By Saleha Mohsin, Annmarie Hordern and Alberto Nardelli
Western nations have agreed to trigger new sanctions to further isolate Russia’s economy and financial system after initial sanctions failed to persuade President Vladimir Putin to withdraw from Ukraine.
The decision by Western countries to exclude some Russian banks from the SWIFT messaging system, used for billions of dollars in transactions between banks around the world, was announced in a joint statement on Saturday.
This decision targets Russian banks which have already been sanctioned by the international community, but can be extended to other Russian banks if necessary, according to a German government spokesperson.
In addition, the nations said they would act together to impose “restrictive measures that will prevent Russia’s central bank from deploying its international reserves in ways that undermine the impact of our sanctions.”
Further sanctions against the bank could come this weekend, according to a US official. Russia has about $640 billion in reserves.
As the conflict in Ukraine continues, a consensus has emerged to prevent Russia from using the plumbing of the modern financial system and isolating it as a pariah similar to Iran, Venezuela and North Korea.
“The speed and unity to take this unprecedented financial action will give Putin pause,” said Josh Lipsky of the Atlantic Council. “SWIFT’s decision was widely expected, but a strike at the central bank will reverberate in Moscow and beyond.”
The Western decision “will not send the entire Russian economy into immediate shock. But that took away all the potential support for big commercial banks,” he added.
Authorities have not determined the full list of banks that will be affected by the SWIFT sanctions. But a US official briefing reporters on condition of anonymity said they would be carefully chosen to maximize impact on Russia and minimize impact on EU countries.
It is unclear how badly these measures will impact Russia, or whether they will really do much to help Ukraine in the coming days. President Joe Biden said it would take weeks or more for the pain of sanctions to be felt, but Saturday’s decision suggested Western countries wanted to speed up that process.
“Sanctioning Russia’s central bank is likely to have a dramatic effect on the Russian economy and its banking system, similar to what we saw in 1991,” said Elina Ribakova, deputy chief economist at the Institute of international finance, before the last round table. penalties were imposed. “This would likely lead to massive bank runs and dollarization, with a sharp sell-off, a drain on reserves – and, eventually, a total collapse of the Russian financial system.”
All Russian banks that have already been sanctioned by the international community will be banned from accessing SWIFT. This list can be expanded if necessary, officials said.
“Sanctioning Russia’s central bank is the kind of draconian sanctions we’ve employed against Iran,” Rep. French Hill, a Republican from Arkansas, said on Twitter ahead of the joint action. “I don’t see why waiting carries any strategy. Putin took this catastrophic step. He must pay the maximum price now.
The Biden administration has already sanctioned five Russian banks, including Sberbank and VTB Group, which collectively account for about half of the country’s banking assets. Russia had more than 360 licensed banks at the start of the year.
While Russia is steadily reducing its dependence on foreign currencies, the Central Bank of Russia still held 16.4% of its holdings in dollars at the end of June 2021, according to the latest official data, compared to 22.2% a year earlier. early. The share of the euro increased by 32.2%.
By targeting the central bank, the West could complicate the implementation of monetary policy while removing a potential source of liquidity for the government.
Losing access to overseas funds would handcuff the Russian central bank as it tries to shore up the ruble in the foreign exchange market by selling hard currency. The direct interventions, announced this week after Putin ordered his army to attack Ukraine, mark the first time the Bank of Russia has entered the market since 2014.
Although the decision is unprecedented for an economy the size of Russia, the United States has already sanctioned central banks of adversaries. In 2019, the Treasury Department blacklisted the monetary authorities of Iran and Venezuela for funneling money that supported destabilizing activities in the respective regions. North Korea’s central bank is also blacklisted.
The Bank of Russia kept 22% of its treasury in gold, most of which is held domestically and would be beyond the reach of Western sanctions, while about 13% of the central bank’s holdings were in yuan.
According to Credit Suisse Group AG strategist Zoltan Pozsar, Russia still has about $300 billion in foreign currency held abroad – enough to disrupt money markets if frozen by sanctions or acting suddenly to avoid them.
In a report this week that analyzed central bank and financial market data, Pozsar calculated that a much larger share is held in dollars than official figures suggest. The Bank of Russia’s dollar exposure is around 50%, Credit Suisse estimates.
Any undeclared reserves would be much harder to track and target with sanctions, though it does increase the possibility for the US and others to target more accounts – if they can identify where that money is. Pozsar said in his note that the offshore currency holdings he described could be vulnerable to sanctions or moved beyond their potential reach, potentially fueling further de-dollarization.
Sanctioning the central bank could also affect the country’s ability to facilitate trade and hamper its ability to promote international investment.
In the case of Iran, by the time the Trump administration targeted the country’s central bank in 2019, there was little left of the Islamic Republic’s economy that had not been penalized, states United States having already adopted substantial sanctions against its banking sector.
This further increased the chilling effect of sanctions on trade relations with Iran, prevented the central bank from accessing its special drawing rights under the International Monetary Fund, and also impaired its ability to carry out good humanitarian trade, including food and medicine.
Nor will Russia necessarily be able to rely on Chinese financial institutions to help cushion the blow of Western sanctions. At least two of China’s largest state-owned banks are restricting funding for Russian commodity purchases, Bloomberg reported on Friday.
Other financial sanctions that may still be on the table include a ban on Western public pension funds investing in Russian assets and the country’s exclusion from JPMorgan Chase & Co’s Emerging Markets Bond Index. or equivalent MSCI Inc. benchmarks, according to Bluebay. Ash.
Full blocking sanctions against some Russian banks are already expected to stifle their ability to make dollar payments with their US counterparts, even if they retain access to the global messaging service.
Banks can also use alternative systems and even communicate via email to send payment instructions, said Julia Friedlander, senior researcher at the Atlantic Council, before the announcement.
Still, “it’s like a kick in the shins,” she said. “Transactions with Russia would be slower and more expensive. A sudden cut will also keep a lot of short-term assets in limbo, for businesses and banks.