Will sanctions hurt Putin?

The fight back against President Putin’s incursion into eastern Ukraine has begun. In the UK Boris Johnson has imposed sanctions on five Russian banks and three wealthy Russians while in Germany the Chancellor has suspended the approval of the Nord Stream 2 gas pipeline.

Along with other new sanctions yet to be announced, Johnson this morning declared that Rossiya, IS Bank, General Bank, Promsvyazbank and the Black Sea Bank will be blocked from doing business in the UK.  

Three “high net worth” individuals – Gennady Timchenko, Boris Rotenberg and Igor Rotenberg – will also have their assets frozen while the three men will be banned from travelling to the UK and all UK individuals and entities dealing with them will be stopped. But Johnson’s measures were roundly condemned as not being harsh enough and not going far enough. He was also criticised for protecting “Londonograd”.

Chancellor Olaf Scholz’s decision to postpone the certification of Nord Stream is in itself a significant move as Germany is so dependent on Russian gas for its energy supplies. About half of all Germany’s natural gas comes from Russia. The new pipeline was to provide the country with a big chunk of its total energy needs, a share that is due to rise over the next few years as its three nuclear power plants are closed and coal is phased out.  

A package of more sanctions on Russian companies and individuals by Britain are likely to be announced later today and are said to be aimed at targeting “those complicit in the violation of Ukraine’s territorial integrity”.

The Prime Minister has already warned that Britain will block Russians from buying property and Russian companies from raising new capital on London’s public markets, a move which will hurt Russian business as many are listed in the City. 

Cracking down on individuals – and other entities advising them – will also have a big impact on flows of capital as many Russians are known to use London as a “laundromat”, as well as the UK bankers and lawyers who advise them.

Many of the 31 Russian companies listed on the London Stock Exchange have their primary listing in Moscow with a secondary floating in London, making it easier to raise money. They include the state-backed oil and gas producers Rosneft and Gazprom and state-run banks VTB and Sberbank, as well as mining companies such as Norilsk Nickel. 

No wonder then that a number of FTSE listed companies such as steelmaker Evraz – incorporated in London but with big operations in Russia – fell sharply on the news of tighter sanctions. Roman Abramovich, the Russian owner of Chelsea football club, owns nearly a third of Evraz.

So did shares in Rosneft, Lukoil and Gazprom while Sberbank fell 13%.

But it’s not only Russian banks which will be hit by sanctions – figures from the Bank of International Settlements (BIS) show that French, Italian and Austrian banks hold most of the nearly $30 billion in foreign banks’ exposure to Russia.

Austria’s RBI, for example, which has big operations in Russia and Ukraine, also saw its shares fall on the latest news while the Dutch bank, ING, warned of negative consequences on its business.

According to Reuters, the Russian central bank estimates that total Russian banking foreign assets and liabilities stood at $200.6 billion and $134.5 billion respectively. The US dollar share of both is about half, down from 76-81% two decades ago.

President Biden is also said to be close to deciding on how much further to go with sanctions aimed at stopping Russians having access to dollars while also tightening up on individuals. In the past, the US has used the Special Designated Nationals designation to sanction oligarchs and others said to be “bad actors”. But the administration has become more sceptical about using such tools after the 2018 sanctions imposed on the owner of Russia led to booming aluminium prices. 

A new bill introduced last month allows for new sanctions against top Russian government and military officials – including President Putin. Indeed, Biden has threatened to consider personal sanctions against Putin although the Kremlin has hit back against any such move, claiming it would prove “politically destructive.” 

As well as targeting key Russian companies, the European Union is also debating whether to ban trading in Russian state bonds and sanctioning hundreds of people. A decision is due later today.

Whether even the toughest of economic sanctions will have any impact on Putin’s next moves in Ukraine is of course questionable: sanctions are the crudest of tools and as history shows, are rarely effective in changing behaviour. 

Over the last few years Russia has been stockpiling foreign currency reserves, said to stand at over $600 billion, so it can most probably weather any temporary sanctions. 

While Russia has depended on gas exports to European countries for revenue, it also has hungry customers for its energy in China and India. Selling less gas to the West is unlikely to be the weapon to change Putin’s mind.