In the wake of the Russian invasion of Ukraine in 2022, the United States-led Western Bloc swiftly rallied to impose stringent economic sanctions on Moscow. These sanctions were designed to cripple the economic arteries of the nation, severing Russian banks from international financial systems, limiting their access to foreign currency, and throttling their operations to put pressure on Moscow’s political ambitions.
Over two years later, however, Russia’s banking industry is not only surviving but also thriving. Reports show an unexpected surge in net profits, defying predictions of an economic collapse. This feature explores the sanctions imposed, the operational hurdles faced, the ways Russian banks have adapted, and what lies ahead in light of recent geopolitical developments.
Financial strangulation or inconvenience?
The sanctions were multifaceted, with several escalations over the past two years. Perhaps the most significant measure was cutting several major Russian banks from the SWIFT international payments network. This effectively isolated Russia from global financial transactions, making it challenging for banks to execute cross-border payments.
The SWIFT ban meant that Russian banks could not easily communicate with foreign institutions, severely restricting their ability to engage in international trade and payments. This was a severe blow, particularly for a country like Russia, which heavily depends on exports of oil, gas, and other commodities to finance its economy.
Sanctions also included freezing the foreign assets of major Russian banks, such as VTB Bank, Sberbank, and Gazprombank, and also prohibiting these institutions from transacting in dollars, euros, and other major currencies. By freezing assets, Western nations sought to deny these banks access to liquidity critical to their international operations. The transaction bans also meant that Russian banks were effectively barred from participating in the global financial system, making international business dealings extremely cumbersome.
The sanctions also targeted high-level executives, CEOs, and board members of these banks, freezing their assets abroad and restricting travel. Such moves aimed to apply personal pressure to decision-makers within the banking industry, effectively putting a face to the consequences of Russia’s geopolitical actions. The sanctions have not only impacted the finances of these executives but also added a psychological component to the economic warfare, further incentivising key stakeholders to change their behaviour.
Over the past two years, these sanctions have continued to evolve, with Western nations adding further layers. The aim was to close any loopholes that Russian financial institutions could exploit. Additional sanctions targeted secondary players, cryptocurrency transactions, and correspondent banking services that helped Russian banks indirectly access international systems. The new restrictions were also extended to subsidiaries and affiliates in third countries, tightening the noose around the Russian banking sector and forcing them to reassess their international strategies.
Challenges faced by Russian banks
The sanctions have certainly not been without consequences for Russia’s financial institutions. Among the most critical challenges faced by Russian banks were the inability to access foreign capital markets, currency shortages, and severed ties to Western institutions. These challenges forced Russian banks to find new ways to maintain their operations and services for both domestic and international customers.
Banks struggled with liquidity crises due to restricted access to foreign currency. Given that a large portion of Russia’s financial reserves was held abroad, the freezing of these assets led to immediate concerns about the ability to manage balance sheets. Moreover, the exclusion from SWIFT severely impacted the ease of international payments, forcing Russian banks to look for alternatives to conduct cross-border trade and facilitate remittances. The sudden loss of liquidity threatened the ability of Russian banks to fulfil their obligations, leading to fears of insolvency.
The sanctions also caused significant issues in terms of technological isolation. Many Russian banks had relied on Western software and technologies to run their operations smoothly, and sanctions meant that updates and support for these technologies were no longer available. As a result, Russian banks had to accelerate the development of domestic alternatives, often with mixed results. This increased operational costs and presented security vulnerabilities, adding another difficulty for the banking sector.
Yet despite these considerable hurdles, Russian banks were quick to pivot and discover ingenious adaptation methods. By leveraging state support and establishing alternative financial mechanisms, they managed to maintain functionality and even thrive under pressure.
How Russian banks found workarounds
The resilience of the Russian banking sector can largely be attributed to a combination of government support, market adaptability, and strategic partnerships. Anticipating the risk of being cut off from SWIFT, Russia developed its own domestic payment system, SPFS (System for Transfer of Financial Messages). Though it lacks the reach of SWIFT, SPFS has ensured the continuity of domestic transactions and has even expanded to work with foreign entities in countries like China, India, and Iran. SPFS’s adoption has grown steadily, with numerous financial institutions from partner countries joining the network, allowing Russia to maintain a channel for international payments, albeit with added delays and higher costs than SWIFT.
