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Sanctions pressure on Russia: risks for the financial sector of Kyrgyzstan

US President Joe Biden in the White House (c) White House

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The introduction of severe sanctions against the Russian financial sector has inevitably impacted our country’s financial sector. In this article, we analyse the primary risk factors that will be pertinent this year.

Russia’s «special military operation», initiated approximately a year ago in Ukraine, and the international sanctions imposed in response to it on Russian economic interests caught Kyrgyzstan’s financial sector off guard. In 2014, Western powers had already implemented restrictive measures against individual Russian banks as a reaction to Russia’s actions in Crimea and the Donbass, but the 2022–2023 sanctions are incomparable to the problems faced by the Russian financial sector eight years ago.

The main impact of the anti-Russian sanctions in Kyrgyzstan was on the correspondent banking system. In spring 2022, Russian Alfa-Bank, Sberbank, and Transcapitalbank were added to the sanctions lists, depriving a significant portion of Kyrgyz banks of convenient access to international settlements in dollars and euros. The disconnection from Transcapitalbank was particularly painful: in previous years, it had become a sort of «external currency treasury» for many banks, facilitating the buying and selling of various currencies and settlements through its extensive network of correspondents. It is unlikely that Transcapital will regain its former role in the foreseeable future, given the sanctions» justification («a Russian bank at the heart of circumventing US sanctions») offers little chance for redemption and re-entry into the global currency settlement system.

Throughout 2022, Kyrgyz banks searched for new correspondent banks for settlements in dollars and euros, and they continue to do so. Most have found new options, but some banks still lack direct access to settlements in major Western currencies. Replacing the relatively flexible Transcapitalbank has not been an easy task.

We attempted to analyse how the continuation of Russia’s military operation in Ukraine might affect our financial sector and how our banks can prepare for the new realities.

Military-political forecast

The majority of analysts surveyed by Ekonomika agree that we should not anticipate a cessation of hostilities in Ukraine in 2023. This is not due to a decisive victory for Russian forces (such a scenario is not even remotely visible now) nor a victory for the Ukrainian side (Western weapons provide significant assistance, but are unlikely to ensure a decisive breakthrough this year). 

Russia’s current attempts to offer peace on its terms (preserving the occupied territories) are categorically rejected by the Ukrainian side, whose peace scenario only includes the withdrawal of Russian troops to the internationally recognized borders of 1991. As a result of the ongoing hostilities, sanctions pressure on Russia will intensify in 2023 — both in terms of introducing new sanctions and in terms of strengthening the administration of those already in place (which includes combating schemes to circumvent them).

For the Kyrgyz financial sector, this implies several relevant risks.

Growing isolation of the Russian banking sector

Our analysis of the correspondent networks of Kyrgyz banks in early March this year reveals that most have established new correspondent relationships with Russian banks to replace those previously sanctioned for both ruble and dollar settlements. A significant risk, however, is that some of the banks currently used for correspondent settlements may become subject to additional sanctions, leading to disconnection from settlements in dollars and euros and from the SWIFT interbank network.

Our experts consider a complete blockade of the Russian banking sector unlikely (dozens of foreign subsidiary banks are still actively operating in Russia, and they are unlikely to want to be blocked; Western companies also maintain commercial relations with the Russian non-military sector). However, an expansion of the list of banks sanctioned by the US and European Union is highly likely. As a result, we will once again have to modify the routes of foreign exchange settlements and bear the risks of client payment blockades.

The relevance of this risk is reaffirmed by the US sanctions package introduced on February 24 this year. Russian MTS Bank, Bank Uralsib, and Bank Zenith, which were included in the package, were actively used by Kyrgyz banks for ruble-dollar transactions.

Additional sanctions on Russian industry and procurement

Throughout 2022 and early 2023, the European Union, the United States, Canada, Great Britain, Japan, Taiwan, and other countries consistently expanded sanctions against individual enterprises and even entire sectors of Russian industry. They also imposed bans on the import of certain types of goods into Russia, primarily those that could be used for military purposes. We expect this trend to continue this year. 

Consequently, Kyrgyz banks will have to scrutinize payment flows of Russian-linked companies even more diligently to avoid losing their correspondent accounts in dollars and euros due to correspondent banks» desire to eliminate support for sanctions circumvention schemes. It is known that such control programs are already in place in most of our banks (analysis of transaction documents, analysis of counterparties, verification of payment justifications by keywords in relation to sanctions acts and lists).

Remittances from migrants

A pressing question is how much the sanctions pressure against the Russian financial sector might impact the flow of remittances sent by migrants from Russia to their homeland.

In our opinion, the sanctions are unlikely to affect the channels for transferring migrant income. If one or two payment systems become subject to restrictive measures, the dynamic and competitive transfer market will quickly find new channels for sending money.

The Russian side is also unlikely to restrict such transfers, except perhaps for political reasons. However, predicting the dynamics of relations between Russia and Kyrgyzstan at the political level is beyond the scope of this article.

In a broader context, the problems of the Russian economy, caused by disproportionate spending on the military operation and the sanctions blockade of the main raw materials sectors of the Russian industry, may lead to a decrease in migrant income and, as a result, a drop in remittance volume. However, the main areas where our migrants are employed in Russia—such as the service sector, construction work, and housing and communal services—are not expected to contract as rapidly as the commodity and financial sectors.

Currency imbalances in the domestic market

Since spring 2022, the country’s domestic foreign exchange market has been under stress due to an unprecedented influx of rubles, coupled with the simultaneous outflow of dollars. The government was even forced to impose restrictions on the export of cash currency from the country—first for organizations (in response to demands from the American side), and at the end of 2022, for individuals as well (to somehow balance the domestic foreign exchange market, which faced a shortage of cash dollars).

Currency imbalances in the cash market will persist. In addition to temporary trends caused by waves of young professionals leaving Russia (as in September-October 2022), the imbalance favouring the ruble has a more fundamental basis: it is politically beneficial for Russia. Rightfully considering itself a key trading partner of our country, Russia aims to consolidate this position as firmly as possible—now with political goals. 

It is strategically important for Russia to make the ruble, rather than the dollar, the main currency of private savings and, perhaps, even large household and business settlements. If, during 2023, Russia introduces a ban on private transfers of dollars abroad affecting our migrants, we can assume that this plan is entering an active phase.

Artur Muradov



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