesday.

Restrictive measures come into force from Wednesday. According to Biden, they will affect, among other things, representatives of the Russian elites and members of their families, who “share in the corrupt gains of the Kremlin policies.”

The U.S. has implemented ‘full blocking sanctions’ against two large financial institutions of Russia – VEB and the military bank ‘Promsvyazbank’. The restrictions will affect VEB, Promsvyazbank, 42 of their subsidiaries.

Biden said this is “the first tranche of sanctions”, in the event of an escalation of the crisis around Ukraine, new ones will follow.

In addition, the U.S. administration is working with Germany to ensure that the Russian Nord Stream 2 gas pipeline does not start work.

The U.S. will not impose all sanctions at once

White House Press Secretary Jen Psaki on Tuesday, during a regular briefing, stated that the United States had no intention to impose all possible sanctions against Russia at once since Washington hopes for a containment effect.

In a Twitter broadcast, Psaki said that if all sanctions were imposed immediately, it is not clear what the deterrent effect is, which will prevent [Putin] from taking further actions to, as the West claims, worsen the situation in Ukraine.

The White House spokeswoman added that disconnecting the Russian Federation from the SWIFT interbank payment system is not included in the initial package of restrictive measures, but “this option remains.”

How do the latest sanctions affect Russia?

Most western investors will now stay away from Russian sovereign debt but may invest in Russian equities that trade on many western exchanges. Foreign investors are normally unsure of investing in Russia.

Investments may flow into equities of the companies with deep value and which are capable of withstanding the volatility in the Russian markets currently. In the short run, most investors who do not study Russian (and Ukrainian) companies may avoid the equity. 

Canada’s “first round” sanctions include a ban on Canadians having any financial dealings with Luhansk and Donetsk. Canadians are also forbidden from purchasing Russian debt and cannot have financial transactions with two Russian banks sanctioned by the U.S.

VEB bank has been under sanctions since 2014, and the new sanctions will not have much effect. The embargo is seen as incremental rather than anything drastic.

The new sanctions on the Russian economy are expected to be negative in the near term as Russia does not depend on the U.S for trade and has faced them for a decade.

Liquidity and credit may see a further restriction in a severely credit-starved economy, impacting Russia’s GDP and employment generation in the short to medium term. In the longer-term alternative financing sources may emerge which are not dependent on U.S. and western banking institutions.

Currently not under sanctions threat, but Russia’s non-political elites and their families may shift assets away from the western financial ecosystem as in the future they can be impacted. The sanctions will prevent capital flight from Russia but might create friction between the rich and the government. 

Political and politically connected elites will bear the brunt of sanctions. An influential group of politicians – 67 MEPs – have called on the E.U. to impose sanctions personally on Putin and Russia’s Security Council members. Canada is sanctioning all Russian parliament members who followed Putin’s lead and voted to recognize the two separatist regions. 

The U.S. has already blocked five ships belonging to the “daughter” of Promsvyazbank. The U.S. Treasury has said that Washington is re-imposing sanctions against FSB Director Alexander Bortnikov and Deputy Chief of Staff of the Russian President Sergei Kiriyenko.

Tokyo is studying the option of sanctions measures in the financial sector regarding the freezing of assets of Russian individuals. Who exactly is it is not specified at the moment. 

Sanctions affect Europe and the US.

Europe is currently the largest investor in Russia. Germany is the largest investor in Russia, followed by France. The U.S. invests in Russia and is the fourth largest investor after the two European countries and China. These countries have invested close to a trillion dollars in long-term projects over the decade. However, investments trickled down to just $1.4 billion as per the data in 2021.

Nord Stream 2

On Tuesday, German Chancellor Olaf Scholz said that the German government was stopping the certification of the Nord Stream 2 project after Russia recognized the DPR and LPR. He said that he had asked the Ministry of Economy to revoke a report with an analysis of energy security, which is in the Federal Grid Agency. He said that Nord Stream 2 cannot be launched without this certification. 

US Secretary of State Anthony Blinken supported Germany’s decision on the pipeline. 

White House press secretary Jen Psaki declined on Tuesday to clarify whether Germany’s guarantees that decisions to suspend or terminate the Nord Stream 2 pipeline would not be reconsidered.

At a regular briefing, journalists asked her about the gas pipeline. The spokesperson said the statement made ‘today’ by the German Chancellor [Olaf Scholz] was not accidental. After a series of diplomatic contacts and efforts by President [US Joe Biden] and members of the U.S. national security team and the unity of Europe, it [the gas pipeline] cannot go any further.

President [Biden] has never been a supporter of Nord Stream 2. The US has always criticized it and did not support it. The US has taken several steps and sanctions to clarify this, said the spokeswoman.

Earlier, Federal Minister of Digitization and Economic Affairs of Austria MargeretSchrambyok in an interview with the Austrian public broadcaster ORF has said that Austria will not abandon the Nord Stream 2 gas pipeline project and will not join the sanctions prohibiting its commissioning at the request of other countries.

Russian Reaction

The official representative of the Russian Foreign Ministry, Maria Zakharova, called the new Western sanctions against Russia illegitimate. The diplomat noted that Moscow has long understood that restrictions are the only tool of the West against the Russian Federation to restrain its development.

(The author is a publisher, columnist and author. He writes on defence and strategic affairs and occasionally other topics. He tweets @chackojoseph Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited).