Belarus and Russia: Severe financial sanctions lead to immediate and severe impact on Russian economy

Event

On Thursday 24 February, Russia launched a full-scale invasion of Ukraine and demanded the Ukrainian army to lay down its weapons. In the following hours, the EU, the US, the UK and Canada imposed several batteries of sanctions on Russia and Belarus, mainly targeting individuals and companies. These sanctions were already far-reaching, e.g. the decision to cut off the country’s biggest bank, Sberbank, from the US financial system. Moreover, on 26 February, the EU, the US, the UK and Canada unveiled their plan to impose even more severe financial sanctions on Russia. First of all, they announced plans to disconnect some Russian banks from the SWIFT global payment system. As a result of the announcement, the ECB already flagged Sberbank Europe AG, and its subsidiaries in Croatia and Slovenia are failing or likely to fail due to deposit outflows. Secondly, on 28 February, the US and the EU banned all transactions with the Russian Central Bank, thus blocking the Central Bank of Russia from using a large chunk of its foreign exchange reserves (e.g. to defend its currency) as these are mainly held overseas in the US, Germany, France, China, the UK, Austria and Japan. More sanctions on both Russia and Belarus are possible in the coming days.

Impact

The sanctions announced and set up last weekend can be seen as some of the most severe sanctions the West could possibly deploy. Ejecting some banks from SWIFT (at this point, these banks are still to be named) will have a significant impact on cross-border payments from Russia. SWIFT, or the Society for Worldwide Interbank Financial Telecommunications, is a secure messaging platform used worldwide for cross-border payments. Other secure messaging platforms do exist, as Russia for example began to create its own Financial Communications System (SPFS) in response to the introduction of sanctions in 2014. However, such other messaging platforms have limited reach outside the country that created the platform. As a result, cross-border payments involving the Russian banks targeted by the sanctions will be extremely difficult. Hence, a large number of Russian companies might not be able to make cross-border payments even if their transactions do not involve specifically targeted entities.

The Russian economy is clearly hit hard by the sanctions. The Russian rouble has tumbled (as shown in graph 1) while interest rates showed a sharp hike from 9.5% to 20%. Many international companies are also disinvesting in the country. Higher inflation (8.8% in January 2022 y-o-y), significant supply chain disruptions, shortages of goods (especially high-tech goods) and of foreign exchange are in the cards. The Kremlin introduced capital controls to shore up foreign exchange revenues. According to international press reports, those controls ban Russians from transferring foreign currency abroad or from servicing loans in foreign currency outside the country from 1 March. The Kremlin also ordered Russian exporters to sell 80% of their foreign currency revenues dating back to 1 January in an effort to help offset the rouble’s sharp decline. However, the exact legislation is yet to be clarified and confirmed.

In this context, Credendo has decided to downgrade Russia’s short-term political risk rating to category 7/7. Moreover, Russia’s medium- to long-term political risk rating was downgraded to category 7/7. Furthermore, the business environment risk (category (E/G), political violence risk (4/7) and expropriation risk (5/7) are under pressure.

Given that part of the Russian troops launched Ukraine’s invasion from Belarus, and considering Putin’s decision to put nuclear forces on high alert (possibly moving nuclear weapons to Belarus), Belarus – a key ally of Russia – is likely to be targeted by additional sanctions from the West. Moreover, Belarus has no access to international markets and relies on Russia as a main source of funding, which will be heavily impacted by the above-mentioned sanctions. Hence, the short-term political risk of Belarus has been downgraded to category 7/7. Furthermore, Belarus’ medium- to long-term political risk rating has been downgraded to category 7/7, while political violence risk (currently in 4/7) is under pressure as well.

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com