Aurelia Butler

LONDON/NEW YORK (Reuters) – A decision by Western allies on Saturday to block “selected” Russian banks from the SWIFT payments system will inflict a crippling economic blow, but also cause much pain to their own companies and banks. And the allies still have room to do more. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a secure messaging system to ensure rapid cross-border payments which has become the principal mechanism to finance international trade. Russian banks denied access to SWIFT will find it harder to communicate with peers internationally, even in friendly countries such as China, slowing trade and making transactions costlier.But the allies, who also vowed curbs on Russian’s central bank to limit its ability to support the rouble, have not yet said which banks would be targeted. That would be crucial to the measure’s impact, said sanctions and banking experts.”The devil will be in the details,” said Edward Fishman, an expert on economic sanctions at the Eurasia Center of the Atlantic Council think tank. “Let’s see which banks they select.”If the list covered the largest Russian banks, such as Sberbank, VTB, and Gazprombank, it would be “an absolutely huge deal,” he wrote on Twitter (NYSE:TWTR).Sberbank and VTB have previously said that they were prepared for any developments. The decision to kick some banks off SWIFT, though not all, could encourage “nesting”, in which Russian entities turn to non-sanctioned banks and large multinationals instead in a bid to access the global financial system, one expert said.Such a workaround for the Russians would create compliance headaches for global banks.”It really is a dagger into the heart of Russian banks,” said Kim Manchester, whose firm provides financial intelligence training programs to institutions. Manchester said the Biden administration had been selective in its sanctions, leaving room to tighten further by blocking more banks and eventually imposing a blanket ban. “It is a creeping barrage.”DEVASTATING BLOW The impact is likely to be devastating for the Russian economy and markets.The sanctions are likely to hit the rouble hard when markets open on Monday, said Sergey Aleksashenko, a former deputy chairman of the Russian central bank who now lives in the United States, leading to the disappearance of many imports to Russia. “This is the end of a significant part of the economy,” Aleksashenko added. “Half the consumer market is going to disappear. These goods will disappear if payments can’t be made for them.”But the impact could be blunted if the listed banks were limited to those already sanctioned and Russia’s central bank was given time to transfer assets elsewhere, said one former senior Russian banker, who spoke on condition of anonymity.”If it is the banks that are already sanctioned, it doesn’t really make a difference. But if it is the top 30 Russian banks then that is an entirely different matter,” he said.”It all sounds very loud and everyone is very glad, but in reality it is a political statement.”Previously announced U.S. sanctions against a handful of Russian banks including Sberbank and VTB, took direct aim at the vast majority of about $46 billion worth of daily foreign exchange transactions by Russian financial institutions. Those sanctions targeted nearly 80% of all banking assets in Russia. As an alternative to SWIFT, Russia has set up its own network, the System for Transfer of Financial Messages (SPFS).It sent about 2 million messages in 2020, or about a fifth of Russian internal traffic, says the central bank, which aims to up this share to 30% in 2023.But SPFS, which limits the size of messages and operates only on weekdays, has found it hard to add foreign members.’FINANCIAL NUCLEAR WEAPON’The decision to block Russian banks from SWIFT has been fraught.Over the past few days, even as Ukraine urged Western nations to kick Russia off the payments system and was backed by countries such as Britain, others, such as Germany, worried about the possible impact on their economies and companies. The SWIFT ban was a “financial nuclear weapon,” French Finance Minister Bruno Le Maire said on Friday. “When you have a nuclear weapon in your hands, you think before using it,” he told reporters.The tide shifted, however, as Russian forces launched an assault on Kyiv and hopes of a diplomatic resolution faded.Earlier on Saturday, Germany, which has the EU’s biggest trade flows with Russia, softened its stance and suggested it was looking for a way to remove Russia from SWIFT while trying to limit the collateral damage.Manchester, the financial intelligence trainer, said the partial ban would force Russian banks to get more creative in accessing the financial system. Multinationals with large treasury operations and banks with SWIFT access could become the new hubs of financial transactions out of Russia. Nesting, he said, was a massive concern for global banks, which would have to ensure that any transactions they support do not violate Western sanctions.Manchester said he spoke on Friday to a contact in the financial crimes division of a global bank.Such banks could face heavy regulatory penalties if they dropped the ball on sanctions, he added.”They are burning the midnight oil to make sense of everything that’s going on,” Manchester said. More

