Russia could face tougher sanctions if it attacks Ukraine

There are growing tensions between Moscow and Western powers that have raised the possibility of new sanctions being imposed on Russia, possibly the most severe yet, if it attacks neighboring Ukraine.

The U.S. Senate Democrats have unveiled a bill that will impose sanctions on Russian government and military officials - including President Vladimir Putin - and banking institutions if Moscow engages in hostilities against Ukraine.

If Russia is using its military force to acquire land in Ukraine, that will be a serious economic response, a senior White House official said on Wednesday.

Russia has gathered tens of thousands of troops near Ukraine's borders in what Kyiv and its allies fear could be preparation for a new military offensive.

Russia, which denies plans to attack Ukraine, has been subject to sanctions since its 2014 annexation of Crimea from its neighbor. Following an investigation into Russian meddling in the 2016 U.S. presidential election, more punitive measures were added, after a former Russian spy was poisoned in Britain in 2018 and following an investigation into Russian meddling in the 2016 U.S. presidential election.

Russia denies attempting to interfere in foreign elections, as it denies involvement in the poisoning of ex-spy Yuri Skripal and his daughter.

Here are some ways financial sanctions could target Russia:

The White House told the U.S. chip industry to be prepared for new restrictions on exports to Russia if Moscow attacks Ukraine, sources said. The country could be hampered from access to global electronics supplies because of this.

Similar measures were deployed during the Cold War, when the United States and other Western nations maintained severe technology sanctions on the Soviet Union, keeping it technologically backward and crimping growth.

One of the harshest measures would be to disconnect the Russian financial system from SWIFT.

In March 2012, the country lost half of its oil export revenues and 30% of foreign trade due to the US-based cooperative, governed by a 25 member board, including Eddie Astanin, chairman of Russia's Central Counterparty Clearing Center NCC.

Iran's economy is smaller and not as linked up internationally as the Russian economy whose interconnection with the West has worked as a shield. According to Maria Shagina at Carnegie Moscow CenterMoscow Center, the US and Germany would lose most of their money, as their banks are the most frequent SWIFT users with Russian banks.

In 2014, when Moscow annexed Crimea, calls to cut Russia's SWIFT access was mooted, prompting Moscow to develop an alternative messaging system, SPFS.

The number of messages sent via SPFS reached around 2 million, or one-fifth of Russian internal traffic in 2020, according to the central bank, which aims to increase this to 30% in 2023. The SPFS system, which has size limits on messages and is only available on weekdays, has had a hard time picking up foreign members, according to Shagina in a 2021 paper.

The AtlanticAtlantic Council spokesman O Toole said that cutting Russia off from SWIFT would cause immediate disruption but the impact would diminish over time.

Some payments would be delayed and there may be increased cost in making new ones, but broadly speaking there is unlikely to be a collapse of Russian trade as long as that trade remains legal and not sanctioned, O Toole said.

The European Union and the United States have already sanctioned Russia's energy, financial and defense sectors.

The White House has proposed curbs on Russia's biggest banks and has previously mooted measures targeting Moscow's ability to convert rubles into dollars and other currencies. According to Mark Stone, a former U.S. State Department economist, said that sanctions applied to individual firms cause sector-wide pain, as they make investors worry that the curbs will be widened or that they won't be able to differentiate.

Brian O Toole, a fellow at the Atlantic Council think tank, said that the sanctions on transactions with Russian banks and freezing assets would be more impactful and more targeted than a cut-off from the SWIFT global messaging system.

O Toole said that Russia's access to SWIFT would be useful only after broad financial sanctions by the United States, Britain and the European Union.

With a ban on secondary market participation being floated as an option, access to Russian bonds has become more restricted and curbs could be tightened further.

In April 2021, U.S. President Joe Biden banned U.S. investors from buying new Russian ruble bonds — OFZs as they are known — over accusations of election meddling.

Sanctions imposed in 2015 made future Russian dollar debt ineligible for many investors and indexes such as JPMorgan's EMBI Global. Since early 2014, the measures have cut Russia's external debt by 33% - from $733 billion to $489 billion in the third quarter of 2021. A country's balance sheet is improved with less debt, but it is deprived of funding sources that could contribute to economic growth and development.

Sanctioning individuals via asset freezes and travel bans is a common tool and can sometimes resonate widely. Britain imposed sanctions on 14 Russians in April 2021, but the new law gives the U.K. government the power to punish those who are supposedly involved in the most serious corruption abroad.

The bill unveiled last week by Senate Democrats envisions sweeping sanctions on top Russian government and military officials, including Putin.

The idea of imposing sanctions on the Russian president would have serious consequences for relations between Moscow and Washington, according to a spokesman for the Kremlin, Dmitry Peskov.