Changing Course: Financial Sanctions on Russia

There are reports this morning that the Obama administration is contemplating extending economic sanctions against two large Russian banks-- Gazprombank and  Vnesheconombank (VEB).  This is a step I have called for here and here.  If true, this is a significant event and, given the magnitude of Russia’s links to global financial markets, introduces a new era in the use of economic sanctions.  It also makes sense to do this now, as the current strategy is not working to deter Russian aggression against Ukraine.

It is interesting  that the sanctions are aimed at two state-controlled banks most closely associated with the fiscal authorities, and holding back for now on the most active, leveraged banks (e.g., VTB, Sberbank).  So the goal would seem to be to punish the state, not go after corruption or specific activities.  I presume that the sanctions would prohibit U.S. institutions from financing and transacting with the two banks, holding their securities/collateral, or buying and selling their liabilities in U.S. markets.  It is not clear whether the Europeans will match these sanctions, but even if they don’t I believe that the measures could be powerful as long as the major European and Japanese banks do not fill in as U.S. banks depart--and risk of getting entangled in future sanctions.