The new restrictions imposed by the US on 15 April will not significantly affect the Russian economy or its public finances but will push relations between Moscow and Washington to a new nadir. In response, Moscow could step up provocations in eastern Ukraine, which could result in tougher Western sanctions on Russia in the future.
The sanctions entail:
- A ban on US financial institutions from participating in the primary market for ruble-denominated sovereign bonds issued after 14 June.
- Travel bans and asset freezes on 16 entities and 16 individuals for disinformation efforts and interfering in the 2020 US presidential election.
- Asset freezes on six Russian technology companies supporting the country’s intelligence services.
- Travel bans and asset freezes on five individuals and three entities linked to Russia’s occupation of Crimea.
- The expulsion of ten Russian diplomats from its mission in Washington, DC.
- Additional actions through “diplomatic, military and intelligence channels” in response to reports of bounties on US soldiers in Afghanistan.
In a follow-up press briefing, US President Joe Biden noted that restrictions on Russia had been designed to hold Russia accountable but not to escalate tensions; however, sanctions could be swiftly tightened – including those targeting sovereign debt – if Moscow continued its malign activities.
Russia has pledged to respond in kind without providing further details. Where possible, reciprocal measures – such as the expulsion of US diplomats or cutting investment in US securities – are likely. In other areas, an asymmetric response – such as new cyber-attacks, further administrative harassment of US/Western companies operating in Russia (particularly in the digital technology sector), or military provocations – could be expected. However, the greatest risk is the further escalation of the conflict in eastern Ukraine, where Russia has reportedly amassed more than 100,000 troops and large amounts of military equipment.
On 15 April, Ukraine’s foreign ministry issued a statement voicing concerns about Russia’s alleged intentions to close off the Kerch Strait to warships and state vessels from other countries due to military exercises for six months starting 24 April. If implemented, the move would seal off the only passage into the Sea of Azov and block access to Ukraine’s Mariupol and Berdyansk ports. If implemented, this would have a significant negative economic impact on Ukraine and disrupt global supply chains of steel and crude iron in particular. Other provocations targeting Ukraine could be expected as well.
Moderate US restrictions will have a limited impact on Russia’s economy and public finances, which benefit from substantial financial buffers, low external debt levels, and strong domestic demand for sovereign debt. A recent decision by OPEC+ to phase out mandatory oil output cuts in the coming months could further boost Russia’s fiscal position. However, a persistent threat of new/tighter sanctions will likely reinforce Russia’s conservative fiscal policy and redouble Moscow’s efforts to lessen its dependence on Western institutions. In this context, it will likely accelerate efforts to develop domestic alternatives to the global interbank communication system (SWIFT) or international payment systems such as Visa or Mastercard.