Analysis: Only the financial equivalent of unleashing a nuclear arsenal will dent Russia’s foreign assets war chest

A branch of VTB bank in Moscow
A branch of VTB bank in Moscow. Economists have said sanctioning banks is largely ineffective. Photograph: Evgenia Novozhenina/Reuters


The war against Russia is one western countries want to fight with only economic sanctions, not guns.

Russia’s conflict with Ukraine, despite its long gestation and planning by Vladimir Putin and his supporters in the Kremlin, was supposed to end quickly once financial retaliation began. Yes, there would be military skirmishes on the ground, but little more than a few casualties were expected once a range of penalties began to bite.

The western powers have quickly realised that unless they are willing to fire the financial equivalent of a nuclear arsenal, Putin has made sure Russia is largely immune, at least in the short term.

Over a decade, Kremlin policy has carefully reduced domestic public and private sector debt and allowed the central bank time to build a war chest of foreign assets large enough to shore up the countries finances for months, if not years.

This means that the sanctions put in place over the past couple of days by the EU, US, UK, Japan and Canada are unlikely to have any significant effect on the Russian economy or its financial stability.

Only the full package of measures used against Iran – shutting Russia out of the international payments system, Swift, while also banning purchases of Russian oil and gas – will do the trick.

As Hosuk Lee-Makiyama, the head of the European Centre for International Political Economy, said, Europe has allowed itself to become more integrated with Russia, while Russia has separated itself from Europe.

He said EU countries owned a combined €300bn of Russian assets that would be vulnerable to confiscation if a full-blooded financial war broke out. The UK owns billions more via firms such as BP, which has a near-20% stake in the Russian oil company Rosneft.

“Sanctions are one of the few options that European countries have in a conflict situation like this. If you disconnect North Korea or Iran from the international financial system, you do not expose yourself to that much damage.”

Speaking on BBC News, he added: “But while I don’t say it is impossible to envisage Russia being barred from the Swift system, it is a nuclear option that means you exterminate yourself along with your enemy.”

Swift (the Society for Worldwide Interbank Financial Telecommunication) is the main secure messaging system that banks use to make rapid and secure cross-border payments, allowing international trade to flow smoothly.

It transmits trillions of dollars’ worth of deals every day, but is coming under pressure from a Chinese government-backed rival, Cips, which Russia could use to conduct its financial business deals supplemented by direct transactions with counterparties.

It is also possible for the G7 countries and EU to ban the purchase of Russian gas and oil, but commodities analysts agree that while there is spare capacity in oil markets to make up for the loss of Russian supplies with a price rise limited to $140 a barrel, there is no hope of boosting gas output to fill a gap created by a Russia ban.

Shortages would quickly force countries in Europe to ration gas and the price would be likely to rocket back to nine times normal levels, as seen before Christmas, stirring memories of the 1974 oil price shock.

Andrew Kenningham, the chief Europe economist at the consultancy Capital Economics, said that while some countries – the Czech Republic and the Baltic states – had pushed for bans on Russian gas, “others are more reluctant and it would presumably take much more devastating developments in the conflict to trigger such measures”.

Tom Mayne, a Russia expert at the thinktank Chatham House, said there was room to improve the current sanctions that allow a Russian kleptocracy access to London’s financial markets.

In a report last year, the thinktank said an effective anti-kleptocracy drive would “close legal loopholes, demand transparency from public institutions, deploy anti-corruption sanctions against post-Soviet elites and prosecute British professionals who enable money laundering by kleptocrats”.

Even the ramped-up sanctions announced by Boris Johnson fall short of this effective ban on illegal Russian money entering UK economic life. The UK is keen to go further than the EU with restrictions on Russian energy imports, but the EU has allowed itself to be much more dependent than the UK, limiting its appetite for further sanctions.

Without bans on gas and oil exports, and expulsion from international payments systems, the impact of sanctions will be limited.