Russia also advanced its Mir payment card system, positioning it as an alternative to Visa and Mastercard, both of which had suspended operations in Russia. The acceptance of Mir cards has expanded, particularly in countries with close ties to Russia, such as Turkey and Belarus, reducing dependency on Western financial infrastructure.
Mir cards have also become essential for domestic consumers, facilitating transactions in an environment where international payment systems are no longer reliable. The government has incentivised the use of Mir cards, integrating them into salary disbursement for public sector employees and pensions, thereby ensuring mass adoption.
The Kremlin made significant moves towards a de-dollarisation strategy, increasing the use of the Russian ruble and the Chinese yuan in international trade. Partnering with countries willing to bypass the dollar system, Russian banks leveraged these partnerships to maintain trade flows and stabilise the ruble.
Bilateral trade agreements with China and India have helped to replace dollar-denominated transactions with rubles and yuan, insulating Russia from currency-related vulnerabilities. These new trade channels have also helped stabilise the Russian economy, allowing it to maintain essential imports and exports without relying on Western financial institutions.
The Russian government further stepped in by providing state-backed loans and liquidity support to key banks. These efforts helped cushion the immediate impact of sanctions, allowing banks to restructure and avoid insolvency. Interest rate adjustments by the Russian central bank also played a role in stabilising the domestic financial environment.
The central bank’s decision to raise interest rates sharply following the initial wave of sanctions helped curb capital flight and stabilise the ruble, although it made borrowing more expensive. Subsequently, rate cuts were used to stimulate the economy and support domestic lending, showing the flexibility of Russian monetary policy in responding to crisis conditions.
Russian banks have also increasingly leaned towards cryptocurrencies and are piloting the digital ruble. This pivot has provided alternative channels for transactions, bypassing the traditional and heavily sanctioned banking infrastructure. Also cryptocurrencies, despite their volatility, have become a crucial tool for facilitating international transactions and evading sanctions. Meanwhile, the digital ruble, currently in its testing phase, aims to provide a stable, government-backed digital currency that can be used both domestically and internationally, further diversifying Russia’s financial tools in the face of Western sanctions.
Finally, partnerships with countries like China, India, Turkey, and UAE have provided critical support. Russian banks have utilised correspondent banking relationships in non-Western financial centres to facilitate international payments, allowing trade and finance to continue albeit at a higher cost. By establishing and strengthening these regional alliances, Russia has managed to circumvent many of the financial barriers imposed by Western sanctions. These partnerships have not only provided much-needed financial channels but have also helped foster a bloc of nations with a shared interest in resisting Western dominance in the global financial system.
In response to technological isolation, Russian banks have invested in emerging technologies, such as blockchain, to create secure channels for international financial transactions. Blockchain technology has enabled Russia to develop a decentralised mechanism that bypasses traditional international banking systems. This has reduced the reliance on Western technologies and allowed for a more resilient payment infrastructure.
Furthermore, partnerships with non-Western tech companies have also facilitated the development of banking software tailored to circumvent Western sanctions. Russian banks are increasingly collaborating with Chinese and Indian technology firms to enhance their capabilities, allowing them to maintain functionality similar to pre-sanction operations.
Are sanctions effective?
Chris Weafer, Chief Executive of Macro Advisory, notes that the Russian banking sector has demonstrated remarkable adaptability.
He said, “The sanctions have certainly hurt the Russian economy, but the notion that they would quickly cripple the banking sector and force political concessions was over-optimistic. Russia’s ability to adapt—through alternative financial networks and domestic ingenuity—shows a capacity to endure despite the isolation.”
Another perspective comes from Elina Ribakova, Deputy Chief Economist at the Institute of International Finance, who believes that the impact of the sanctions is blunted by Russia’s strong fiscal policies and partnerships with non-Western countries.
“Russia has built financial bridges to partners like China and India, which has kept their economic engine running. It is also clear that domestic banking support from the government has cushioned the blows, allowing for short-term profitability,” she noted.