The US has for years used the power of the dollar to cut adversaries off from global finance. Now, it is using the prevalence of American technology to cut Russia off from global chip supplies. Far-reaching export controls announced by Washington are intended to isolate Russia from the world’s tech economy and stymie its military capabilities, while allowing ordinary citizens in the country to still buy mobile phones, dishwashers and laptops.The measure is part of a wave of US and western sanctions in retaliation for Russia’s invasion of Ukraine that have also targeted financial institutions, leading companies and the wealthy oligarchs that surround the administration of President Vladimir Putin.The tech-related export controls are “novel and complex” in their structure, said Kevin Wolf, a former senior commerce department official, designed to have an impact on government and industrial groups rather than ordinary consumers. “What the administration has done here is set out a structure to cut Russia off from chips and said that this is a policy and a mission,” said Wolf. “And this isn’t going to go away. There is massive allied co-operation on this.”The move shuts off supply from leading US groups such as Intel and Nvidia. Taiwan Semiconductor Manufacturing Company, the world’s largest contract chipmaker, which controls more than half the global market for made-to-order chips, has also pledged full compliance with the new export controls. The US honed its ability to cut companies off from semiconductors by using its export control powers on Chinese telecoms company Huawei during the Trump administration. After first restricting the sale the US technology to Huawei by putting it on its trade blacklist, Washington ratcheted up pressure by applying the so-called foreign direct product rule. This allowed the US to reach beyond borders and control products made outside the country if they are designed or manufactured using American technology.“Huawei was a trial run,” said Christopher Timura, a trade lawyer at Washington’s Gibson Dunn. “The US didn’t see a dramatic impact on Huawei until it developed the entity list foreign direct product rule.”Using this same power against Russia broadly for some items, and more stringently against a specific list of 49 military entities, means the country is now effectively denied access to high-end semiconductors and other tech imports critical to its military advancement. “Russia is very well prepared but over time this is going to degrade their military capabilities severely,” said Julia Friedlander, a former US Treasury official.

Video: Russia’s invasion of Ukraine: what next? | FT Live

The blockade will also affect Russian tech more broadly, said Jim Lewis, of the Center for Strategic and International Studies. “This puts paid to Russia’s tech ambitions. Russia was already falling behind in emerging tech, and this just pushes them further back.”Putin has tried to wean Russia off dependence on foreign technology after western governments peppered the country with sanctions following its invasion of Crimea in 2014, but the measures had little success. Yandex, Russia’s leading US-listed tech giant, boasts one of the world’s leading supercomputers that powers its automated online translation services and relies on hardware made by US-based Advanced Micro Devices and Nvidia. Dmitry Peskov, Putin’s spokesman, said in January that “dishwashers and other such household items are not the most sacred things in our society, as important as they are for home comforts”.Russia has vowed to respond to the sanctions “based on its own interests” and warned that its countermeasures might be “asymmetric”.Despite these far-reaching US restrictions, analysts have predicted that some Chinese companies, especially those that have themselves been the target of US sanctions, might help Russia circumvent the export controls.

