Businesses fear ripple effects from "cosmetic" Russian sanctions

By Lionel Laurent and Megan Davies

PARIS/MOSCOW, March 21 (Reuters) - U.S. and Europeansanctions against Russia are already having a ripple effectbeyond their immediate targets, with Visa and MasterCard halting payment transaction services for clients of abank not even on the blacklist.

SMP bank's co-owners are two of the 20 Russians targeted byU.S. President Barack Obama as he tries to punish RussianPresident Vladimir Putin for annexing Crimea.

The lender described the move by Visa and MasterCard asunlawful. However, financial services firms arewary of doing business with any person or group that can belinked back to Obama's blacklist.

Banks have paid dearly in the past for violating U.S.sanctions on countries such as Iran, and the threat of broadermeasures against the Russian economy should Putin threatensouthern and eastern Ukraine reinforces their caution.

The U.S. sanctions forced Russian billionaire GennadyTimchenko to sell his nearly 50 percent stake in Gunvor, theworld's fourth-largest oil trader, this week but their directeffect has generally been relatively minor so far.

What bankers and business people fear is an escalation ofmeasures that would choke off international payments and trade,halt investments and stymie deals. Germany's main trade bodywarned on Friday that full-blown economic sanctions would be a"real catastrophe".

In a worst-case scenario, Washington would stop banks doingbusiness with Russian counterparts and corporates, similar tothe sort of sanctions that were imposed on Iran.

Germany's "wise men" council of economic advisers said thisweek that the Ukraine crisis was the biggest threat to growthglobally, and especially in Germany, because of Russia'simportance of an energy exporter.

"What has been announced so far is really nothing. It'spurely cosmetic," said a French banker based in Moscow.

"The biggest risk is tougher sanctions and really thepotential impossibility of transfers in U.S. dollars. That willhit trade finance, which depends on correspondent accounts indollars," said the banker, who declined to be named because ofofficial sensitivity around the restrictions.

"Being able to make payments in dollars is crucial for theRussian economy, which is dependent on energy exports. It wouldreally hurt us domestically."

********************************************************

Bank exposure to Russia http://link.reuters.com/xej67v

Russia's main trade partners http://link.reuters.com/jup77v

Russia's EU trade ties http://link.reuters.com/rup77v

********************************************************

State-owned Russian banks and companies are expected torepatriate funds from overseas after Putin told them this weekto bring their assets home. But foreign bankers in Russia saidthings would have to deteriorate further before they wouldreconsider their investments there.

"It would have to be a lot worse than this. We are waitingfor the response from the Russian side. It's very difficult topredict," said another Western banker in Moscow. "I haven'theard of any Western companies pulling out of Russia. If acompany is substantially invested here it will be difficult forthem to consider getting out."

WAIT AND SEE

Even before the Crimean crisis blew up last month,international banks such as HSBC, Credit Suisse and Barclays had pulled out of dozens ofmarkets because the risk of falling foul of financial crimerules and sanctions outweighed the returns.

The cost to banks of cleaning up an array of misdeeds thathave come to light since the global financial crisis, includingsanctions busting, has soared to over $100 billion.

With that figure expected to climb, Western banks have sofar steered clear of attempts by Iran to get them involved infinancing humanitarian transactions, despite a diplomatic thaw.

With the U.S. and European sanctions so far focused onwealthy individuals close to Putin, private banks which cater topowerful Russians are under the spotlight.

Switzerland, the centre of international private banking anda bolt-hole for wealthy Russians, has yet to impose anysanctions but its banks, such as UBS and CreditSuisse, still have to be aware of sanctions when they deal withclients.

Beyond banking, big companies such as AstraZeneca have said they are monitoring the situation in Russia, whiledoubts are growing over whether smaller firms with lessfinancial flexibility should push ahead with investments inRussia such as building factories.

"They are in a wait-and-see mode. But again the timing couldbe waiting three to six months rather than scrapping the wholething," said a second French banker working in Moscow.

Vasili Brokvo, the head of communications for Russia's statedefence conglomerate Rostec, made the corporate case for peace.

"We hope and our international partners also hope thatpolitical differences over certain issues won't annul or destroyeverything we've built and all previous agreements with foreignpartners will be successfully implemented," he said on abusiness trip to Chile this week. (Additional reporting by Katharina Bart in Zurich, BenHirschler in London and Alexandra Ulmer in Santiago. Writing byCarmel Crimmins; editing by David Stamp)