How sanctions against Russia affect payments and FX

03 March 2022

The United States and the European Union are restricting the use of SWIFT’s payments service for Russia’s banks and freeze the country’s central bank reserves. What will that mean for payments and the FX markets? flow's Desirée Buchholz draws on latest Deutsche Bank Research to summarise the current situation

Responding to Russia’s attack on Ukraine launched on 24 February 2022, the United States, the United Kingdom and the European Union have implemented a set of financial sanctions against Russian banks, institutions and President Vladimir Putin himself. The situation is very dynamic, as western policy makers add to and tighten the sanction regime almost daily.

“The past few days have turned our view of the world and our sense of global security upside down,” says Stefan Hoops, Head of Corporate Banking at Deutsche Bank. “Russia’s attack on Ukraine also has serious economic consequences and impact on our customers. This is why we want to support companies right now – with competent advice and practical information.” Deutsche Bank initiatives include launching an information page that will be regularly updated and expanded.

In this article, flow is focusing on how the ban of selected Russian banks from the SWIFT messaging system and the decision to freeze Russian central bank reserves could affect international payments, FX and the money markets. Both measures were announced on 26 February – two days after troops moved into Ukraine – in a joint statement from the White House and the European Commission1 – and here we provide the latest insights from Deutsche Bank Research strategists and analysts on the West’s response and the ensuing implications for cross-border payments and FX.

Selected Russian banks are banned from SWIFT

Over the weekend of 26–27 February, the US and the EU committed “to ensuring that selected Russian banks are removed from the SWIFT messaging system”2. SWIFT is used by 11,000 financial institutions in more than 200 countries worldwide to exchange financial messages.3 These messages are used to initiate payments, enable securities settlement and facilitate trade finance transactions.

“Put simply, Russia’s ability to transact with any financial institution at a global level will be severely impaired, because most international banks across any jurisdiction use SWIFT”
George Saravelos, Oliver Harvey and Peter Sidorov of Deutsche Bank Research

“Put simply, Russia’s ability to transact with any financial institution at a global level will be severely impaired, because most international banks across any jurisdiction use SWIFT”, writes the Deutsche Bank Research team of George Saravelos, Oliver Harvey and Peter Sidorov in their report Historic moments – thoughts on the market open and beyond (27 February). The trio expects the impact of a SWIFT suspension to affect European banks more than US financial institutions, as “correspondent banking between the US and Russia has to a significant extent already been curtailed”.

On Wednesday, 2 March the EU then formally implemented the exclusion of seven Russian financial institutions from the SWIFT network. Starting from 12 March 2022, this affects Russia's second-largest bank VTB, as well as Bank Otkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank and Vnesheconombank. Sberbank and Gazprombank are not on the list published in the EU Official Journal.4 SWIFT had already announced, that the organisation is engaging with the authorities “to understand which entities will be subject to these new measures and will disconnect them once we receive legal instruction to do so.”5

With this decision the EU followed its announcement to exclude “selected banks”. The possibility that some Russian financial institutions might still retain access to SWIFT “looks like a conscious attempt to leave some transactions power available to Russia, such that payments can still be made, albeit for a narrow and select range of imports and other flows that are in the West's own interests”, writes Alan Ruskin, Macro Strategist at Deutsche Bank Research in his FX Blog: What happens when the CBR is restricted (27 February).

Before the announcement on 26 February, several countries including Italy, Germany, Austria and Hungary had opposed a SWIFT exclusion of Russian banks. This was due to concerns that such a ban would have a severe impact on the import of energy and raw materials from Russia which could now longer be paid for and therefore might be stopped.6 The EU receives 40% of its natural gas imports from Russia; Germany’s percentage is even higher at more than 50%. See also the flow article Ukraine on the brink? for further detail on energy security and Russian oil and gas exports to the EU.