“Now that it’s almost certain that Huawei’s competitors like Ericsson would pull out of Russia and from co-operation in making 5G equipment, this will create space for Huawei,” said Artyom Lukin, an associate professor at Far Eastern Federal University in Vladivostok. “Huawei could monopolise the Russian telecom equipment market: as a result of western sanctions, China could gain 100 per cent control over our country’s tech supplies,” Lukin added.US restrictions on tech exports to Russia might also lure Chinese semiconductor companies to jump into the gap. SMIC, China’s largest chipmaker, is itself under US sanctions. The company was put on the entity list after the US government determined some of the chips it made ended up with users defined as military-linked. SMIC has since lost access to the equipment it needs to build production lines at the most advanced process technology level. It has, however, been able to continue buying machinery for expanding capacity using slightly older technology.A senior Biden administration official rejected the idea that China would help Russia circumvent US sanctions. “China alone can’t supply all of Russia’s critical needs for the military,” the official said. “And it certainly can’t compensate Russia for everything that we’re essentially restricting through these rules, especially as it relates to the production of semiconductors. China accounts for only 16 per cent of global capacity.”Martin Chorzempa of the Washington-based Peterson Institute think-tank said: “Even China, with its thriving technology ecosystem and immense government subsidies, has failed to produce advanced chips. It’s unimaginable that Russia would be capable of doing so.” Additional reporting by Max Seddon in Moscow More

Ethiopia is seeking billions of dollars of foreign investment as it presses on with reforms to open up its state-managed economy and boost flagging growth. Addis Ababa this month launched a fund, aimed at attracting investment for at least $150bn worth of state-owned companies and assets. Ethiopia is keen to regain economic momentum after it slowed during the Covid-19 pandemic and a civil war in the northern region of Tigray. By allowing a degree of private investment, officials in Africa’s second-most populous country said the launch of Ethiopian Investment Holdings marked a key step away from the longstanding state-led development model that promoted national control of sectors such as banking, logistics and telecoms. “The establishment of EIH is a strong testament that the government’s economic reform agenda for growth and resilience is well on track,” Mamo Mihretu, the fund’s founding chief executive, told the Financial Times.Ethiopia’s economy grew at near double-digit rates for the best part of two decades. However, the IMF said in its latest forecast that it expanded only 2 per cent last year, and it omitted growth projections for 2022 “due to an unusually high degree of uncertainty”. 

Ethiopia has planned a series of privatisations, including the sale of a stake in Ethio Telecom © Tiksa Negeri/Reuters

Ethiopia has historically followed a state-led development model, partly funded by infrastructure investment from China and a high level of local savings. The EIH is the latest stage in a reform process aimed at encouraging expansion of the private sector in one of the region’s economic powerhouses, a country of 115mn people.Under Abiy Ahmed, prime minister since 2018, Ethiopia has committed to opening up its economy and has planned a series of privatisations, including the sale of a stake in Ethio Telecom. The government allocated the country’s first telecoms licence last year, while Abiy this week pledged in parliament to open the banking and financial sector to foreign investors.“The Covid pandemic and the conflict in Tigray are subsiding, so now the talk here is how we can revamp the Ethiopian economy,” said Mehrteab Leul, managing partner at Ethiopian corporate lawyer MLA, which advises foreign investors. “Years back, the underlying principle of the Ethiopian economy was a developmental economy with the state having the leading role. But now the thinking is that the private sector should have a big role.”Ethiopia has joined two dozen other African countries that have established sovereign wealth funds. The first was Botswana’s Pula Fund, set up in 1994. Ethiopia has more than 40 state-owned enterprises, including Africa’s largest carrier Ethiopian Airlines; Commercial Bank of Ethiopia, the country’s biggest bank; and significant federal land holdings. However, it is unclear how much interest there will be from international investors. Of several companies that had expressed interest in last year’s telecoms auction, only two consortiums submitted offers.The aim of the EIH was to “make the most” of the value of state-owned assets through professional management, Mamo said. “By optimising the value of the range of assets the government owns, EIH will be a booster to the Ethiopian economy.” Mamo, previously a senior economic adviser to Abiy, sees the EIH as a strategic development sovereign fund on similar lines to Singapore’s Temasek Holdings and Abu Dhabi’s Mubadala Investment Company.Temasek was established in 1974 to manage the government’s stakes in telecoms, airline, manufacturing and shipping companies. The Turkey Wealth Fund, set up in 2016, is anchored in government stakes in some of the nation’s biggest companies, including Turkish Airlines, Turk Telekom and three large banks. Analysts described these types of sovereign funds — which are not tied to commodities, as in Chile and Norway — as akin to holding companies that help enterprises develop best practice and identify poor management. They can also act as a partner for foreign direct investment.“Sovereign wealth funds in countries like Turkey, Morocco or Egypt, which don’t have ‘excess’ profits to bank from commodities, are . . . a way for the state to retain primacy in a private sector and . . . help leverage state assets to up investment. I think both apply in Ethiopia’s case,” said Charlie Robertson, global chief economist at Renaissance Capital.“This is Ethiopia’s attempt to find more sources of investment inflows via debt, which would support its investment-led growth model,” he added. More

