Sanctions Western countries are putting more pressure on Russia than ever before with severe economic sanctions: “We have entered a whole new phase”

World the new sanctions against Russia by the major economies are exceptionally severe.

The United States and the European Union and their partners are preparing to freeze foreign investment by the Russian central bank and disconnect Russian banks from the international payment system (Swift).

On top of all that, the assets abroad of the billionaires, business leaders and their companies subject to the sanctions will be confiscated.

“North Korea, Iran and Venezuela have been hit as hard as economic sanctions have been imposed on Russia in recent years. We are now entering a whole new phase in the use of severe sanctions against Russia, ”says an adviser to the Bank of Finland specializing in the Russian economy. Laura Solanko.

Russian Roughly $ 130 billion of the central bank’s foreign exchange reserves are in gold, $ 70 billion in Chinese securities and more than $ 400 billion in bonds of the richest Western countries (G7) and their corporations.

According to preliminary data, most of the wealthiest countries would be willing to prevent the Central Bank of Russia from using its foreign exchange reserves of more than $ 400 billion. The decisions are scheduled to be announced later on Sunday.

Over the past week, the central bank has sought to mitigate the weakening of the ruble by buying ruble-denominated securities from the market. Such purchases, in turn, require the central bank to be able to use its foreign assets continuously and quickly.

“If this opportunity is taken away from the central bank, the ruble will collapse like a rock. Even if a large number of Russians do not know what is really going on in Ukraine due to propaganda, the full collapse of the currency will not go unnoticed by any Russian, ”Solanko says.

Household in everyday life, the collapse of the ruble would mean a very sharp rise in consumer prices, ie a collapse in the purchasing power of wages.

The anticipated collapse of a currency usually results in a deposit foreclosure that no bank will endure over time. On Sunday, people were already queuing across Russia for ATMs to withdraw their deposits.

Deposits with commercial banks are not banknotes in the bank vault, but are always placed forward, in which case a large-scale escape of deposits means running out of cash. As a result, banks will have to sell their other investments, which could be very difficult due to sanctions.

Question it is up to which foreign investor would want or dare to buy securities from Russian commercial banks due to sanctions when they are defined as “toxic”.

Sberbank and VTB, Russia’s two largest commercial banks, have already been severely sanctioned, putting their financiers at risk of sanctions.

“Because of the anticipated sanctions, it is difficult to imagine a party that would want or dare to buy even the foreign bonds it holds from the Central Bank of Russia. Such a party would run the risk of being sanctioned, or that U.S. banks would not want to have anything to do with it, ”Solanko says.

It is also clear that it is not possible to operate in the financial markets without direct or indirect cooperation with US banks. U.S. banks, on the other hand, refuse to deal with those whose customers are sanctioned banks, companies, or people.

“Sanctions are getting tougher all the time and it seems that sanctions against the central bank could destabilize the entire Russian financial system. It is almost certain that the ruble will weaken sharply on Monday if the Central Bank of Russia is actually deprived of the opportunity to make subsidy purchases to prevent the collapse of the ruble, ”says Nordea’s main strategy Jan von Gerich.

Last there is also a lot of discussion these days about disconnecting Russian banks from the Swift payment system. It can be compared to a water distribution pipeline. If Russian banks are prevented from using the pipeline, it will not inevitably prevent the use of water, but will make it difficult: water will have to be carried from the well.

“The separation of Russian banks from Swift complements the very severe sanctions already imposed in the past. In principle, it could be possible that some Asian banks, for example, would consider that the decision to prevent the transfer of dollar-denominated payments by Russian banks does not apply to them. By disconnecting Russian banks from the Swift pipeline, this route will also be blocked, ”says the Head of the Bank of Finland’s Payment Systems Department. Päivi Heikkinen.

To date, the United States has already prevented large banks from raising funds from Western financial markets for Sberbank, VTB Otkritije and Sovcombank, and has banned the processing of payments from them. Prior to this, Russian government funding from the financial markets was severely restricted.

Read more: US separates Russia’s largest banks from Western financial markets – impact could be tougher than EU-rejected Swift ban

Russian blocking a central bank’s use of foreign investment is a sanction it may have already prepared for. The only problem is that central banks never tell very precisely where their foreign investment, or foreign exchange reserves, is.

Russia’s central bank may have been preparing for sanctions by moving its gold bars home, so they cannot be confiscated abroad. It may also have increased investment in Chinese securities, as it is still unclear what sanctions China might be prepared for.

Of the United States president Joe Biden and the European Union and its partners also announced on Saturday they would start cooperating to freeze the assets of people and companies subject to sanctions.

Laura Solanko, Adviser to the Bank of Finland, also considers this to be a very important decision.

“If such a decision is made and sufficient resources are given to monitor it, the Russian elite will no longer be able to continue the lifestyle to which it has been accustomed for years. As a result, Russia’s richest people may begin to think that the president Vladimir Putin there is no point in doing so, or at least not benefiting them or the business in general. ”

Solanko also stresses that it is still possible to tighten sanctions. Most of Russia’s richest people or their companies have not yet been sanctioned.

“In principle, comprehensive sanctions could be imposed on the Central Bank of Russia, which would mean roughly the same as an economic embargo. Payment transactions to Russia would be virtually blocked, ”says Solanko.

As Russia attacked Ukraine on Thursday, the general index of the Moscow Stock Exchange collapsed and the ruble weakened very sharply. Shares and the ruble recovered on Friday as state-owned banks were likely ordered to buy shares and the central bank to acquire other ruble-denominated securities.

“I consider it very possible that trading on the Moscow Stock Exchange will not normally start on Monday due to huge uncertainty. If it starts, almost anything can happen, ”says Jan von Gerich, Nordea’s chief strategist.