The Biden administration and its European allies vowed Saturday to block Moscow’s access to its sizable foreign currency reserves in the West, teeing up one of the most powerful financial penalties and threatening to send the Russian financial market into free fall.
The United States and the Europe Union also announced they were moving to sever some Russian banks from SWIFT, a global messaging network that enables banks to communicate their financial transactions in a secure manner. The steps come as Russian President Vladimir Putin intensifies his military aggression against Ukraine in an attempt to topple its government and take the capital, Kyiv.
“Putin embarked on a path aiming to destroy Ukraine. But what he is also doing in fact is destroying the future of his own country,” European Commission President Ursula von der Leyen said Saturday. In response, she said, “we will paralyze the assets of Russia’s central bank. This will freeze its transactions. It will make it 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 they reached an agreement on what appear to be unprecedented measures to “ensure that this war is a strategic failure for Putin.”
“As Russian forces unleash their assault on Kyiv and other Ukrainian cities, we are resolved 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 within the coming days.”
But the White House didn’t immediately release details on how the moves against the central bank would be implemented. Steps short of freezing Russia’s reserves held in all the major Western economies could have a lesser impact on its central bank, which is Russia’s equivalent of the Federal Reserve.
Russia’s central bank had over $640 billion in foreign exchange reserves as of Feb. 18, much of it held in the computers of Western central banks in cities such as New York, London and Frankfurt. The effort to freeze or quarantine that money will likely put tremendous pressure on Russia, one of the world’s largest economies and a nuclear power. It could lead to domestic turmoil, triggering a bank run, cratering the ruble and causing businesses to panic.
“We’re disarming ‘Fortress Russia’ by taking this action,” said a senior administration official, speaking on the condition of anonymity under rules set by the White House.
In its statement, the allies said, “We commit to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions.”
Those measures will come on top of sanctions that the United States and Europe began imposing this week in response to Russia’s 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 the 10 largest Russian financial institutions, holding nearly 80 percent of total bank assets.
“This has been the worst week for the Russian stock market on record,” the senior administration official said. The Russian ruble has had its worst week since March 2020, its currency hit a record low against the dollar this week, and Russian borrowing costs have almost doubled to 17 percent, the official said. “In short,” the official said, “Russia has become a global economic financial pariah.”
The targeting of Russia’s central bank would be the most significant penalty yet. The United States and other governments are still working out the exact measures, the official said, explaining that they could involve blocking “flows that the Russian central bank is allowed to undertake” as well as freezing its assets.
Already, the sanctions imposed have induced Moscow to dip into its foreign reserves. Russia’s central bank announced it had decided to “start interventions in the foreign exchange market” to stabilize its financial market and provide banks with “extra liquidity.” It has not reported how much of its foreign currency it has sold to do so.
Michael Bernstam, a research fellow at the Hoover Institution at Stanford University, said a full and immediate sanction of the central bank is the only financial punishment that could possibly get Moscow to stand down from its aggression.
Cracking down on the central bank could prompt 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 research scholar at Columbia University, said if done in a coordinated fashion, “you would impose dramatic sweeping costs on the Russian state. This would in one fell swoop say all the reserves of Russia are locked down and no longer usable,” adding that “it could have a devastating effect on the Russian economy.”
But the strategy is not without its risks. The United States has never taken this step against any country with nuclear weapons or an economy as large as Russia. And it is possible the Kremlin reacts by ratcheting up hostilities against Ukraine or by using it to reinforce Putin’s claim at home that the West is out to destroy Russia. Sanctioning the central bank, Nephew said, “will be seen as a massive escalation regardless.”
Mark Weisbrot, a liberal economist and a director at 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 that recent events have shown, it’s that threats to meet or deter military force with economic punishment are not working,” he said. “And if carried out, these threats have additional costs for all parties.”
Russians have an acute memory 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 decline in oil prices, the ruble also plummeted, prompting Russians to line up at banks to withdraw money and make huge purchases of appliances, cars and other items before prices surged.
As of June 30 last year, 32 percent of Russia’s foreign currency reserves were euros and 16 percent were U.S. dollars, according to its central bank. About 7 percent were British pounds, 13 percent Chinese renminbi and 22 percent monetary gold. The remainder was held in other currencies.
So China is not a likely safety net here for Russia, analysts said. The senior administration official also pointed to media reports this week that China had restricted financing for Russian commodity purchases, suggesting Beijing had limits to its willingness to support Moscow in the crisis.
SWIFT is short for the 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 as money is transferred through the banking system. Last year, SWIFT averaged 42 million messages a day.
President Biden was asked by reporters several days ago why the White House hadn’t decided to restrict Russia’s access to SWIFT. He said the idea was under consideration but that some European countries had not yet agreed to take that step.
Europe’s calculation appeared to have changed in the past few days as Russia’s attacks in Ukraine continued. While under siege in Kyiv, Ukrainian President Volodymyr Zelensky appealed to the West to cut Russia off from SWIFT, and in particular urged Germany and Hungary to do so, suggesting they were the final European holdouts.
In their joint statement, the United States and its allies said “we commit 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 statement did not specify which “selected Russian banks” would be removed, and the statement suggested that some Russian banks could be exempt from the action. 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 “limit the sale of citizenship” through “golden passports” that let “wealthy Russians connected to the Russian government become citizens of our countries and gain access to our financial systems.”
In addition, they said they were creating a task force that is meant to ensure that sanctions against oligarchs and others are implemented effectively.