Russia is Hurting Published by the Financial Times

When the US imposed sanctions on 24 Russian oligarchs and officials, and 12 related companies, in response to “worldwide malign activity” by the Russian state, the impact was not immediately clear. But within a week it was unmissable.

The share prices of Rusal, one of the world’s largest producers of aluminium, and its parent company EN+ Group, both sanctioned for their material connection to Oleg Deripaska (also on the sanctions list), fell roughly 50 per cent. The wider Russian market was down 10 per cent. Those, such as commodity traders, transacting with designated companies found related payments blocked as banks reacted to the news. Clearstream, a key component of investment market infrastructure, announced it would stop processing related securities transactions.

Sanctions have become the preferred tool of policymakers feeling an imperative to act — a step short of conflict. The UN, the EU and the US have made extensive use of sanctions against Iran for a range of issues, including its nuclear programme and human rights abuses. The UN and US have imposed sanctions on North Korea in response to its continued development of a nuclear capability. Each missile launch or underground test is greeted with a further round of economic pressure.

In 2014, the US and EU imposed sanctions on Russia following the annexation of Crimea, military incursions into Ukraine and the shooting down of a Malaysia Airlines passenger aircraft over eastern Ukraine. On the face of it, the latest sanctions designations, declared by the US Office of Foreign Assets Control, seemed little different from those that have gone before. But a week on from that announcement, there is a sense that this time things might be different. Why? Despite the rise of China and the growth in economic prosperity across the globe, the US — and, importantly for sanctions, the dollar — remain dominant. Alternative payment methods have emerged — currencies such as the euro and the Chinese renminbi have increased in liquidity and asset markets outside the US have grown. Yet approximately 50 per cent of global trade is still conducted in dollars and nearly two-thirds of global currency reserves are held in the US currency.

During the past two decades, the US has taken advantage of its economic and financial hegemony. Successive administrations have sought to “weaponise” the dollar against those acting counter to its interests and beliefs. What does this mean for Russia and the latest round of sanctions? Why does the impact seem so immediate and severe, in contrast to previous sanctions put in place by the US against Iran and North Korea?

Russia is a very different target from either of those countries. Since Russia emerged from its debt crisis in 1998, its banks and corporates have benefited from globalisation. The former have tapped the deep capital markets in Europe and the US for funding, and corporates, particularly those from the extractive sector, have benefited from the global demand for commodities and have listed their shares in London, Hong Kong and New York.

Russia has thus become integrated into global supply chains and global finance. But just as globalisation has benefited Russia, this integration presents a vulnerability if the markets in which these companies operate are turned against them.

The recent history of banking is scarred by enforcement actions against an extensive roll-call of names. HSBC, Standard Chartered and many others have paid fines to settle claims that they breached US sanctions. In the case of BNP Paribas of as much as $8.9bn. Any bank that uses the dollar can find itself subject to the long-arm of US law enforcement. This extraterritorial reach is often criticised but, as long as it lasts, the US will exert pressure to conform with its priorities on any bank that wishes to have access to the American market or the dollar.

The extent to which Russian banks, companies, oligarchs and officials are exposed to the dollar means that no bank, whether US-based or not, will want to risk handling funds that could bring unwelcome attention from American authorities. Guidance accompanying last week’s sanctions announcement played on this fear. It underlined that foreign persons are also covered by these new designations if they “knowingly facilitate significant transactions, including deceptive or structured transactions, for or on behalf of any person subject to US sanctions with respect to the Russian Federation, or their child, spouse, parent, or sibling”.

In London this week, US Treasury undersecretary Sigal Mandelker warned there would be “consequences” for UK financial institutions that maintain business relations with the newly listed individuals and entities.

In January, the US Treasury, at the direction of Congress, published a list of more than 200 senior Russian political figures and oligarchs. While those listed were not initially subject to sanctions, it was made clear that additional, classified information had been prepared which might support sanctions decisions in the future. Last week’s designations would seem to have borne out that fear. There are potentially a further 180 names to go. The direct impact of the latest sanctions applied to Russia has been striking. But perhaps most concerning for markets, banks and investors, and therefore damaging for Russia in the long term, is the uncertainty surrounding what future action might be taken by a US administration that is clearly willing to use far-reaching economic warfare to counter its adversaries.