WASHINGTON (Reuters) – The SWIFT international payments system said on Saturday it was preparing to implement Western nations’ new measures targeting certain Russian banks in coming days.”We are engaging with European authorities to understand the details of the entities that will be subject to the new measures and we are preparing to comply upon legal instruction,” it said in a statement. More

As Russia’s invasion of Ukraine has intensified, so have the rhetorical gymnastics of diplomats from the country’s giant neighbour that is also one of its few large remaining international partners: China.Their attempts to balance Beijing’s policy of support for global peace and stability while avoiding any criticism of Moscow are a sign that the war is unlikely to derail China’s quasi-alliance with Russia, diplomats and analysts said.“The Chinese foreign ministry is doubling down on their alignment to Russia, so we are learning in real time what they mean when they say there are ‘no limits’ in their partnership,” said Evan Medeiros, a China expert at Georgetown University and former senior Asia policy adviser to Barack Obama. China’s close ties with Russia theoretically created a “strategic trilemma” for Beijing, potentially clashing with its other foreign policy principles, such as protection of states’ sovereignty, and with other important economic relationships with the US, Europe and elsewhere, he said. “But they are clearly privileging their alignment with Russia and pursuing something I would call pro-Russia neutrality.”Beijing has been here before. Both in 2008, when Russia sent troops into Georgia, and in 2014, when Moscow annexed Crimea, Beijing avoided directly backing Russia’s actions but also refused to criticise them.“China and Russia handle their partnership on two levels. On one level is rather non-committal rhetoric about conflicts in each other’s neighbourhoods, and on another is the strong alignment when it comes to great power competition,” said Alexander Korolev, a lecturer at the University of New South Wales who researches the China-Russia relationship. “There is a stronger rhetorical support from China for Russia in its resistance against Nato expansion this time.”A volunteer guards a main road leading into Kyiv © AFP via Getty ImagesWhen Russian president Vladimir Putin visited Beijing for the Winter Olympics this month — he was one of the few foreign leaders to do so — Chinese president Xi Jinping threw his weight behind Putin’s opposition against Nato expansion. On Friday, China abstained in a vote on a UN draft resolution condemning Russia’s attack on Ukraine.Some western analysts wonder, however, whether this time, by starting a war in Europe, Putin may be putting too great a strain on the partnership.“Russia does have a penchant for destabilising actions, while China has this desire to rise to great power status on its reputation for prudence and stability,” Andrea Kendall-Taylor, senior fellow at the Center for a New American Security and a former intelligence officer working on Russia, said at a debate this week. She added this contradiction might introduce fissures in the relationship. “So far it has deepened without any side having to incur any cost for the other. That is going to be put to the test in this case,” she said.Until the eve of the attack, Chinese state media was still calling US warnings of a Russian invasion disinformation. “It was a shock to wake up to [the invasion] because we still thought that he was bluffing,” a Chinese diplomat said, referring to Putin. “There is an element of surprise in the expert community and among the public about the mode and scale of Russia’s action,” said Zhang Xin, a Russia expert at East China Normal University. “It is possible that more concrete information was exchanged between the two leaders.”Zhang said it was “slightly embarrassing” for the government to reiterate principles, such as respect for territorial integrity, while accommodating Russia’s military action and also being at odds with Chinese interests such as the aim for common development and prosperity in Eurasia.But this seemed to be a minor concern for Beijing. “No matter how much bloodshed we see in this conflict, unless it becomes an all-out regional war and great powers get pulled in, I don’t think it will have an impact on China’s bilateral ties with Russia,” Zhang said.One reason is the personal stamp Putin and Xi have put on the relationship.“There is definitely some personal rapport and chemistry between them, to the extent that you could almost speak of a personal alliance,” said Artyom Lukin, an associate professor at Far Eastern Federal University in Vladivostok, who believed Putin informed Xi of his plans. “Putin is not completely mad — he must have understood that he needed support from China on this. Moreover, not informing Xi could have been a personal affront.”Analysts also said Xi had shown a higher acceptance of risk and friction in foreign policy during his nearly nine years in office than his immediate predecessors, reflected in his pursuit of a more confrontational and assertive stance in disputes with neighbours. This made Putin’s actions more palatable to him.Sanctions may be a more serious test. China is expected to offer Russia respite, for example by increasing commodities trade through state-owned policy banks that have less trouble circumventing US sanctions.“Look to North Korea for reference: All trade with them is banned under international sanctions and yet China accounts for 95 per cent of their foreign trade,” Lukin said.

