This is an audio transcript of the FT News Briefing podcast episode: Russian banks hobbled by sanctions
Marc Filippino
Good morning from the Financial Times. Today is Monday, March 14th, and this is your FT News Briefing.
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US officials say Moscow has asked Beijing to send military support for its invasion of Ukraine. We’ll also look at a key weapon Ukraine’s been using in its fight against Russian forces.
Ayla Jean Yackley
Ukrainians have been flaunting the success that they’ve had with these drones on social media. They’ve written a pop song dedicated to them. Puppies and a lemur born in the Kyiv Zoo were named after the drones.
Marc Filippino
And Moscow is threatening to pay its dollar-denominated debt in roubles. Plus, we’ll look at how Russia’s banks are faring in the wake of Western sanctions. I’m Marc Filippino and here’s the news you need to start your day.
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US officials yesterday said that Russia has asked China for military equipment to support its invasion of Ukraine. This news comes as US national security adviser Jake Sullivan is set to meet China’s top foreign policy official today in Rome. People familiar with the situation said Sullivan plans to warn China that any efforts to help Russia with the invasion or avoid Western sanctions would have consequences.
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Moscow’s invasion of Ukraine has been brutal, but FT reporters have also found this initial phase has been full of blunders, poor planning, weak intelligence and high casualties. Russia has lost hundreds of tanks and armoured vehicles, and one reason Ukrainian forces have been able to wreak so much havoc is that they’re using a Turkish-made drone called the Bayraktar TB2.
Ayla Jean Yackley
It has a wingspan of about 12 metres, and it’s able to carry up to four laser-guided munitions.
Marc Filippino
Ayla Jean Yackley says these drones are relatively low cost, and they’ve become so famous in Ukraine. There’s even a pop song about them.
[Audio clip, fading Bayraktar. Bayraktar]
Ayla Jean Yackley
They’re helping the Ukrainian military create a force multiplier because the Russian army is so much larger and has much more advanced weaponry than the Ukrainians, that using the drones to say attack a Russian supply convoy or strike one of its missile launchers has allowed Ukrainians to, one way it’s been described to me, is serve as a significant irritant for the Russians. It has helped slow the Russians’ ability to take control of more territory because they are having to contend with drones flying above.
Marc Filippino
Ukraine’s use of the drones puts Turkey in a tricky spot, since Ankara not only has good relations with Ukraine, but Russia as well.
Ayla Jean Yackley
Russia has expressed anger over Turkey’s supply of these drones to Ukraine, and it’s one reason why Turkey has sought to downplay it. Turkey itself has sought to depict these drones as just another commercial transaction. So Turkey has tried to balance its relationship both with Ukraine and with its NATO partners, while not stirring the ire of Russia.
Marc Filippino
But these unmanned aerial vehicles are not expected to change the outcome of the war long term. Military analysts say once Russia takes control of the skies above Ukraine, they’ll likely target the drones.
Ayla Jean Yackley
They are large, slow moving aircraft, and so they do make for easy targets. The issue here is how many drones do the Ukrainians have? Their initial agreement with Turkey was for fewer than two dozen. But it’s something that the Ukrainians have said that they’re interested in acquiring more drones. There is a possibility that Turkey could ship more,
Marc Filippino
Ayla Jean Yackley writes for the FT.
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In a few days, Russia is due to make a key interest payment on its foreign debt. But yesterday, Moscow threatened to pay some of its international bondholders in roubles. Russia’s finance minister said this is absolutely fair until Western sanctions that he claimed have frozen $300 billion of the country’s reserves have been lifted. Here’s the FT’s markets news editor Adam Samson and what could happen if Moscow follows through with this and whether it would be considered a default.
Adam Samson
Basically, it would be up to the ratings agencies and various other bodies to sort of decide what does that actually count as a debt default. There’s various technical factors that go into that. Even after the bond, the coupon payments are due, which is this coming Wednesday. They still have a 30-day grace period after that to make the payments. So theoretically, we can be waiting quite a long time to sort of hear from the ratings agencies on whether this counts as a default. The bonds are already trading at really, really low prices, which means investors are kind of expecting them to default anyway in the first place. But for typical countries, the problem with doing something like this is, you know, it makes it very hard to get investors to ever trust you again.
