Russian Fintechs and the Sanctions

Recent events in the global market have been shocking, to say the least, as the geopolitical landscape changed massively with Russia’s invasion of Ukraine, with whom it shares a border. The situation is grave, and the human impact is beyond comprehension at the moment. The Western Allies and the United States have imposed heavy sanctions on Russia, which are meant to impact the country’s Fintechs in the past week.

Sanctions were initially imposed on Russia when Vladimir Putin deemed that the Eastern regions of Ukraine, Luhansk and Donetsk were now independent. The consequences have even been felt on the sporting stage, as FIFA and UEFA have announced a ban on Russian football clubs to keep them from participating in their tournaments. UEFA ended its long-standing sponsorship with Gazprom, one of the world’s biggest energy companies, as it is state-owned by Russia.

The decision made by Russia to disregard diplomacy and launch an all-out invasion of Ukraine was shocking, to say the least, and was met by disdain by world leaders. We assess the Ukraine conflict in detail and the impact on Russian Fintechs due to the consequences of the sanctions.

What Are the Most Recent Sanctions?

The West and the US have announced a plethora of fresh sanctions on Russia, which now target the financial sector, Russian companies, politicians, individuals, officials, and more. The US, Canada, the UK, Italy, Germany, France, and the European Commission have all agreed that they will freeze Russian President Vladimir Putin’s assets and those of other officials, Russia’s Security Council, and Sergei Lavrov, the Russian Foreign Affairs minister.

Other sanctions include not allowing wealthy Russians to purchase ‘golden passports’ and preventing the Central Bank of Russia from using its international reserves. The payment system of the Society for Worldwide Interbank Financial Telecommunication, also known as SWIFT, has also removed Russian banks from their system, which is one of the harshest sanctions to date.

What Removal from Swift Means for Russian Fintechs

The United States and several countries in the European Union had not been on the same page when the sanctions were first imposed, as they were concerned that such sanctions would have repercussions to their own economies. That’s because the international payments system, called Swift, is used by every bank in the world for making or receiving payments and communicating financial information.

Russian banks use it to transact with customers globally, particularly in the gas and oil sector. Getting removed from Swift would cripple Russian banks and Fintechs as that would mean they need to find alternate methods to communicate with international banks and companies. The European Union has also effectively frozen the central bank reserves of Russia, which will have an even more negative impact on the Russian economy.

Litany of Sanctions

The United Kingdom has also sanctioned hundreds of Russian Oligarchs and companies, including Chelsea FC owner Roman Abramovich. These measures include travel bans and freezing of assets. Among the extensive range of sanctions on Russian Fintechs, including restricting the biggest Russian Fintechs to trade financially, along with numerous individuals and sovereign debt trading, the United States Treasury also slapped bans on other Fintechs and entities that were vital to the Russian economy.

Measures were taken to restrict exporting sensitive technology to Russia, and influential financiers and families close to Vladimir Putin were also sanctioned. At the same time, leaders of the European Union also agreed that they would levy new sanctions on Russia’s energy, financial, and transport sectors. These sanctions also include blocking financial transactions, stopping state-controlled organizations from listing new equities on the European exchanges, and banning industrial equipment, including jet and aircraft parts.

Despite the plethoras of sanctions, most of the major international sanctions have spared energy exports from Russia. As of now, the only country that has banned the import of Russian oil is Canada. Other major economies like Australia, South Korea, and Japan have imposed the most stringent sanctions. At the same time, the US and the UK have also imposed sanctions separately on Belarus for their participation in Russia’s invasion of Ukraine.

The Response from Russia

It’s not that Russia has lied on the mat and taken all these sanctions on board without any retaliation. Putin placed the deterrent forces of Russia over the weekend on “high alert,” which does include its arsenal of nuclear weapons. Russia also banned all airlines from the UK from landing in Russia last week and limited its airspace as well.

The central bank and several Russian Fintechs also increased their policy rates from 9.5% to 20% to reduce the impact of the international sanctions. There was also a requirement introduced for exporters to now sell 80% of all credited foreign currency from January of this year. At the time of writing, Russia has also instilled temporary bans on every western company removing or backing out of their Russian investments.

What could be the Impact on Russian Fintech due to the Consequences of these Sanctions?

Global economists and strategists have looked at the long list of sanctions imposed on Russia and have predicted that these sanctions can quickly go to the next level. For instance, these sanctions are nowhere near as severe as the ones placed on Iran by the West, which could have some scratching their heads. It’s become one of those situations where the West is just showing that they disagree with what Russia is doing but don’t want to antagonize them any further for fear of all-out war.

Russia is not Iran, as, with Iran, all banks operating in the United States can’t deal with them, and every American was strict in not crossing that line. Western banks may not want to be involved with what’s happening in Russia and don’t want to trade with the country right now, but more severe sanctions could be the order of the day if Russia doesn’t stop what it is currently doing in Ukraine.

Russia is a global player, and it’s not only in the oil industry that it is dominating because its economy is easily comparable to Italy. It also accounts for nearly 4% of exports in the Eurozone, and fewer from the United States. That being said, Russia doesn’t drive demand globally, but there could be liquidity problems and dislocations in the financial markets if the situation persists.

However, if the fighting doesn’t end, there could be further escalation of events, which would mean further sanctions imposed on Russia and Russian Fintech. It can create more pressure on the West to act and get involved in supporting Ukraine because they can’t stand idly and let Russia do as it pleases. In the current scenario, it is expected that the price per barrel of oil could easily touch $150 per barrel.

There can also be further increases in percentages in food prices, which would add to the already spiraling out-of-control inflationary pressure on the global economy.

Conclusion

The one thing that has become clear from the Ukraine –Russia conflict is that moving money in or out of the two countries is virtually impossible right now. That’s mainly because of new sanctions placed on Russian Fintech and oligarchs. However, it’s not impossible, thanks to cryptocurrency and Fintech developments. Most regulated and centralized crypto companies will be compliant with sanctions, but policing decentralized players will be a much more complicated task.

Most people believe that the wealthiest Russians on the planet will move their money into crypto channels to lighten the impact of sanctions. Iran can be viewed as a recent example, as it has been dealing with sanctions for years now and has used Bitcoin to deal with their impact.

The harsh truth is that Russia has been dealing with sanctions for several years now, and it is not entirely new to them. Russian Fintechs and banks have learned how to navigate these murky waters and are more than well-equipped to deal with the consequences of harsher sanctions from the West. It remains to be seen how China, the world’s second-largest economy, responds to the crisis, as whoever it supports will likely emerge as the victorious party.

It will blunt the impact of all sanctions imposed by the West and further strengthen the hand of Russia and Russian Fintechs. It could even be that we are staring down the barrel of a Third World War. One can only hope that sense prevails and an agreement can be reached through diplomacy, but that remains a far-fetched dream as of now.