Putin has set out on a path aimed at destroying Ukraine. On Saturday, European Commission President Ursula von der Leyen said what he was actually doing was destroying the future of his country. In response, she said, “We will paralyze the assets of the Central Bank of Russia. This will freeze its transactions. It will make it impossible for the Central Bank to liquidate the assets.”
In a joint statement issued by the European Union, the United States, Britain and Canada, the countries announced that they had reached an agreement on what appeared to be unprecedented measures “to ensure that this war is a strategic failure for Putin.”
“As Russian forces launch their attack on Kiev and other Ukrainian cities, we are determined to continue imposing costs on Russia that will further isolate Russia from the international financial system and our economies,” the statement said. “We will implement these measures in the coming days,” he added.
But the White House did not immediately release details of how the moves against the central bank would be carried out. Steps short of freezing Russia’s reserves held in all major Western economies may have less impact on its central bank, which is the equivalent of Russia’s Federal Reserve.
The Russian Central Bank had more than $640 billion in foreign exchange reserves as of February 18, most of which is in the computers of Western central banks in cities like New York, London and Frankfurt. Efforts to freeze or isolate those funds are likely to put enormous pressure on Russia, one of the world’s largest economies. and nuclear power. It can lead to domestic unrest, triggering a wave of banks, causing a collapse in the ruble and causing corporate panic.
“We are disarming ‘Fortress Russia’ by taking this action,” said a senior US administration official, who spoke on condition of anonymity under rules set by the White House.
“We are committed to imposing restrictive measures that prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions,” the allies said in their statement.
These measures come in addition to the sanctions that the United States and Europe began imposing this week in response to the Russian invasion. Biden announced, on Tuesday, the imposition of sanctions on two Russian state-owned banks. On Thursday, the West upped the ante, punishing more Russian banks and targeting Russia’s 10 largest financial institutions, which hold nearly 80 percent of the banks’ total assets.
“This was the worst week ever for the Russian stock market,” the senior administration official said. The Russian ruble had its worst week since March 2020, the official said, as its currency hit a record low against the dollar this week, and Russian borrowing costs nearly doubled to 17%. In short, Russia has become a pariah from a global economic financial point of view,” the official said.
Targeting the Russian Central Bank will be the most significant punishment yet. The official said the United States and other governments were still working on the precise measures, explaining that they could include blocking “the flows that the Russian Central Bank is allowed to make” as well as freezing its assets.
Indeed, the imposed sanctions have prompted Moscow to plunge into its foreign reserves. The Central Bank of Russia announced that it had decided to “start intervention in the foreign exchange market” to stabilize its financial market and provide banks with “additional liquidity”. She did not say how much of her foreign currency she sold to do so.
Michael Bernstam, a research fellow at Stanford University’s Hoover Institution, said a full and immediate central bank sanction is the only financial sanction that could push Moscow to back off its aggression.
Bernstam said cracking down on the central bank could prompt Russian citizens and businesses to “rush the dollars.” “There will be great panic, a rush for the dollar. The exchange rate will collapse.”
If done in a coordinated manner, Richard Nephew, a senior researcher at Columbia University, said, “You would impose huge and dramatic costs on the Russian state. This would say in one fell swoop that all of Russia’s reserves are closed and no longer usable,” adding that “could be It would have a devastating effect on the Russian economy.”
But the strategy is not without risks. The United States has never taken this step against any country with nuclear weapons or a large economy like Russia. The Kremlin will likely respond by escalating hostilities against Ukraine or using it to bolster Putin’s claim at home that the West seeks to destroy Russia. Neveu said imposing sanctions on the central bank “would be seen as a massive escalation regardless.”
Mark Weisbrot, a liberal economist and director of the Center for Economic and Policy Research, warned that targeting the Russian Central Bank could be a mistake. “If there is one thing that recent events have shown, it is that threats to counter or deter military force with economic sanctions do not work,” he said. “And if these threats are implemented, they have additional costs for all parties.”
Russians have a sharp memory of the country’s financial crisis in 1998. Many people saw their savings build up as Moscow devalued the ruble and defaulted on its debts. In 2014, when Putin’s first invasion of Ukraine coincided with a drop in oil prices, the ruble fell as well, prompting Russians to line up at banks to withdraw money and make massive purchases of appliances, cars, and other items before prices rose.
As of June 30 last year, 32 percent of Russia’s foreign exchange reserves were in euros and 16 percent in US dollars, according to central bank. About 7 percent British pounds, 13 percent Chinese renminbi and 22 percent cash gold. The rest was held in other currencies.
So, analysts said, China is not a potential safety net here for Russia. The senior administration official also pointed to media reports this week of China restricting funding for purchases of Russian goods, suggesting that Beijing has limits on its willingness to support Moscow in the crisis.
SWIFT is an acronym for the Society for Global Interbank Financial Telecommunication, a global messaging network that connects banks around the world. The consortium, based in Belgium, connects banks in 200 countries and is used as money to be transferred through the banking system. Last year, SWIFT averaged 42 million messages per day.
President Biden was asked by reporters several days ago why the White House had not decided to restrict Russia’s access to the Swift system. He said that the idea is under study, but some European countries have not yet agreed to take this step.
Europe’s calculus appears to have changed in the past few days as Russian attacks in Ukraine continue. While under siege in Kiev, Ukrainian President Volodymyr Zelensky appealed to the West to cut Russia off from the Swift regime, urging in particular Germany and Hungary to do so, suggesting that they were the last European strongholds.
“We are committed to ensuring that selected Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally,” the United States and its allies said in their joint statement.
The statement did not specify which “selected Russian banks” would be removed, and suggested that some Russian banks be exempted from the measure. It included three other commitments. The countries said they would take action against people and entities responsible for the war in Ukraine and “the harmful activities of the Russian government.”
They also said they would “reduce the sale of citizenship” through “golden passports” that allow “wealthy Russians connected to the Russian government to become citizens of our countries and gain access to our financial systems.”
In addition, they said, they were forming a task force aimed at ensuring that sanctions against the oligarchs and others were effectively implemented.
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