The Russian central bank targeted by the White House and its allies

“Putin has embarked on a path to destroy Ukraine. But what he is also doing, in effect, is destroying the future of his own country,” European Commission President Ursula von der Leyen said on Saturday. In response, she said, “ we will paralyze the assets of the central bank of Russia. This will freeze its transactions. It will be impossible for the central bank to liquidate assets.

In a joint statement by the European Union, the United States, Britain and Canada, the countries announced that they had reached agreement on what appear to be unprecedented steps to “ensure may this war be a strategic failure for Putin”.

“As Russian forces launch their assault on Kyiv and other Ukrainian cities, we are determined to continue to impose 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.”

But the White House did not immediately release details on how the measures against the central bank would be implemented. Steps away from freezing Russian reserves held in all major Western economies, the impact on its central bank, which is Russia’s equivalent of the Federal Reserve, would be less.

Russia’s central bank had more than $640 billion in foreign exchange reserves as of Feb. 18, much of it held in the computers of Western central banks in cities like New York, London and Frankfurt. The effort to freeze or quarantine that money will likely put enormous pressure on Russia, one of the world’s largest economies. and a nuclear power. This could lead to domestic unrest, trigger a bank run, crater the ruble and cause corporate panic.

“We are disarming ‘Fortress Russia’ by taking this step,” said a senior administration official, speaking on condition of anonymity in accordance with rules established by the White House.

In their statement, the allies said: “We pledge to impose restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in such a way as to undermine the impact of our sanctions.”

These measures will come on top of the sanctions that the United States and Europe began imposing this week in response to the Russian invasion. On Tuesday, Biden announced sanctions against two Russian state-owned banks. On Thursday, the West upped the ante, penalizing more Russian banks and targeting Russia’s 10 largest financial institutions, holding nearly 80% of total banking assets.

“It was the worst week on record for the Russian stock market,” the senior administration official said. The Russian ruble had its worst week since March 2020, its currency hit a record high against the dollar this week and Russian borrowing costs nearly doubled to 17%, the official said. “In short,” the official said, “Russia has become a global economic and financial pariah.”

Targeting the Russian central bank would be the biggest sanction yet. The United States and other governments are still working on the exact measures, the official said, explaining that they could involve blocking “flows that the Russian central bank is authorized to undertake” as well as freezing its assets.

Already, the sanctions imposed have pushed Moscow to dip into its foreign exchange reserves. Russia’s central bank announced that it had decided to “start foreign exchange market interventions” to stabilize its financial market and provide banks with “additional liquidity”. He did not say how much foreign currency he 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 possibly make Moscow back off its aggression.

The central bank crackdown could cause Russian citizens and businesses to “rush to get dollars”, Bernstam said. “There will be a huge panic, a run on the dollar. The exchange rate will collapse.

Richard Nephew, a senior fellow at Columbia University, said that if this were done in a coordinated way, “you would impose considerable costs on the Russian state. This would suddenly mean that all of Russia’s reserves are blocked and no longer usable,” adding that “it could have a devastating effect on the Russian economy.”

But the strategy is not without risks. The United States has never taken this action against a country with nuclear weapons or such a large economy as Russia. And it’s possible the Kremlin will respond by stepping up hostilities against Ukraine or using it to bolster Putin’s claim at home that the West is ready to destroy Russia. Sanctioning the central bank, Nephew said, “will be seen as a massive escalation anyway.”

Mark Weisbrot, liberal economist and director of the Center for Economic and Policy Research, warned that targeting Russia’s central bank could prove to be a mistake. “If there’s one thing recent events have shown, it’s that threats to meet or deter military force with economic sanctions don’t work,” he said. “And if acted upon, these threats come at additional costs for all parties.”

Russians have vivid memories of the country’s financial crisis in 1998. Many people saw their savings go up in smoke as Moscow devalued the ruble and defaulted on its debt. In 2014, when Putin’s first invasion of Ukraine coincided with a drop in oil prices, the ruble also fell, prompting Russians to line up at banks to withdraw cash and make huge purchases of appliances, cars and other items before prices spike.

As of June 30 last year, 32% of Russia’s foreign exchange reserves were in euros and 16% in US dollars, according to its central bank. About 7% was sterling, 13% Chinese renminbi and 22% monetary gold. The rest was held in other currencies.

China is therefore not a likely backstop here for Russia, analysts said. The senior administration official also pointed to media reports this week that China had restricted funding for Russian commodity purchases, suggesting that Beijing had limits on its willingness to support Moscow in the crisis.

SWIFT is the abbreviation of Society for Worldwide Interbank Financial Telecommunication, a global messaging network that connects banks around the world. The consortium, based in Belgium, links banks in 200 countries and is used when money is transferred through the banking system. Last year, SWIFT received an average of 42 million messages per day.

A few days ago, journalists asked President Biden why the White House had not decided to restrict Russia’s access to SWIFT. He said the idea was being considered but some European countries had not yet agreed to take this step.

Europe’s reckoning appears to have changed over the past few days as Russia’s attacks in Ukraine continued. While under siege in Kiev, Ukrainian President Volodymyr Zelensky called on the West to cut Russia off from SWIFT, and in particular urged Germany and Hungary to do so, suggesting they were the last European holdouts .

In their joint statement, the United States and its allies said “we are committed to ensuring that certain Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and will harm their ability to operate globally.

The statement did not specify which “selected Russian banks” would be removed, and the statement suggested that some Russian banks may be exempt from the action. It included three other commitments. The countries said they would take action against individuals and entities responsible for the war in Ukraine “and the harmful activities of the Russian government”.

They also said they would “limit the sale of citizenship” through “golden passports” that would allow “wealthy Russians linked to the Russian government to become citizens of our countries and gain access to our financial systems.”

Additionally, they said they were in the process of creating a task force to ensure that the sanctions against oligarchs and others are implemented effectively.