Marc Filippino
So theoretically, Adam, what would a default look like?
Adam Samson
Russia’s an interesting economy in that going into this, they were in a very strong fiscal position. So I mean, I think there’s an expectation that it won’t necessarily immediately all go to hell for them. But the problem they have is they can’t access hundreds of billions of dollars in their foreign exchange reserves. The fact that their currency has collapsed by 50 per cent is a huge problem. So, like the default itself isn’t necessarily a huge problem. They don’t sort of rely on foreign inflows, but it’s the thing that’s going to buy, you know, over time, there’s not gonna be anybody to help them. Presumably this time around, certainly in the West anyway. I mean, whether other countries are willing to do dealings with them, China and that sort of thing, I think is an open question. But there’s going to be presumably no IMF, no Western help or anything.
Marc Filippino
Adam Samson is the FT’s Markets news editor.
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Sanctions have also slammed into Russia’s banking system. The FT’s European banking correspondent Owen Walker has been looking at the country’s two most important banks. Its big retail bank, Sberbank, that has more than a third of all banking assets. The other is the Russian state investment bank, VTB.
Owen Walker
The then-CEO of Deutsche Bank told Vladimir Putin in the early 2000s that, you know, you can’t be taken as a serious nation without a serious investment bank like we have at Deutsche Bank. So he went there and invested heavily in VTB and tried to make it russia’s version of Deutsche Bank. And VTB had large, prominent offices in the world’s financial institutions. Its office in London, for example, directly overlooked the Bank of England, and they prominently flew a huge Russian flag in a kind of real show of defiance of Russian financial prowess.
Marc Filippino
So what’s been happening to VTB and Sberbank? You’ve been reporting that they had these big international ambitions and you know, they’ve been opening branches outside of Russia.
Owen Walker
Well, firstly, they are closing offices all over Europe. Those accounts will be closed or wound down. Then if you go into domestically for these banks, they’re going to have to prepare for their customers to be withdrawing their funds at a rate of knots. They’re going to need that liquidity to really help them there. Their share prices have taken an absolute battering. Western investors across the board are pulling out of Russia. And even when you’re seeing indices, companies taking Russian companies off their benchmarks, that means the big passive players who have invested in these banks is kind of a barometer for the Russian economy. They’re gonna be forced to sell as well. So short term, there’s gonna be a lot of pain. Longer term, it’s gonna be a real struggle, too.
Marc Filippino
Yeah, I do wanna ask you about that. How do they move forward?
Owen Walker
Well, first is plain to say these banks will survive, they will not collapse. That is, the state will do whatever it is in its position to keep them going, either by capitalising them to provide them with liquidity. If there is a run on the banks and depositors are rushing to withdraw their savings and ultimately on their share price, just to kind of prop up the share price. Russia’s central bank, the Ministry of Finance, they will do whatever it takes to — they’re not gonna fold because if they did, there would be catastrophe across Russia. But longer term, they do face a problem being blocked from the dollar market because, you know, they fund a lot of big companies even domestically. And then VTB, for example, is being kicked off the Swift global payments messaging service. But for banks, that’s going to cause problems. Russia does have its own version of Swift, but it’s really only for domestic payments at this point.
Marc Filippino
So what does this mean for Putin? Do these sanctions and the pressure that they’re putting on the banks that we’re talking about here, is it enough to put pressure on Putin and Russia’s higher ups?
Owen Walker
Well, I mean, like anything, it’s a question of what Putin is prepared to accept in terms of the pain for his people. This will undoubtedly cause a lot of pain for Russian citizens. Of course payments for the banks themselves and the executives. The people who work in those banks are gonna make it very hard for Russian companies. But ultimately, I mean, I can’t speak to Putin’s motives, but the games he’s playing, it seems much more on a personal level, and maybe protecting interests of his oligarchs is more important to him than the impacts on the Russian people. So me personally, I don’t think it will have a huge impact on Putin’s approach to the invasion of Ukraine.
Marc Filippino
Owen Walker is the FT’s European banking correspondent. Thanks, Owen.
Owen Walker
Thanks very much, Marc.
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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.
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Russian banks hobbled by sanctions
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