Barclays Warns on ‘Drastic’ Proposal to Sanction Russian Banks

U.S. President Donald Trump and Russian President Vladimir Putin hold a joint news conference after their meeting in Helsinki, Finland, July 16, 2018. REUTERS/Leonhard Foeger

Summary

President Trump may have dismissed Russia’s meddling in US elections, but his administration is not taking any chances. A new bill sponsored by a bipartisan group of lawmakers aims to impose sanctions on Russia unless the Kremlin ceases to target the American electorate, according to the bill’s co-sponsor Senator Lindsey Graham.

Sanctions against Russia, however, do not only bear consequences for Russia. Similar to Trump’s recent tariffs that hit US farmers as collateral damage, the sanctions may hold unintended consequences for US investors. Barclays warns that one of the bill’s provisions, which sanctions Russia’s largest banks, has significant ramifications. The provision bans “all transactions in all property and interests in property of Russian financial institutions.” Those featured on the list include the country’s biggest lenders—Sberbank, VTB Bank, Gazprombank, and more.

The bill also calls for sanctions on Russian sovereign debt, a proposal rejected by the US Treasury Department when it was first introduced last February. The Treasury warned that sanctioning the debt would cause negative spillover effects on global financial markets rather than directly targeting the Russian Federation. It is unclear whether this previously rejected provision is being reconsidered. Liza Ermolenko, an economist at Barclays in London, said, “Even so, the [bill] clearly shows the determination to go further than before in order to cause damage for Russia.”

 

 

Barclays Warns on ‘Drastic’ Proposal to Sanction Russian Banks

 

A little-noticed provision in the draft law adding sanctions on Russia could hit some of the country’s largest banks, potentially doing more damage than a clause calling for a ban on purchases of sovereign debt that has worried investors, according to Barclays.

“The most drastic version of the sanctions on transactions with Russian banks, in which all of the state banks are sanctioned, would have significant ramifications for the entire Russian economy, which could be even more painful than sovereign debt measures,” said Liza Ermolenko, an economist at Barclays Capital in London. “These proposals are currently very broad and would likely need to be clarified further given the potential implications.”

One of the draft’s provisions calls for the U.S. to “prohibit all transactions in all property and interests in property of one or more of the Russian financial institutions.” It lists some of the country’s largest lenders: Sberbank, VTB Bank, Gazprombank, Promsvyazbank, Rosselkhozbank and Vnesheconombank. The list also includes Bank of Moscow, which was merged into VTB in 2016, while Vnesheconombank is listed twice in the text, without explanation.

The bill was introduced in the Senate last week by a bipartisan group of legislators, aiming to “impose crushing sanctions and other measures against Putin’s Russia until he ceases and desists meddling in the U.S. electoral process,” according to co-sponsor Senator Lindsey Graham.

Draft Version

The proposal’s call for sanctions on issues of new Russian sovereign debt had drawn investor attention, although the U.S. Treasury in February came out publicly in opposition to that idea, warning it would have broad market impact.

With President Donald Trump calling for closer ties with Russia, the outlook for passage of the bill remains uncertain. Both Republicans and Democrats in Congress have called for tough measures against Russia in the wake of last month’s summit between Trump and Russian President Vladimir Putin.

“Of course, this is just a draft version and it is only reasonable that the arch Russia-hawks in the Congress would start negotiations for new legislation with the harshest possible terms following the recent meeting of Presidents Trump and Putin,” Ermolenko said in an emailed note. “But even so, the document clearly shows the determination to go further than before in order to cause damage for Russia.”

The last round of U.S. sanctions, imposed in April, battered the ruble and prices on government debt. The Bank of Russia has accelerated its preparation to tougher measures from the U.S. after those restrictions were imposed. In the months that followed, Russia drastically cut its holdings of U.S. Treasuries.

 

 

Source: Bloomberg, Anna Andrianova, August 6, 2018. Photo credit to NBC News.