How the West Unplugged Russia From the World’s Financial Systems

Two weeks ago, Russia’s companies could sell their goods around the globe and take in investments from overseas stock-index funds. Its citizens could buy MacBooks and Toyotas at home, and freely spend their rubles abroad.

Now they are in a financial bind. Soon after Russia invaded Ukraine, another war began to isolate its economy and pressure President

Vladimir Putin.

The first move was made by Western governments to sanction the country’s banking system. But over the course of the past week, the financial system took over and severed practically every artery of money between Russia and the rest of the world, in some cases going further than what was required by the sanctions.

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stopped processing foreign purchases for millions of Russian citizens. Apple Inc. and Google shut off their smartphone-enabled payments, stranding cashless travelers at Moscow metro stations. International firms stepped back from providing the credit and insurance that underpin trade shipments.

This unplugging of the world’s 11th-largest economy opens a new chapter in the history of economic conflict. In a world that relies on the financial system’s plumbing—clearing banks, settlement systems, messaging protocols and cross-border letters of credit—a few concerted moves can flatten a major economy.

Russia now faces a repeat of one of the most painful episodes in its post-Soviet history—the financial crisis of 1998, when its economy collapsed overnight. In the decades that followed, Russia earned its way back into the good graces of financiers in New York, London and Tokyo. It is all being undone at warp speed and will not be easily put back together.

The ruble has lost more than one-quarter of its value and is now virtually useless outside of Russia, with Western firms refusing to exchange it or process overseas transactions. Moscow’s stock exchange was closed for a fifth straight day on Friday. The Russian Central Bank more than doubled interest rates to attract foreign investment and halt the ruble’s free fall. Two firms that are crucial to clearing securities trades, Euroclear and DTCC, said they would stop processing certain Russian transactions.

With their interest payments stuck inside the country—following the sanctions, Mr. Putin also ordered intermediaries in Russia not to pay—some Russian companies and government entities could default on their bond payments to international creditors. That could make the country toxic for investing for years. Shares of Russian companies, even those without obvious ties to the Kremlin, were booted from stock-index funds, which will further isolate them from pools of Western capital.

Analysts expect Russia’s economy to contract as much as 20% this quarter, roughly the same hit the British economy took in the spring of 2020 during the pandemic lockdowns.

Inside Moscow’s Kievskaya metro station. After Apple and Google shut off their smartphone-enabled payments, travelers had to find other ways to pay.


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Aleksandr Iurev of Pocketfied is looking for ways to pay his employees in Russia.


Desiree Rios for The Wall Street Journal

Aleksandr Iurev left Moscow eight years ago as an aspiring entrepreneur. Russia’s escalating hostility in the region made it “no place for business people,” he said from his home in New Jersey. The 36-year-old runs a mobile-app startup and this week, he can’t make payroll for the six developers who work for him in Russia because they hold personal accounts at sanctioned banks.

“It is completely shut off,” he said. He’s looking into cryptocurrency to keep his staff from bolting.

His company, Pocketfied, has other problems: Members of his marketing team in Ukraine took the week off to help build street barricades in Dnipro, in the country’s east.

The one lifeline that still connects Russia’s economy to Western markets is its supplies of energy, which European countries rely on and have been loath to cut off, especially during the winter. U.S. lawmakers are pressuring the White House to expand sanctions to include energy payments, which would sap Russia of its largest source of income, at $240 billion last year.

Even if governments don’t act, the market is speaking: Russian oil producers have had trouble finding buyers for shipments since the invasion began.

“The golden age that we had from 1945 to last week is now over,” said

Gary Greenberg,

head of global emerging markets at

Federated Hermes,

which manages $669 billion in assets. “As investors, we need to look at things differently now.”

As it dug out from the 1998 crash, Russia plugged itself into the global economy. It joined Brazil, China and India—dubbed the BRIC economies by Western investors—as the next frontier of finance.