Indeed, the net profit figures for the Russian banking sector tell a surprising story. As of October 2024, the sector posted a 4% increase in net profit, despite an overall economic slowdown. Analysts attribute these figures to the government’s interventionist policies, capital controls that limited cash outflows, and high interest rates which benefited profit margins on loans. The Russian central bank’s proactive measures to stabilise the ruble and manage inflation also played a crucial role.
Yet, there are dissenting voices. Mark Galeotti, an expert on Russian politics, points out that the profitability of Russian banks may be deceptive.
“What we see are banks that are generating profit on paper, largely because of state subsidies and artificial financial mechanisms. In reality, the sector is not as healthy as it looks, especially given the mounting non-performing loans and restricted access to technology that impacts long-term growth,” he added.
Non-performing loans have indeed been on the rise, as many businesses struggle to stay afloat amid a stagnant economy and the challenges of isolation from the West. This has led to concerns about the sustainability of the banking sector’s profitability. Moreover, the reliance on government support raises questions about how these banks will perform if and when this support is scaled back.
The sanctions have undoubtedly isolated Russia from major financial markets, curbed its access to capital, and put tremendous pressure on its economy. The Russian middle class, international businesses, and many sectors of the economy have been severely affected, leading to capital flight, unemployment, and economic contraction. The standard of living for many Russians has declined, with rising inflation and decreased purchasing power affecting everyday life.
However, when it comes to the financial sector, the story is more complex. The Russian banking sector’s adaptability has blunted the intended effects of sanctions. Non-Western alliances, state support, and structural adjustments have given Russian banks a lifeline that the West perhaps underestimated. Moreover, with oil and gas revenues still flowing in—albeit redirected—the Kremlin has had the funds necessary to prop up its banking system. These revenues have allowed Russia to maintain its fiscal policies and support the broader economy, thereby reducing the pressure on the banking sector.
There is also the aspect of sanctions fatigue. As the war drags on, some Western nations face economic pressures, leading to hesitations about further tightening sanctions. Additionally, loopholes in enforcement have allowed Russia to continue leveraging cryptocurrencies and informal networks for financial transactions. The effectiveness of sanctions is thus undermined not only by Russia’s adaptability but also by the challenges of maintaining a united front in the West as economic conditions worsen globally.
The Trump factor
The effectiveness and future of these sanctions are even more uncertain with the changing political climate in the United States. The recent return of Donald Trump to the presidency raises significant questions about the direction of US foreign policy concerning Russia. During his previous term, Trump took a less confrontational stance towards Moscow, often expressing a desire to improve relations.
While it remains to be seen how the new administration will navigate the ongoing war and sanctions regime, analysts suggest that Trump may be more inclined towards negotiation rather than escalation. This shift could mean a softening of sanctions or at least less emphasis on expanding them, particularly if Trump seeks rapprochement with Russia to focus on countering China’s economic rise. Trump’s approach might involve revisiting the terms of existing sanctions and potentially lifting some in exchange for concessions from Moscow, which could provide much-needed relief for the Russian banking sector.
According to Dmitri Trenin, a senior fellow at the Carnegie Endowment for International Peace, “Trump’s presidency might bring a recalibration of the US’s approach to Russia. If Washington opts for dialogue over confrontation, we could see sanctions being dialled back or loopholes being allowed to ease tensions.”
This change, however, could lead to tensions with Europe, which has so far been united in sanctioning Russia under US leadership. If the US softens its stance, European allies may find it increasingly challenging to maintain a tough position without American support, especially as European economies also struggle with high energy prices and inflation. The potential divergence in transatlantic policies could create gaps that Russia might exploit, further undermining the effectiveness of the current sanctions regime.
As the world watches the political landscape shift, particularly with a change of leadership in the United States, the direction that sanctions—and ultimately the Russian banking sector—will take is a question that remains open.
The only certainty is that the next chapter will be shaped by a complex interplay of politics, economics, and international alliances. The Russian banking sector’s fate, much like the broader geopolitical scene, is far from settled, and the coming years will be crucial in determining whether the adaptations made thus far will be enough to secure long-term resilience or merely a reprieve in an ongoing economic battle.