West has some cover to ramp up Russian sanctions

LONDON, Feb 24 (Reuters Breakingviews) - The United States and Europe have options in their response to Russia’s invasion of Ukraine. The most likely ones will isolate Russia’s biggest banks and businessmen from the international financial system. But that creates the risk of a tit-for-tat response from the Kremlin targeting Europe’s Achilles heel – energy supplies.

Sberbank (SBER.MM) and VTB (VTBR.MM) shares halved on Thursday after Russia invaded its neighbour. read more . That’s because a U.S. official said this week the state-backed lenders could come under further sanctions. Most likely is Washington severing their relationships with correspondent banks in the West. Losing access to international finance would hit revenue and profitability. Sberbank tried to reassure its clients on Thursday but has already lost two-thirds of its $100 billion market value in late 2021.

Blacklisting Russia’s top oligarchs, as happened to aluminium tycoon Oleg Deripaska in 2018, is another logical step. Making it impossible for counterparties to touch them without risking sanctions themselves would, at the margins, build pressure on President Vladimir Putin, who uses them to fund domestic projects.

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The critical question is how this muscle-flexing co-exists with Europe’s dependence on Russia for 30% of its gas supplies. Washington has made clear that any bank sanctions will not imperil energy supplies. But it remains unclear how this will work in practice.

Even if it can be managed, the West still has a problem. Moscow is doubtless irked at Germany’s decision to mothball the Nord Stream 2 pipeline. This was given a near-irreversible backstop on Wednesday by Washington putting the company building the pipeline, which bypasses Ukraine, on its toughest Specially Designated Nationals sanctions blacklist. Throw in the curbs on banks and billionaires, and Putin could hit back by switching off some of the 150 billion cubic metres of gas that can flow to Europe. Putin is unlikely to turn off the taps entirely given the importance of energy exports to the Russian economy. But Thursday’s 40% drop in Gazprom shares and a 30% rise in spot European gas prices suggest the market is taking this threat seriously.

The West’s one comfort is that a relatively mild winter – now almost over – means Europe’s gas storage is around average levels. Throw in liquefied natural gas cargos, and the region could withstand a major gas supply cut for a month or so. The headache of replenishing stocks by next winter is likely to keep prices high. But in the short term, the West has a window to get tough.

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(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)

CONTEXT NEWS

- The United States and Europe said they would impose severe sanctions on Russia after its military forces launched an attack on Ukraine on Feb. 24.

- Sberbank shares plunged 57% and VTB’s 50% in early trade on Feb. 24 on fears that Russia’s two biggest lenders would lose access to the international dollar system via cuts to their “correspondent” banking relationships. A senior U.S. official said on Feb. 22 Washington was ready to further sanction Russia’s biggest financial institutions.

- On Feb. 23, Washington sanctioned the company building Russia's Nord Stream 2 pipeline, putting it on a so-called Specially Designated Nationals list which stops people and companies from dealing with it at the risk of being sanctioned themselves. The U.S. Treasury also issued a general license authorising the "wind down" of transactions with Nord Stream 2 AG until March 2.

- Russia’s Gazprom owns the entire pipeline but paid half the costs, with the rest shared by Shell, Austria's OMV, France's Engie and Germany's Uniper and Wintershall Dea.

- Gazprom shares plunged as much as 55% on Feb. 24. Uniper shares fell 13%, while OMV lost 6% and Engie 3%.

- On Feb. 22, Washington also stopped U.S. companies from buying secondary Russian sovereign debt. Russia’s five-year corporate default swaps soared to a record high of 738 basis points on Feb. 24.

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Editing by Ed Cropley and Karen Kwok

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Dasha is a columnist in London writing about the consumer goods sector, as well as Russia and Turkey. She has been at Reuters since 2012 as deals reporter in London and Turkey correspondent, covering the 2016 coup and the war in Syria. Prior to that she produced business news on BBC radio and worked as an investment banking analyst. She holds a degree in Politics, Philosophy and Economics from the University of Oxford.