Banks brace for sanctions spiral after Russia invades Ukraine

Western countries are set to unveil coordinated and tough sanctions on Russia on Thursday - with banks likely to be first in line - after Russia began an invasion of Ukraine.

Measures announced earlier this week hit several Russian banks and individuals and targeted Moscow's ability to raise money in international debt markets. But finance industry experts and some Western politicians said these actions were not severe enough.

The United States, the European Union, Britain and their allies are now expected to make it more difficult for Russian lenders to operate internationally.

Here is a rundown of how sanctions announced so far impact banks and investors and which potential new measures might hit harder:

What has been announced so far?

European foreign ministers earlier in the week agreed to sanction 27 individuals and entities, including banks financing Russian decision-makers and operations in the breakaway territories in Ukraine.

The package of sanctions also included all members of the lower house of the Russian parliament who voted in favour of the recognition of the breakaway regions.

Britain imposed sanctions on three billionaires with close links to Russian President Vladimir Putin, and on five banks - Rossiya, IS Bank, GenBank, Promsvyazbank and the Black Sea Bank.

The lenders were relatively small and only military bank Promsvyazbank is on the Russian central bank's list of systemically important credit institutions.

Bank Rossiya was already under US sanctions from 2014 for its close ties to Kremlin officials.

Washington imposed sanctions on Promsvyazbank and VEB bank.

The United States also ramped up prohibitions on Russian sovereign debt, which US President Joe Biden said would cut the Russian government off from Western financing.

 What might come next?

Russia's large banks are deeply integrated into the global financial system, meaning any sanctions on the biggest institutions could be felt far beyond its borders.

The sanctions already announced focused on smaller banksand were not as extensive as those imposed after Russia's annexation of Crimea in 2014, although many of those remain in place.

President Biden said on Thursday after the latest Russian action that G7 leaders and US allies would impose severe sanctions.

A senior US administration official told reporters earlier this week that Russia's state-backed Sberbank (SBER.MM) and VTB would face American sanctions if Moscow proceeded with its invasion of Ukraine.

Shares in those banks, which actually rose on Tuesday after the initial sanctions were announced, nearly halved in value on Thursday as investors ditched Russian assets.

Sberbank, Russia's largest bank, said that it was prepared for any developments.

Washington has also prepared a raft of measures including barring US financial institutions from processing transactions for major Russian banks by cutting "correspondent" banking relationships, sources told Reuters last week.

Disabling international payments would hit hard and it is not clear whether officials will deploy that now or keep it in reserve.

British Prime Minister Boris Johnson said Britain and its allies would agree a package of economic sanctions to hobble the Russian economy. He is expected to announce specific measures around 1700 GMT.

European Union leaders are preparing new sanctions, including freezing Russia's assets, halting its banks' access to European financial markets and targeting "Kremlin interests".

What would hit hardest? 

What banks and Western creditors fear most is the possibility that Russia is banned from the global payment system, SWIFT, which is used by more than 11,000 financial institutions in over 200 countries.

Such a move would hit Russian banks hard but the consequences are complex. Banning SWIFT would make it tough for European creditors to get their money back. Russia has been building up an alternative payment system.

Banning Russia from SWIFT is unlikely to be agreed at this stage, several EU sources said on Thursday.

Analysts said Russian institutions are better able to cope with sanctions than eight years earlier.

Russian state banks have cut their exposure to Western markets and since 2014 Russia has diversified away from US Treasuries and dollars.

The euro and gold account for a bigger share of Russia's reserves than do dollars, based on a January report from the Institute of International Finance.

Russia has other defences, including abundant hard currency reserves of $635 billion, oil prices near $100 a barrel and low debt.

The Russian central bank has said it will intervene to help the rouble after it crashed to record lows on Thursday.

Which foreign banks are most exposed?

There were big falls in shares of European banks on Thursday, with an index of European banking stocks down 7.5%.

Banks with significant operations in Russia were particularly hard hit, with Austria's Raiffeisen Bank International down 20% and France's Societe Generale losing 11%.

Italian and French banks each had outstanding claims of some $25 billion on Russia in the third quarter of 2021, based on Bank of International Settlement figures.

Austrian banks had $17.5 billion. That compares with $14.7 billion for the United States.

Many foreign banks have significantly reduced their exposure to Russia since 2014, making some bankers less concerned about sanctions.