“Putin has embarked on a path 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 on Saturday.
In response, she said, “we will cripple 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 European nations, the United States, Britain and Canada, the countries announced that they had reached agreement on what appear to be unprecedented steps to “ensure that this war is 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.
Russia’s central bank has more than $640 billion in foreign exchange reserves, 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 this money is likely to 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 panic Russian businesses.
In the joint statement, the United States and its allies said, “We are committed to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in a way that undermines the impact of our sanctions.”
SWIFT stands for Society for Worldwide Interbank Financial Telecommunication, which is a messaging network that connects banks around the world. The Belgium-based consortium connects 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.
Journalists asked President Biden several days ago why the White House had not decided to restrict Russia’s access to SWIFT, and 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, President Volodomyr Zelensky called on the West to cut Russia off from SWIFT, and in particular urged to Germany and Hungary to do so.
In their joint statement, the US, Canadian and European 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.
Michael S. Bernstam, a research fellow at Stanford University’s Hoover Institution, said full and immediate sanctions against Russia’s central bank would not only be the most impactful financial sanction, but the only sanction, in his view, that could cause Moscow to withdraw from its invasion of a neighboring country.
The White House has already sanctioned Russia’s biggest banks, but Moscow may try to use its large foreign exchange reserves to prop up those banks for some time. Removing that option, he said, would cripple Moscow’s ability to bail out its banks.
The central bank crackdown could prompt Russians and businesses to “rush to get dollars,” Bernstam said. “They will run to exchange offices and banks to get $20 bills, $50 bills, but there won’t be. So there will be a huge panic, a run on the dollar. The exchange rate will collapse.
Until now, the White House had relied on imposing sanctions on specific people and companies in Russia to create financial pressure. Targeting Russia’s central bank is a much bigger step. The freezing of Russian central bank reserves could also prevent the Kremlin from using its large financial reserves as a safety net to meet the rising costs of war, as US and European sanctions take effect.
“If you were to do this in a coordinated way, you would impose considerable costs on the Russian state. This would suddenly mean that all of Russia’s reserves are locked down and no longer usable,” said Richard Nephew, a senior researcher at Columbia University.
“This could have a devastating effect on the Russian economy. It will be seen as a massive escalation anyway.
But the strategy is not without risks. The United States has never taken this action against a nuclear-weapon country. And it is possible that the Kremlin will react by intensifying hostilities against Ukraine.
Mark Weisbrot, liberal economist and co-director of the Center for Economic and Policy Research, warned that targeting Russia’s central bank could prove to be a mistake. “This situation is dangerous and requires de-escalation to reach a diplomatic solution. 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 have additional costs for all parties.
The joint statement by the United States and its allies 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 said they would “restrict the sale of citizenship – the so-called golden passports – which allow wealthy Russians connected to the Russian government to become citizens of our countries and access our financial systems.”
Additionally, they said they were in the process of setting up a task force to ensure that the sanctions are effectively enforced.
“As part of this effort, we are committed to applying sanctions and other financial and coercive measures to other Russian officials and elites close to the Russian government, as well as their families and their enablers to identify and freeze the assets they hold in our jurisdictions,” the statement read.
The declaration also pledged to intensify [our] coordination against disinformation and other forms of hybrid warfare.