These could include cutting off Russia’s access to key technologies such as semiconductors and even the payments service SWIFT, which powers most of the world’s international money transfers.
All of this could have potentially have devastating consequences on Russia’s economy.
Chips are the lifeblood of the modern world. Used in everything from mobile phones and computers to cars and missile systems, semiconductors are the brains that power today’s electronics.
Their importance can’t be understated. Without access to certain chips, Russian carmakers and defense companies would be crippled.
EU President Ursula von der Leyen said Thursday that the bloc plans to present a package of “massive and targeted sanctions” to European leaders for approval.
“We will target strategic sectors of the Russian economy by blocking their access to technologies and markets that are key for Russia,” she said, adding that the EU will look to limit Russia’s “capacity to modernize.”
Meanwhile, U.S. President Joe Biden promised more measures to hit Russia’s economy after the invasion started.
One possible economic sanction could be a Russia-focused Foreign Direct Product Rule (FDPR), according to U.S. think tank The Atlantic Council. This is the same rule that the U.S. used to stifle Chinese tech giant Huawei in 2019 and it would limit Russia’s ability to source or use technology originating in the U.S.
“The U.S. has a full-spectrum of options when it comes to technology sanctions,” Abishur Prakash, co-founder of the Center for Innovating the Future, an advisory firm, told CNBC via email Thursday.
“For instance, the U.S. might push its technology companies who have Russian funding or Russian board members to change their structure. Or, the U.S. might propose delisting Russian firms from U.S. stock markets. Of course, there are more radical steps the U.S could take, like banning the export of certain software (i.e. Android) to Russia, but the commercial blowback on U.S. companies might deter Washington.”
The foreign ministry of Russia, which is a major supplier of oil, gas and materials like titanium, said Thursday it will respond to U.S. sanctions in a tit-for-tat manner, according to news agency RIA.
Prakash said there’s a “high” likelihood that the West will try and block Russia’s access to chips. “Since the first round of sanctions targeted Russia’s financial sectors, the next round are likely to target Russia’s military and economy — putting semiconductors in the crosshairs,” he said.
U.S. chip heavyweights include Nvidia, Intel, AMD and GlobalFoundries, while European chipmakers include the likes of Infineon and STMicro. There’s also TSMC and Samsung in Taiwan and South Korea respectively. If Russia was unable to use products made by these companies, it may be forced to turn to Chinese chipmakers like SMIC, whose semiconductors lag behind the most advanced chips in the world.
Russian carmaker Avtovaz is already looking for alternative sources of chips, the firm’s CEO said Tuesday.
But Russia can also hurt semiconductors companies in the West who rely on materials from Russia to make their products.
“The semiconductor materials and components that Russia exports to the West might be restricted, putting Western technology firms in a challenging position,” Prakash said. “This will force companies to rapidly reorient their supply chains, causing the world to become vertical, as the nations split apart because of technology orientation.”
When it comes to international payments, Czech President Milos Zeman said Thursday that Russia should be cut off from the international payments network SWIFT, adding that Russia’s attack on Ukraine was a “crime against peace.” SWIFT is a messaging network that financial institutions use to securely transmit information and instructions.
However, the EU is unlikely at this stage to take steps to cut Russia off from SWIFT, Reuters reported Thursday, citing sources familiar with the matter.
Chris Weafer, CEO of Moscow-based Macro-Advisory, said the move to cut Russia off from the SWIFT system would have a “very severe and long-lasting” effect on the domestic economy, but would also have negative consequences for Europe. He suggested the Kremlin may be hoping that this will serve as a deterrent to Western powers.
“Remember all of Russia’s material exports and energy exports – most of which goes to Europe but quite a lot goes to the U.S. and other countries as well – they have to be paid for and they’re paid for using the SWIFT system,” Weafer told CNBC on Thursday.
“So Russia has said that it would not cut off energy supplies for political reasons, but if those supplies are not paid for, then you may see a disruption of energy going into those markets, so it’s a very extreme action that would of course have severe consequences for Russia but also would have consequences for Europe and for the global economy, if those exports were to be cut.”
For this reason, Weafer said SWIFT could be held back as a “last chance saloon” sanction, if Russia’s invasion and intentions continue to become more sinister.
– Additional reporting by CNBC’s Elliot Smith.