EU finance ministers, the ECB and the European Commission are actively working on measures to prevent circumvention of international sanctions imposed on the Russian banking sector, in particular the exclusion of seven banks from the Swift system undertaken in response to Russia's invasion of Ukraine.
By disrupting the Russian financial system and paralysing the Bank of Russia (see EUROPE 12900/8), our sanctions are “highly effective”, said French Finance Minister Bruno Le Maire after the conclusion of an extraordinary ‘Ecofin’ Council meeting. In order to “avoid any circumvention of sanctions, we will put in place provisions on crypto-assets”, he added.
The European Commission’s Executive Vice-President Valdis Dombrovskis noted “an increased volume of transactions in crypto-assets which may indicate some attempts to avoid or evade sanctions through crypto-assets”.
The proposed ‘MiCA’ regulation to regulate crypto-asset markets is under negotiation at a European level, with the EU Council having decided its negotiating position at the end of 2021 (see EUROPE 12841/2), while the European Parliament backed down earlier this week (see EUROPE 12900/23).
Seven banks excluded from Swift system. On Wednesday, the EU Council decided to exclude seven Russian banks – Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, VEB, VTB Bank – from Swift, a financial framework that facilitates the exchange of information on inter-bank payments and which sees the participation of 11,000 financial institutions worldwide.
The decision, which had previously only been taken to sanction North Korea and Iran, will be effective as of Saturday 12 March, while the European banking sector gets it up and running, according to a European official. According to the official, the targeted banks are those who are most involved in the Russian war effort; the impact will also be visible in the transactions between Russian banks themselves, since they are said to use the Swift system for at least 70% of the transactions they make. It is certainly possible to circumvent this sanction by using less sophisticated, but more expensive and less secure methods, or indeed by connecting to the Chinese system.
The absence of Sberbank and Gazprombank from the list of banks excluded from Swift has been explained by the fact that a partial disconnection from Swift is impossible and that the first and third largest Russian banks represent the main payment channels in the EU for energy, according to the source. Some EU countries, notably Germany and Italy, remain particularly dependent on Russian gas.
“By refusing to exclude these two banks, the message is quite clear: the EU is protecting its gas supplies”, said MEP Aurore Lalucq (S&D, France) to EUROPE. In her opinion, sanctions against Russia will therefore “be lessened because of gas and, more broadly, due to the EU’s dependence on fossil fuels”.
This is also the opinion of Lev Menand, Associate Professor at Columbia Law School. In his view, the sanctions against the Bank of Russia are being weakened by the fact that the EU continues to purchase Russian energy, in dollars and in euros, through the Russian banks who then sell these foreign currencies in roubles, thereby substituting for the Russian central bank.
Simone Tagliapietra, a researcher at the Bruegel think-tank, says the EU needs to realise that its gas and oil imports from Russia might be helping to finance the war. With natural gas (FTT) at €160 per megawatt hour and oil (Urals) at $90 a barrel, the EU is sending Moscow about €800 million a day (500 + 300 million), the institute said.
See the EU Council Regulation on Swift : https://aeur.eu/f/lb
On Wednesday, other financial measures were also adopted, such as a ban on co-financing new projects involving the Russian Direct Investment Fund, which is the Russian sovereign wealth fund that invests in new technologies. In order to avoid circumvention of the Swift sanctions, the EU also prohibits European banks from exporting cash to Russia, except for individuals and diplomatic missions.
Furthermore, Mr Dombrovskis has announced that the Memorandum of Understanding for the EU’s sixth Macro-Financial assistance of €1.2 billion could be rapidly finalised, with a view to disbursing a first tranche of assistance around 15 March (see EUROPE 12889/11).
At the Extraordinary ‘Ecofin’ Council, EIB President Werner Hoyer said that the EU bank would finalise emergency aid to Ukraine on Friday. This package will be composed as follows: - €700 million to provide liquidity to the Ukrainian authorities by redirecting existing credit lines; - €1.3 billion in commitment appropriation will be reallocated to reconstruction needs in sectors such as transport, energy and digital.
“We will help to rebuild whatever the Russian army knocks down”, Hoyer said. He also announced an initiative to tackle the refugee crisis in Ukraine’s neighbouring countries.
Addressing the impact on the European economy. In Le Maire’s opinion, the impact on the European economy of the war in Ukraine and the international sanctions against Russia will predominantly materialise in the form of a surplus of inflation caused by the surge in energy prices, which he quantified at “0.2%”.
On Wednesday, Eurostat estimated inflation at a rate of 5.8% in February for the euro area.
In the short term, the French minister said that coordinated European measures could be taken in respect of state aid and via specific loans made to companies where they would focus on those which were “ the most fragile, the most ‘network-intensive’ and the most exposed to international competition”. In the longer term, the extraordinary EU summit on 10–11 March will look at how to strengthen European energy independence.
Dombrovskis did not exclude the possibility of specific instruments for the energy sector (see EUROPE 12901/13) nor, in response to a question from EUROPE, neither did he exclude a reorientation of national recovery plans within the framework of the Next Generation EU plan, or even Cohesion policy, particularly in relation to dealing with the massive influx of refugees. (Original version in French by Mathieu Bion, with Damien Genicot)