American, British and Swiss banks courted the flood of money its oil industry produced. Russia’s biggest banks listed shares in London. One of them moved into an office across the street from the Bank of England. The Moscow exchange itself went public in 2013 with backing from U.S. and European investors.

The first signs of decoupling came in 2014, when Mr. Putin’s territorial ambitions began to stir. Western governments put limited sanctions on Russia after it annexed Crimea from Ukraine.

Russia began trying to sanction-proof its economy. It built its own domestic payments network—called Mir, Russian for “peace”—to function alongside and, if needed, replace those run by Western firms. It shifted its overseas holdings away from the U.S. and its European allies and toward China, which has been relatively more accommodating of Mr. Putin’s efforts to expand his influence and territory. It doubled its gold reserves.

VTB, one of Russia’s largest banks, drew U.S. sanctions.


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People walked along Arbat Street in Moscow on Friday.


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Those efforts to wall itself off may prove insufficient. At least 40% of Russia’s $630 billion in foreign reserves are in countries that have joined in the latest sanctions. The rest, mostly in China, it is free to spend—but only in China. Moving those reserves out of the country would require first converting them into a Western currency like dollars or euros, which no global bank will do.

Russia, like many energy-rich countries, exports oil and gas and imports much else—automotive parts, medicines, broadcast equipment, wallpaper, fresh vegetables.

The financial journey that enables their geographical one depends on a complex web of loans, insurance policies and payments. Western banks are stepping back from trade financing, executives said, wary of the risk that their counterparty uses a sanctioned Russian bank, or has ties to a sanctioned oligarch. Maersk, the Danish shipping giant, suspended deliveries to Russia, citing tougher terms now being demanded by financiers.

Czarnikow Group, a London-based trade-financing firm, was preparing this week to send a shipload of a specialty plastic used in soda bottles and clamshell packaging, with scheduled stops in Russia and Ukraine. On Monday, the firm got notice from its insurance provider that its policy would no longer cover the ship.

“It was obvious we weren’t going to be able to put a vessel in,” said Robin Cave, Czarnikow’s chief executive, who began looking for alternative ports and is talking to his client about where to send the cargo.

A powerful coalition of democracies announced it would cut off some Russian banks from the global payment system Swift. Here’s how Swift works, and how the move could ramp up pressure on Russian President Putin. Photo: Anton Vaganov/Reuters

The steps taken by financial firms could close off Russia from global markets for years. Some of the largest index compilers, which maintain lists of stocks that are tracked by trillions of dollars of investments, said they would exclude Russian stocks.

The move was in part a practical decision. With the Moscow stock exchange still closed, it is impossible to assign prices to those shares. But it will ultimately damp the flow of foreign capital into Russia’s economy, said Anusha Chari, a professor at the University of North Carolina at Chapel Hill.

An increasing share of investment dollars simply tracks such collections of securities. When Russian companies fall out of the index, that money disappears, which makes it harder for those companies to raise cash in the future.

“It puts the brakes on real investment,” Ms. Chari said.


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Index compilers have dropped countries from key indexes before, during periods of economic instability in places like Pakistan and Argentina. But in those cases, the decisions came after months of deliberations, said Dimitris Melas, a senior executive at

MSCI Inc.,

which took the step Thursday.

“The speed with which events are unfolding, and the severity, made us act a lot faster,” he said.

Whether investors will be able to sell the Russian assets they hold is less clear. Norway’s largest pension fund, KLP Group, planned to unload its Russian stocks this week. With the Moscow exchange still closed, it has resorted to selling shares of companies with a dual listing in London, said Kiran Aziz, an executive at the $70 billion fund.

“The market is essentially dead” for Russian assets, said Edward Al-Hussainy, an analyst at Columbia Threadneedle Investments. For the first time he can remember, investors are telling the firm to sell—no matter the price.

A closed currency exchange office in Moscow on Friday.


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Write to Liz Hoffman at [email protected]

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