On March 6, 2014, Barack Obama signed an executive order, and made good on his threat to impose sanctions on Russia over the latter’s “invasion” of Ukraine’s Crimean peninsula.
Crimea is an autonomous republic of Ukraine and has a 1997 treaty agreement with Russia, whereby the Russian Navy is allowed to station planes, armored vehicles, artillery systems, and up to 25,000 troops on the peninsula.
In addition to declaring a U.S. “national emergency” due to the Ukraine crisis being an “extraordinary threat to the national security and foreign policy of the United States,” Obama’s executive order, “Blocking Property of Certain Persons Contributing to the Situation in Ukraine,” also “authorizes sanctions on individuals and entities responsible for violating the sovereignty and territorial integrity of Ukraine, or for stealing the assets of the Ukrainian people.” (The term “entity” means a “partnership, association, trust, joint venture, corporation, group, subgroup, or other organization.”)
Actions have consequences. It now appears Russia has retaliated by dumping U.S. treasury bonds (as promised) and withdrawing billions of dollars from western banks with operations in the United States.
Patrick Jenkins, Daniel Schäfer, Courtney Weaver, and Jack Farchy report for the Finance Times, March 14, 2014, that Russian companies are pulling billions out of western banks, fearful that any US sanctions over the Crimean crisis could lead to an asset freeze, according to bankers in Moscow.
Sberbank and VTB, Russia’s giant partly state-owned banks, as well as industrial companies, such as energy group Lukoil, are among those repatriating cash from western lenders with operations in the US. VTB has also cancelled a planned US investor summit next month.
The capital flight comes as last-ditch diplomatic talks between Russia’s foreign minister and the US secretary of state to resolve the tensions in Ukraine ended without an agreement.
Data published by the Federal Reserve Bank of New York sparked speculation that the Russian central bank was also reducing its vulnerability to potential sanctions. The data showed a drop of $105bn in Treasuries held by foreign institutions for the week ending March 12.
“We can only speculate about who might have decided to move their securities out of the Fed and into a third-party custodian, but one obvious candidate is Russia,” said Lou Crandall at Wrightson Icap.
Russia held $138.6bn in US government debt at the end of December, according to the US Treasury.
At the same time, U.S. banks were already behaving as if Obama’s threatened sanctions were in place. Over the past fortnight, traders and bankers said US banks had been particularly heavy sellers of Russian bonds. According to data from the Bank for International Settlements, US banks and asset managers between them have about $75bn of exposure to Russia.
Joseph Dayan, head of markets at BCS, one of Russia’s largest brokers said: “It’s been quite an ugly picture in Russian bonds the last few days and some of it has to do with international banks reducing exposure.”
Although foreign banks have not yet begun cutting credit to Russian companies en masse, bankers said half a dozen live deals to fund some of Russia’s biggest companies were in limbo as lenders waited to see how punitive western sanctions would be. As an example, Barclays of the UK had withdrawn from a plan with Russia’s VTB jointly to fund an Essar Energy deal. Barclays declined to comment.
Alexei Kudrin, a former Russian finance minister and a member of Vladimir Putin’s economic council, warned that sanctions could drive an extra $50bn of capital outflows from the Russian economy per quarter.
UPDATE (March 17):
In a referendum on March 16, 2014, the people of Crimea overwhelmingly voted to secede from Ukraine and join Russia. The BBC reports that some 95.5% of voters in Crimea have supported joining Russia. Both Obama and the EU call the referendum “illegal and illegitimate and its outcome will not be recognized”.