The Almighty Dollar Isn’t the Currency to Fight Russia

The euro’s important role in Russian trade and finance means Europe has to take the lead on sanctions

A customer exits a foreign currency exchange bureau advertising euro, dollar and ruble rates in Moscow.
By Paul J. Davies
February 25, 2022 | 11:37 AM

Bloomberg Opinion — The West is serious about Russian sanctions and is cutting off the country’s biggest banks from large parts of global finance. If sanctions have to go further, Europe must lead the way, even though massively restricting energy and commodities trade will hurt its economy as well as Russia’s.

The U.S. on Thursday launched major restrictions on Russia’s biggest banks’ ability to make or receive payments in dollars for almost anything apart from energy, food and medicines. The exemptions are meant to limit the pain felt outside of Russia in western economies, which are already suffering rising prices. These sanctions add to bans on Russia’s government, banks and companies from raising funding or buying and selling securities in most western financial markets.

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The European Union was expected to confirm that it will follow America’s moves on Friday. It is crucial that it does so because Russia has been curtailing its use of dollars and has become more reliant on euros ever since 2014, when President Vladimir Putin took the Crimean peninsula from Ukraine. Nearly one-third of Russian trade is now conducted in euros, up from barely a tenth in 2014, according to data from the International Institute of Finance in Washington; the dollar’s share has been cut to 55% from 80%.

Euros also now make up the largest share of more than $640 billion of foreign-currency reserves at the central bank, about 32%, while dollars are about half that amount, down from 40% in 2014, according to the IIF. The central bank now holds more physical gold by value than it does dollars and nearly as much in renminbi.

The Russian banks that really matter are Sberbank of Russia PJSC, VTB Bank PJSC and Gazprombank JSC, which account collectively for almost 55% the country’s total banking assets, according to official Russian data from local credit-rating agency RIA Rating. These banks, which are named along with several other major lenders in the U.S. sanctions, are the most important for Russian trade and its economy.


The sanctions from the U.S. and others announced by the U.K. on Thursday are powerful and will be more so assuming the EU follows suit. But further steps are possible.

Cutting Russia’s big banks off from the key messaging system for international payments, known as SWIFT, would severely limit the country’s ability to makes payments to any other country in any currency. President Joe Biden said Thursday that Europe was so far resisting this move. It wouldn’t make payments into and out of Russia impossible, but it would make the process much slower and riskier because it would mean banks have to agree and confirm payments by other means, for example telephone.

Even with this step, the Russian financial system might still be able to function internationally via China, and the two countries have talked about creating direct banking links. However, there is little evidence that many of these have been put in place yet, according to Elina Ribakova, deputy chief economist at the IIF.

Beyond this, blocking payments for energy would be even more painful for the Russian economy, but would be extremely damaging for Europe’s economy too, which is heavily reliant on Russian gas imports.


Hurting Russia’s economy to punish its invasion of Ukraine and even potentially to destabilize Putin’s regime, will also hit the handful of European banks that have maintained significant businesses in the country. Banks in the U.S., U.K., Germany and Japan all have marginal exposures that are worth less than 0.1% of their banking assets, according to the IIF.

Raiffeisen Bank International of Austria, Societe Generale SA of France and UniCredit SpA of Italy have the largest exposures to Russian assets in that order, according to a ranking of Russian banks by local credit-rating agency RIA Rating. Shares in all three fell heavily Thursday: Raiffeisen was down more than 23% and the other two by more than 12%.

These three top the $104 billion in total lending by European banks in Russia, according to Bloomberg Intelligence. Much of this credit is to ordinary Russian consumers rather than banks or companies, so losses would come if the Russian economy took a nosedive.


Raiffeisen is most exposed because it has the largest Russian loan book at 11.6 billion euros ($13 billion) and another 2.2 billion of loans in Ukraine. These loans are equivalent to 90% of its capital base, according to Bloomberg Intelligence, which means large losses would severely hurt the Austrian bank’s stability. For Societe Generale and UniCredit, total loans amount to only 16% and 13% of their capital, respectively. Hungary’s OTP Bank Nyrt. is also badly exposed, with 3.2 billion euros of loans split between Russia and Ukraine, which are worth about 42% of its capital.

Financial shock and awe may be the only tactic that can reverse Russia’s aggression – and it is Europe that will bear the costs. If it doesn’t, it is also Europe that will most likely bear the consequences.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.

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