Freeze of Russian central bank reserves

“While SWIFT has garnered many of the headlines, the macro effects of any freezing of central bank assets is likely to be even more material in the medium term, specifically as it relates to the RUB,” comments Ruskin. On Monday 28 February, the EU prohibited “any transactions with the Central Bank of Russia or any legal person, entity or body acting on behalf or at the direction of the Russian Central Bank”.7 The US has put in place a similar regulation.8

“It is likely that a majority of the Central Bank's reserves will be subject to sanctions given geographical distribution grounds alone”
Alan Ruskin, Macro Strategist at Deutsche Bank Research

These sanctions have potential for significant damage to the Russian economy, given that the Bank of Russia has invested large parts of its FX and gold reserves in France, Germany and USA as of mid-2021 (see Figure 1). Moreover, more than 30% of the Central Bank’s FX and gold assets were parked in EUR as of mid-2021, Ruskin points out: “While the encroaching invasion may have set off some significant shifts in the allocation and location of these assets, it is likely that a majority of the Central Bank's reserves will be subject to sanctions, given geographical distribution grounds alone.”

Figure 1: Geographical distribution of Bank of Russia foreign exchange and gold assets in percentages as of mid-2021

Source: Bank of Russia, DB Research “What happens when the CBR is restricted”

Given Russia’s limited access to its central bank reserves, sanctions could “undermine domestic financial stability and the fungibility of the domestic monetary base; effectively freezing past accumulated wealth; and most importantly removing the most important source of external funding needs for trade, capital flows or otherwise,” the Deutsche Bank Research team noted in an early assessment on 27 February. Should Russian exports shrink due to other sanctions put in place and the Central Bank cannot deploy part of its international reserves, imports and therefore domestic demand will be similarly impacted.

Furthermore, the Bank of Russia is now limited in its ability to bail-out institutions that cannot make foreign payments or repay foreign debt, as Ruskin points out. “Russia's non-bank corporate cross-border exposures are relatively small,” he explains, drawing on data from the Bank for International Settlements (BIS) which puts them at US$33bn in Russian lending and US$5bn in borrowings for Q3 2021. “The cross-border banking sector exposures are more sizable at US$28bn in lending and US$89bn in borrowings as of Q3 2021, suggesting it is bank exposure where western institutions may be more vulnerable.”

Russian Central Bank has introduced new measures

Following the news of the SWIFT ban and the freeze of Central Bank reserves, the RUB plunged by nearly 40% against the USD in early trading on 28 February. In an attempt to “support financial and price stability and protect the savings of citizens from depreciation,” the Bank of Russia raised its benchmark interest rate from 9.5 to 20% that same day.9 Additionally, it also ordered companies to sell 80% of their foreign currency revenues10 and barred non-residents from selling Russian securities.

“The Russian Central Bank also delayed the trading start for domestic loan and foreign exchange markets, which makes it hard to assess the further development of the ruble. The quotations were unsteady and very volatile, the liquidity was obviously very low,” reports Deutsche Bank’s German results. Märkte am Morgen in its 1 March issue.11 “The rapid depreciation of the RUB will weigh heavily on the Russian economy and further aggravate already high inflation rates,” the authors forecast.

For 1 March 2022, the Bank of Russia has scheduled repo transactions with no limit set to address the structural liquidity deficit that the banking sector is facing.12 The situation will therefore remain volatile – especially for companies that have business links with Russia.

Deutsche Bank Research reports referenced

FX Blog: Historic moments – thoughts on the market open and beyond by George Saravelos, Oliver Harvey and Peter Sidorov, Deutsche Bank Research, 27 February

FX Blog: What happens when the CBR is restricted? by Alan Ruskin, Deutsche Bank Research, 27 February


1 See https://bit.ly/3tgm3Gc at whitehouse.gov
2 See https://bit.ly/3Mf1wL4 at ec.europa.eu
3 See https://bit.ly/36KWpSs at swift.com
4 See https://bit.ly/3szk2py at eur-lex.europa.eu
5 See https://bit.ly/3HzLeZM at swift.com
6 See https://bit.ly/3synP6p at cleanenergywire.org
7 See https://bit.ly/36KRIIi at consilium.europa.eu
8 See https://bit.ly/3pxSIGt at treasury.gov
9 See https://bit.ly/3szgYts at cbr.ru
10 See https://bit.ly/36JsZnJ at cbr.ru
11 See See Deutsche Bank’s results. Märkte am Morgen from 1 March 2022, subscription for the German newsletter is available here: https://bit.ly/3HzVGQT
12 See https://bit.ly/35oqoiS at cbr.ru

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