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New sanctions cut Russia off from its foreign currency reserves

Severing access to US dollars will make it more difficult to prop up flagging economy

A protester in Belgium demands Russia be denied access to the SWIFT financial messaging system.
A protester in Belgium demands Russia be denied access to the SWIFT financial messaging system. (Omar Havana/Getty Images)

The Biden administration on Monday imposed sanctions on Russia’s Central Bank that prohibit U.S. dollar-denominated transactions and are intended to largely wipe out Moscow’s $630 billion foreign currency war chest, which the Kremlin hoped would insulate the Russian economy from other sanctions Western nations have imposed.

Additionally, the sanctions from Treasury’s Office of Foreign Assets Control ban all Americans from doing any business with the Russian Central Bank, the country’s National Wealth Fund, the Russian Finance Ministry and the Kremlin’s sovereign wealth fund: the Russian Direct Investment Fund. Collectively, the financial sanctions should freeze any remaining U.S.-based assets held by the Russian Central Bank in the United States or by Americans abroad.

Moscow has traditionally relied on its sovereign wealth fund and its CEO, Kirill Dmitriev, who is close with Russian President Vladimir Putin — both men are now under Western sanctions — to raise capital abroad.

The U.S. moves add to steps taken over the weekend by the 27-member-nation European Union, the United Kingdom, Canada, Japan and other countries to delist certain Russian banks from the SWIFT financial transactions system, an action long championed by U.S. lawmakers that makes it difficult to conduct international banking transactions with Russia.

“No country is sanctions-proof when we act together,” a senior Biden administration official said in a Monday background call with reporters.

The official touted the “months of preparation and planning” by Washington in building multilateral willingness to sanction the Russian Central Bank, an unprecedented punishment. “It takes trust and solidarity to sanction the Central Bank of a $1.5 trillion economy,” the official said, arguing that after Monday’s sanctions actions, “Fortress Russia will be exposed as a myth.”

“This is close to the most ambitious form that this action could take,” Edward Fishman, a nonresident senior fellow at the Atlantic Council think tank and a former member of the State Department’s influential policy planning staff during the Obama administration, tweeted. Fishman explained that the Russian Central Bank won’t be able now to prop up the Russian currency, the ruble, the value of which has plummeted since Russia attacked Ukraine.

Following Russia’s 2014 annexation of Crimea and its military incursions into eastern Ukraine, the United States and European Union imposed relatively modest sanctions on Russia. After that, the Russian government took multiple steps to try to “sanctions-proof” its economy against more severe Western sanctions. Those moves included building up a foreign currency war chest of $630 billion that it could use to bolster the value of the ruble and pay for key imports.

Analysts think the strength of that rainy day fund gave Putin the confidence that Russia could withstand Western economic punishments after invading Ukraine again.

But if Moscow calculated that past disagreements among European countries over how strongly to sanction the Russian financial system — Europe has significantly greater exposure to Russia’s economy than the United States does — it appears to have underestimated just how much the invasion would unify the West around a more powerful sanctions regime.

“This is a sanctions action without precedent. As a result, the specific consequences aren’t easy to predict with a high level of confidence,” Fishman said. “But the consequences will certainly be far-reaching.”

The value of the Russian ruble plummeted 25 percent on Monday in response to the coordinated sanctions campaign.

“We took today’s actions to impair Russia’s ability to use its international reserves in ways that undermine the impact of our sanctions, as well as to prevent Russia from accessing its wealth fund for use in its ongoing war against Ukraine,” Secretary of State Antony J. Blinken said in a statement. “The United States will continue to coordinate closely with our partners and allies to impose severe consequences on Russia for its war against Ukraine.”

SWIFT delisting

The U.S. and European partners are still finalizing the list of Russian banks that they will remove from SWIFT, which is located outside of U.S. jurisdiction in Belgium, the administration official said.

First under consideration are Russian financial institutions already under “full blocking” U.S. sanctions, such as Russia’s second-largest bank, VTB Bank, the official continued.

However, the Biden administration at this time is not imposing the heaviest sanctions on the real driver of the Russian economy: the country’s oil and natural gas exports.

The administration argues that to do so right now would risk fracturing the strong sanctions cohesion with Europe, which is heavily reliant on Russian natural gas imports during the cold winter months. Additionally, U.S. sanctions on the Russian energy sector could produce sharp price spikes in oil and gas over the short term that would benefit Moscow right as the West is trying to isolate Russia financially.

“Sanctioning the Russian Central Bank and the removal of certain Russian financial institutions from the SWIFT messaging system will deal a historic blow to Putin and the elites who have reaped the benefits of his repressive regime,” Senate Foreign Relations Chairman Bob Menendez, D-N.J., said in a Saturday statement. “The West has a responsibility to urgently ratchet up pressure on the Kremlin dictatorship as it seeks to destroy a democracy in the heart of Europe. I am encouraged by this international solidarity and urge continued momentum against Putin’s actions.”

Notably, in a departure from its long-standing position of neutrality, Switzerland on Monday announced it was freezing the financial assets of hundreds of Russian citizens whom the European Union and United States sanctioned last week, including any funds belonging to Putin, The New York Times reported. Russian oligarchs have long favored the opaque Swiss banking system as a safe place to stash their wealth.

Over 350 Ukrainian civilians have died as a result of the Russian invasion, the Ukrainian Internal Affairs Ministry said on Sunday. Some 400,000 people are now refugees after fleeing Ukraine, according to the United Nations refugee agency. It’s not known how many Ukrainian troops have died but the Ukrainian Defense Ministry has claimed its forces have killed approximately 4,300 Russian soldiers. Russia has not disclosed its casualty numbers.

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