The Sanctions Against Russia Do Bite: But Are They Having Their Intended Impact?

Often, the problem with many policy actions employed to influence the economy is their unintended consequences. In the case of economic sanctions, it is not always easy to tell whether half a success is any better than a failure.

On March 21, 2014, under the new sanctions regime, both Visa and MasterCard froze the card payment operations of several Russian banks. The sanctions were lifted from some banks two days later, yet Bank Rossiya, the 16th bank in the country by total assets, is still cut-off from US based card clearing platforms. The bank was forced to close its foreign accounts and switch to rouble transactions only. Russian companies rely on banks to pay salaries into their employees’ checking accounts. They cannot do so right now. As a direct result of sanctions against the bank, its customers cannot use their cards for everyday purchases. They use ATMs, instead, to extract cash inside Russia.

The sanctions are having an impact. The people and companies in Russia do feel them. Yet, the lessons drawn from the experience by the Russian elites may not be the one the West intended. The prevailing view in Russia is that the sanctions are proving the need for Russia to go it alone. It must reduce its economic reliance on Western technology and service companies, and set up its own independent clearing system for card payments.  Several options for such a system are hotly debated. Some argue that Russia should turn east and join the Chinese Unionpay system clearing system that is working already in nearly 120 countries.  In the past few days, it appears that the government has opted to establish a Russian national clearing system as a separate corporation controlled by the Russian central bank that would process all card payments inside the country.

The current initiative falls neatly into Putin’s desire to isolate and protect the country from political risks. In a broader context, the new plan for the national payment system fits well with Russia’s increasing drive towards regional economic autonomy and geo-security.

Many in the Russian banking community are sceptical about the plan. It will take at least six months to set up the system. That is eons of years in financial services timelines, and a risky undertaking in the fragile financial context of the Russian economy. The Russian central bank estimates that the system will process hundreds of billions of rouble transactions by 2016. Meanwhile, the Russian government is considering ways of ensuring that foreign banks will participate directly in the new system, and will use the rouble in international clearing through Continuous Linked Settlement Bank (CLS). But concrete suggestions are thin on the ground.

The man in the street sees things differently. Many Russians view the plan as another victory for President Putin facing an increasingly hostile international political environment. Putin’s approval ratings are at their highest to date, around 85%. The sanctions therefore are having an impact. But in reality they may end up bolstering the isolationist tendencies in Russia, strengthening in the process the economic arm of the Russian state, through the financial system.

2 Responses to "The Sanctions Against Russia Do Bite: But Are They Having Their Intended Impact?"

  1. EzioP1   April 26, 2014 at 3:17 am

    Mr. Putin is waiting for the russian winter season that was of help at different time in destroying the Napoleon troops and the World War II army. So far when the Western countries will need gas Putin will sell it at the price he would need to repay the Russia and recover from the penalties it has been subjugated. The Ukraine problem is hard, severe and of difficult solution, but to solve it with the most probable self-harm it doesn't seem a good solution

  2. taboogen   April 29, 2014 at 1:27 pm

    Obama and the Cold War hawks clinging onto their White House anti-Russian ideology hage shown they know and understand even less about Russia or the Ukraine. Nor have they ever before, clearly evidenced by their failure to capitalize on the so called 2004 Orange Revolution. So, they want to get rid of Putin. Well, as he said, their sanctions have "boomeranged" and Russians laugh and sneer at the presumptous arrogant Americans who conveniently forget or ignore how Roosevelt used Stalin and over 20 million dead Russians killed in the war against Hitler while the West claimed victory! Read Taboo Genocide: Holodomor 1933 & the Extermination of Ukraine, finally released in ebook at http://www.taboogenocide.com. And see how Washington and London carried out western support to consolidate Stalin in power under the Plans in their plan to beat the Japanese, and get the money and world resources while Russians suffered under US backed totalitarian soviet communism and the gulag, made in the USA,