European banking authorities are warning of spate bad debts for banks exposed to Russia and the potential collapse of the European subsidiaries of Sberbank.

There’s been lengthening queue of foreign companies freezing their dealings with Russia while others,like Shell,BP,the Norwegian sovereign wealth fund and our Future Fund have announced plans to exit their Russian-exposed investments. BP has said it could take a $US25 billion ($35 billion) hitto exit its shareholding in Rosneft.

The unexpectedly united and strong response to Russia’s invasion of Ukraine by the West is already doing real damage to Russia’s economy and financial system,much of which will be lasting.

The US,European Union,UK and others have deployed the two most effective weapon s in their armoury – the restrictions in access to SWIFT and the freezing of Russia’s foreign exchange reserves – but haven’t yet taken aim at the heart of Russia’s economy.

Oil and gas-related transactions were excluded from the sanctions because of the EU’s dependence on Russia for its energy – nearly 40 per cent of its gas and 25 per cent of its oil.

Russia could,of course,exploit that dependence to retaliate against the sanctions by shutting down its supplies of energy to Europe.

With energy providing about 40 per cent of the Russian Government’s revenues – and now the only reliable large-scale source of foreign exchange -- however,there is a “mutually assured destruction” element to a decision by the EU to stop buying Russian gas or by Russia to stop supplying it.

If there are to be unintended consequences for the West from the unprecedented attack on Russia’s financial system they might take longer to surface.

If the US and its allies were able to arrange alternate energy supplies for Europe,which the US has been trying to do,the threat of complete economic collapse would loom larger for Russia.

It isn’t yet clear whether there will be material adverse flow-on effects from the financial chaos in Russia to the rest of the world.

Russia’s efforts to reduce the financial vulnerability exposed by the sanctions imposed on it in response to its 2014 invasion of Crimea means that offshore exposures to its sovereign debt are relatively limited.

Similarly,while foreign banks – particularly European banks – do have exposures to Russian companies and are now facing defaults on principal and interest payments because of the sanctions and Russia’s response to them they don’t seem large enough,or concentrated enough to threaten the global financial system or any of the systemically important banks within it.

There could,perhaps,be some isolated liquidity events and some banks that experience material losses – Italy’s UniCredit,France’s Societe Generale and Austria’s Raiffeisen have been singled out by investors,with their shares savaged – but the issues so far seem to be manageable.

While there is turmoil in Russia’s financial markets that hasn’t really had any marked impact elsewhere,other than in the oil market,where the price has now topped $US100 a barrel.

Sharemarkets have been trading sideways and,while there have been some decline in yields on US Treasury securities at the short end of the yield curve,usually a sign of capital flowing towards a perceived “safe haven,” no signs of any real stress.

That could,of course,change quickly if it appears Russia is going to retaliate against the sanctions either by cutting off its exports of critical commodities -- whether energy,agricultural commodities or strategic metals – or with a widening of the conflict.

If there are to be unintended consequences for the West from the unprecedented attack on Russia’s financial system they might take longer to surface.

The demonstrations of dollar dominance and the central role of US banks in the global system,the critical nature of access to SWIFT and the exposed vulnerability of their foreign exchange reserves won’t be forgotten by Russia nor overlooked by others,like China.

The Business Briefing newsletter delivers major stories,exclusive coverage and expert opinion.Sign up to get it every weekday morning.