After Russia invaded Ukraine on Thursday, February 24, the G7 reacted swiftly and introduced a barrage of comprehensive sanctions on Russian entities and persons. Russia in turn, introduced countermeasures both domestically and for foreigners. In this piece, which is based on a report from Goldman Sachs, we provide a non-exhaustive list of the most important developments for financial markets over the past several days for those market participants who have trouble following the ever changing newsflow. We will add to the list in chronological order as new measures are made public.
Thursday (February 24)
As a first response, the US and its allies announced sanctions to target 6 Russian financial institutions including the second-largest lender, VTB. In regard to these 6 banks, "assets held in U.S. financial institutions will be instantly frozen and inaccessible to the Kremlin", implying that any USD-denominated assets of these banks would be frozen.
Furthermore, the US prohibited the debt and equity issuance of major state-owned and private entities to "limit Russia's ability to finance its invasion against Ukraine". Among the entities were Sberbank, Gazprom, and Alrosa.
Weekend Developments (February 25 – 27)
An agreement was made over the weekend by the G7 to exclude selected banks from the SWIFT messaging system. According to the EU commission, the US and EU would work with SWIFT to see if energy-related transactions could be exempted and if certain banks could be excluded (President von der Leyen statement).
President Von der Leyen announced on Saturday that the new sanctions agreed to by the G7 would include the Russian Central Bank (CBR), preventing it from using its 640B in FX reserves. Data on the distribution of the Russian FX reserves is only available as of Q2-21. At that time, 13% of the reserves were held in CNY, 22% in gold, and the rest likely in G7 currencies.
The US similarly stated it would sanction transactions involving the CBR (restrictive measures on international reserves as they may undermine the impact of US sanctions), the National Wealth Fund and the Ministry of Finance.
Five central banks have been sanctioned before but none with the economic size and financial integration of Russia: Afghanistan, Iran, Syria, Venezuela, and Libya.
The CBR stated that “The Bank of Russia has the necessary resources and tools to maintain financial stability and ensure the operational continuity of the financial sector.”
It will provide banks with cash and non-cash liquidity in RUB, with an unlimited repo auction on Monday. The Lombard list will be expanded too.
The CBR also announced it had started buying gold on the domestic market.
We discussed the implications of these sanctions in our most recent CEEMEA in Focus, Marking our Russia Forecasts to the Newly Announced Sanctions. We consider the freezing of G7 currency reserves the most disruptive one as we believe it undermines the stability of the domestic financial system and the ability of the CBR to manage the Ruble vs capital outflows.
Monday (February 28)
In an emergency rate hike, the CBR announced it had raised policy rates from 9.5% to 20%, citing that "external conditions for the Russian economy have changed dramatically".
Based on proposals by the Russian Ministry of Finance and CBR, a temporary mandatory sale of 80% of FX revenues for residents who are active in a "foreign economic activity", i.e., exporters, was announced in order to increase the supply of FX to the domestic market. In a subsequently published Q&A, the CBR confirmed that this concerned all types of foreign currencies.
Vladimir Putin also signed a decree which bans Russian residents temporarily from sending FX loans and transfers abroad.
Furthermore, a temporary ban on brokers from executing foreign sell transactions was put in place by the CBR.
Wednesday (March 2)
The EU put out a statement listing the banks to be cut off from SWIFT. According to the press release, they are Bank Otkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank, VEB and VTB Bank.
A grace period of 10 days (March 12) was granted. “This will give SWIFT and other operators a brief transition period to implement the measure, thereby mitigating any possible negative impacts for EU businesses and financial markets.” Payments are most likely front-loaded.
Furthermore, investing, participating or contributing to future projects co-financed by the Russian Direct Investment Fund are prohibited.
The sale, supply, transfer and export of euro banknotes to Russia is prohibited (exceptions apply).
The CBR also announced it was temporarily halting the transfers of holdings to non-Russian residents to prevent the withdrawal of funds from the Russian financial markets and support stability (coupon payments on OFZs, dividends, etc.). Transfers to non-residents without opening an account have been limited to USD5,000 monthly. It seems the details have not yet been worked out regarding custodians and what this means for a technical event.
Trading on the Moscow Stock Exchange was suspended and the CBR was to decide the following day at 9am local time if the stock exchange would open for the day.
Russia’s largest bank, Sberbank, decided to leave the European market as it cannot provide liquidity to its European affiliates due to the CBR’s instructions of capital outflows.
According to Bloomberg, Gazprom intends to fulfill its financial obligations and has wired the coupon payment on its bond on Monday, February 28, leaving this as one of the last few FX outflow channels.
Thursday (March 3)
The US Treasury announced overnight that it was taking steps to prohibit exporters from assisting the CBR to circumvent the sanctions. The details are not yet clear. The CBR ordered exporters to sell 80% of their exports proceeds to local banks and the local market.
Foreign OFZ holders’ coupons were paid locally to the National Settlement Depository (NDS) but did not receive yesterday’s (Mar 2) coupon in their foreign bank accounts, on order of the CBR. According to Bloomberg, “since Russia made the coupon payment, it remains unclear whether the government is technically in default” because it is not clear how foreigners can access the cash (this would constitute the first default since 1998). The NDS confirmed it received the coupon.
Typically, the Ministry of Finance would send the payment, which would be confirmed by the NDS. The depository would then transfer it to the bondholder’s account. So technically the MinFin paid yesterday; however, it remains unclear whether this constitutes a technical default event.
There is a 30-day grace period according to Clearstream.
The CBR announced on Telegram (most Russian government websites remain down due to decentralised cyberattacks) that it would impose a 30% surcharge on FX purchases by individuals, in addition to the previously announced FX restrictions such as those on the transfer of money and leaving the country with more than USD10,000 in cash.
Friday (March 4)
The CBR announced that Russian entities would not be allowed to service their debt in foreign currencies from domestic resources. Thus, debt payments on Russian bonds and loans to non-residents would need to be paid either from accounts the Russian entity holds abroad or in Rubles domestically.
After the CBR announced yesterday (Mar 3) on Telegram would impose a 30% surcharge on retail FX purchases through brokers as of today, it lowered the surcharge to 12% for individuals. Furthermore, the CBR set a 12% surcharge for legal entities.