Western nations have agreed to unleash new sanctions to further isolate Russia’s economy and financial system after initial penalties failed to persuade President Vladimir Putin to withdraw his forces from Ukraine.
A decision to penalise Russia’s central bank and exclude some Russian banks from the SWIFT messaging system, used for trillions of dollars worth of transactions around the world, was announced on Saturday in a joint statement by the US, European Commission, France, Germany, Italy, UK and Canada.
The nations also said they would act together to impose “restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions”.
“Russia’s war represents an assault on fundamental international rules and norms that have prevailed since World War 2, which we are committed to defending,” the Western governments said. They said they were “prepared to take further measures to hold Russia to account for its attack on Ukraine”.
The move is aimed at Russian banks that have already been sanctioned by the international community, but can be expanded to other Russian financial institutions if necessary, officials said. However, one official said the White House is looking at exemptions for transactions involving the energy sector, which the US administration has sought to avoid to prevent oil prices from surging.
The speed and unity to take this unprecedented financial action will give Putin pause. The SWIFT move was largely expected but striking at the central bank will reverberate in Moscow and beyond.
— Josh Lipsky of the Atlantic Council
More penalties against the central bank could be implemented, according to a US official. Russia has about $640bn (R9.7-trillion) in reserves.
The decision to cut banks off from SWIFT marked a rapid change in course for the US and its allies, who spent weeks signalling that such a move was a “nuclear option” that was unlikely to win broad support. Pressed about that possibility on Thursday, US President Joe Biden said: “Right now, that’s not the position that the rest of Europe wishes to take.”
But the ferocity of Russia’s assault took many nations by surprise and rallied public support in the West to do more. As the crisis escalated, a consensus emerged to prevent Russia from using the plumbing of the modern financial system and isolate 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. “The SWIFT move was largely expected but striking at the central bank will reverberate in Moscow and beyond.”
It’s not clear how severe an impact the moves will have — especially with European nations still dependent on Russian energy supplies — or whether they will do much to help Ukraine in the coming days. Biden said it will take weeks or longer for the pain of sanctions to be felt. Saturday’s move suggests Western nations want to accelerate that process.
The move “won’t send the entire Russian economy into immediate shock”, Lipsky said. “But it removed all the potential to backstop the large commercial banks.”
The decision to hit the central bank is a first for an economy the size of Russia’s. The US has previously sanctioned the central banks of adversaries such as Iran and Venezuela for funnelling money that supported destabilising activities in their respective regions. North Korea’s central bank is also blacklisted.
Sanctioning Russia’s central bank is likely to have a dramatic effect on the Russian economy and its banking system, Elina Ribakova, deputy chief economist for the Institute of International Finance, said before the latest round of penalties was announced. “This is likely to lead to massive bank runs and dollarisation, with a sharp sell-off, drain on reserves — and, possibly, a full-on collapse of Russia’s financial system.”
Authorities haven’t determined the full list of banks that will be hit by the SWIFT sanctions. A US official briefing reporter, on condition of anonymity, said they will be carefully chosen to maximise the impact on Russia and minimise the impact on EU nations.
SWIFT, based in Belgium, said that while it is a neutral global cooperative with members in 200 countries, it is obliged to comply with EU and Belgian regulations. “We are engaging with European authorities to understand the details of the entities that will be subject to the new measures,” the organisation said. “We are preparing to comply upon legal instruction.”
All Russian banks that have already been sanctioned by the international community will restricted from SWIFT. So far, the US and other nations have sanctioned five lenders, 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.
It’s not clear how severe the central bank restrictions will be. The move is likely to limit Russia’s ability to draw on its credit lines at the IMF and may affect its ability to access about $20bn (R303bn) believed to be at the Bank for International Settlements, an institution popularly known as the “central bank of central banks”.
While Russia has been steadily reducing its reliance on foreign currency, its central bank still had 16.4% of its holdings in dollars at the end of June 2021, down from 22.2% a year earlier. The euro’s share was up at 32.2%.
By targeting the central bank, the West could also complicate the enactment of monetary policy and remove a potential source of cash for the government to support the banking sector. Inflation is running at more than double the central bank’s target, despite 525 basis points in interest-rate hikes over the past year.
Losing access to funds abroad would handcuff Russia’s recent efforts to shore up the rouble in the foreign-exchange market by selling hard currency. The direct interventions, announced last week after Putin ordered his military to attack Ukraine marked the first time the Bank of Russia waded into the market since 2014.
Russia still has about $300bn (R4.5-trillion) of foreign currency held offshore — enough to disrupt money markets if it’s frozen by sanctions or moved suddenly to avoid them, according to Credit Suisse Group strategist Zoltan Pozsar.
Despite increased diplomacy between Moscow and Beijing, Russia may not necessarily be able to count on Chinese financial institutions to cushion the blow of Western penalties. At least two of China’s largest state-owned banks are restricting financing for purchases of Russian commodities, Bloomberg reported on Friday.
Banks can still resort to alternative systems and even communicate via email to send payment instructions, Julia Friedlander, senior fellow at the Atlantic Council, said 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-off will also hold a lot of current assets in limbo, for corporations and banks.”
More stories like this are available on bloomberg.com
— Bloomberg
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