This week, China removed restrictions on imports of Russian grain, opening up another source of agricultural export revenues just as Moscow faced new western sanctions.China’s foreign minister Wang Yi warned on Saturday that sanctions would not only hurt the economies of Moscow and the west but would also prevent a political resolution of the conflict.“Sanctions won’t solve [old] problems,” said Wang in a phone call with Annalena Baerbock, his German counterpart. “They will create new ones.”In Washington, policy experts therefore believe that only raising the cost of backing Russia could make China think again.“I don’t think Beijing is terribly uncomfortable with Putin’s play. So if you want to change that calculus, you have to change the pay-off,” said Yun Sun, director of the China programme at the Stimson Centre. “If Russia works with Chinese financiers, in order to block that channel, the US needs to increase the cost for China Eximbank and China Development Bank,” she added.But for now, western governments have their hands full with responding to Russia’s invasion. “The Russia conversation is moving fast,” Medeiros said. “But the ‘what do we do about the Russia-China relationship’ conversation — it has started, but it has not reached terminal velocity.”With additional reporting by Sun Yu in Beijing More

WASHINGTON (Reuters) – China so far does not appear to be helping Russia evade Western financial sanctions on Moscow over its invasion of Ukraine, but doing so would “do profound damage” to China’s reputation, a senior Biden Administration official said on Saturday.”The latest signs suggest that China’s not coming to the rescue,” the official told reporters after announcing that the United States and its allies agreed to impose sanctions against Russia’s central bank and disconnect key Russian banks from the SWIFT international financial transaction network.The official said that recent reports that some Chinese banks have stopped issuing letters of credit for purchases of physical commodities from Russia were a positive sign.This “suggests that, much like has been the pattern for years and years, China has tended to respect the force of U.S. sanctions,” the official added.China is Russia’s biggest trade partner for both exports and imports, buying a third of Russia’s crude oil exports in 2020 and supplying it with manufactured products from cell phones and computers to toys and clothing.The China-Russia trade relationship has grown significantly since 2014, when the West first imposed sanctions against Russian entities over Moscow’s annexation of Crimea. Graphic – Russia’s biggest oil customer: China by far: https://graphics.reuters.com/UKRAINE-CRISIS/SANCTIONS/dwpkrldklvm/chart.png Some of that trade is conducted in China’s yuan currency, which could technically fall outside of sanctions aimed at cutting Russia off from transactions in U.S. dollars, euros, sterling and other major currencies.But Chinese banks that do business with Russian banks and other entities hit with full blocking sanctions and put on the Treasury’s “specially designated nationals” list could face sanctions themselves and loss of access to the U.S. financial system.The official said that if China were to help Russia evade U.S. sanctions, “it really would be an unfortunate signal for China’s vision of the world,” and give “tacit or explicit accommodation to Russia’s invasion of a sovereign country in the heart of Europe.””It would do profound damage to its reputation in Europe, but really across the world,” the official said of China. More