The moves came after European and US officials imposed a raft of economic restrictions on Russia, which effectively barred Moscow from its financial reserves. Under the new system, all people in the United States and the European Union are prohibited from doing business with the Russian Central Bank. Sanctions also apply to Russia’s Ministry of Finance and its sovereign wealth fund, to prevent the Kremlin from using loopholes to continue accessing reserves. The Allies were implementing a hastily combined strategy designed to squeeze the Russian economy and make it extremely difficult for Russian leaders to tap into foreign reserves.
The restrictions amount to suffocating Russia from the international financial system, depriving the country of assets potentially necessary to stabilize its economy. According to sanctions experts, such a step has never been taken against a country with nuclear weapons or a country with a strong military like Russia.
Russia’s economic isolation intensified on several fronts on Monday.
The Treasury Department also announced, on Monday morning, the imposition of sanctions on entities linked to the Russian Sovereign Wealth Fund, including its management company and one of the affiliates of the Sovereign Wealth Fund. Sanctions were also imposed on the leader of that management company.
“The unprecedented action we are taking today will significantly limit Russia’s ability to use assets to fund its destabilizing activities and target money [Russian President Vladimir] Treasury Secretary Janet Yellen said in a statement that Putin and his inner circle counted on him enabling him to invade Ukraine. “Today, in coordination with partners and allies, we are pursuing key commitments to restrict Russia’s access to these valuable resources.”
Two senior administration officials, who spoke on condition of anonymity to describe the White House announcement, said Monday that the freeze is effective immediately and is meant to avoid signals that Russia aims to withdraw its international reserves from around the world.
The sanctions reflect the extraordinary outpouring of support for Ukraine in the West, but they also risk a further escalation of hostilities with Moscow. Putin responded to Western statements in recent days by putting the country’s nuclear forces on alert, although Ukrainian and Russian officials on Monday planned to hold their first diplomatic talks since the invasion began. The European Union also announced that it would close the airspace to Russian aircraft and support Ukraine’s purchase of arms.
Banking restrictions are arguably the most serious form of economic retaliation yet agreed to by Western powers in response to Russia’s attack on Ukraine. It aims to prevent Putin from using his huge financial reserves – totaling more than $600 billion – to stabilize the Russian economy in the face of sanctions and other economic measures imposed by the West.
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 is in sterling, 13 percent in Chinese renminbi, and 22 percent in monetary gold. The rest was held in other currencies.
The US government said it was simultaneously issuing an exemption allowing “certain energy-related transactions” with Russia’s central bank, as the West tried to keep Russia’s energy exports flowing to sustain the European economy and maintain gas prices.
In one fell swoop, the United States and Europe rendered Putin’s war chest unusable. “Doing this by the United States and Europe in a united way sends a very clear message that Russia will face huge costs as long as Putin’s war of aggression continues,” said Edward Fishman, a former official on Russia and Europe sanctions at the State Department. “This action represents a fundamental change in US and European strategy. Just 72 hours ago, such a move would have been out of the question.”
The United States has already announced sanctions targeting nearly 80 percent of the total assets of the Russian banking sector. Its moves include cutting off Russia’s largest bank from the US financial system, as well as cutting off many needed technological inputs to parts of Russian industry. US sanctions have also targeted members of Putin’s inner circle and other business leaders in Russia.
The effect was dramatic. Russian stock markets Suffered one of the worst dips in historyAccording to Bloomberg News. Credit rating agency Standard & Poor’s also downgraded Russia’s debt rating to junk status shortly after the US measures were issued. Reports have emerged of Russians crowding ATMs to make emergency cash withdrawals. The Bank of Russia announced, on Monday morning, that it will not open its stock exchange in the face of unprecedented pressure.
Putin’s bank reserves were intended to mitigate the impact of such a blow. “The steps being announced will undermine Russia’s ability to support the ruble,” said Richard Nephew, a senior researcher at Columbia University. The Russians will not be able to easily defend the currency, and its value will decline.
Some critics questioned how Putin would react to the attack on the Russian economy. Mark Weisbrot, a liberal economist and director of the Center for Economic and Policy Research, said that sanctions against reserves could lead to an “economic meltdown.”
“The Biden administration needs to de-escalate this conflict, and move toward a diplomatic solution before it’s too late,” Weisbrot said. Zelensky wants to negotiate without preconditions. Washington should do the same.”
But senior administration officials have defended their strategy as a necessary response to Putin’s aggression. They also said they are watching closely Possible support from Belarus for the war effort, which could result in separate economic restrictions being imposed on that country.
Adam Smith, a partner at Gibson Dunn and a former sanctions official in the Obama administration, said the attack on the Russian central bank reflected how quickly events were moving in Eastern Europe. Smith stressed that such moves are usually off the table because central banks play such a critical role in a country’s economy, noting that pursuing them has “severe and perhaps unknown side effects.” In this case, Smith said the sanctions would likely make it more difficult for Europe to buy oil and gas while also hurting the average Russian economically.
“Historically, it has been seen as almost over-the-top — the thing to do when sanctions and diplomacy seem to have been exhausted,” Smith said. “That the international community is willing to go this far, and bear the consequences of doing so… indicates the extent to which this crisis has come in just its first week.”
– Marie Ilyushina contributed to this article.
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