(Bloomberg) — The US and its allies are moving to impose tough new sanctions on Russia that will further cut it from the plumbing of modern money after its invasion of Ukraine.
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Germany’s government, which was initially wary of excluding Russia from the SWIFT financial messaging network, said it was now looking for ways to cut it from the system used for trillions of dollars of transactions between thousands of banks around the world. has been
Meanwhile, the US is weighing sanctions on the country’s central bank, according to people familiar with the matter, targeting most of the $643 billion reserves deposited by President Vladimir Putin before his attack on Ukraine. Used to be. It’s not clear how advanced those discussions are.
“Approving Russia’s central bank is likely to have a dramatic impact on the Russian economy and its banking system, similar to what we saw in 1991,” said Alina Ribakova, deputy chief economist at the Institute of International Finance. “This could lead to a massive bank run and dollarization, accompanied by a sharp sell-off, a drain on reserves – and, possibly, a complete collapse of Russia’s financial system.”
The West is putting financial pressure on Russia as Putin ends any hope of diplomacy to end fighting in Ukraine by ordering his military to advance on Saturday.
Final decisions have not been made, but the Biden administration is immediately considering all options to try to save Putin from further devastation in Ukraine, the people said, speaking on condition of anonymity. He said the US aims to work with allies across Europe to take every step to maximize impact.
Arkansas Republican Representative French Hill said on Twitter: “Approving Russia’s central bank is like the harsh sanctions imposed on Iran.” “I don’t see why there is any waiting strategy. Putin took this horrific step he now needs to pay the maximum price.”
A White House National Security Council spokeswoman declined to comment. The Bank of Russia did not immediately respond to a request for comment.
The Biden administration has already approved five Russian banks, including Sberbank and VTB Group, which collectively account for nearly half of the country’s banking assets. At the beginning of the year, there were over 360 licensed banks in the country.
Germany is meanwhile “working to limit the collateral damage of decoupling from Swift in such a way that it affects the right people,” Foreign Minister Annalena Barbock and Vice Chancellor Robert Habeck said in an emailed statement. The US is also considering a similar move.
While Russia continues to reduce its reliance on foreign currency, the central bank still held 16.4% of its holdings in the dollar at the end of June 2021, down from 22.2% a year earlier, according to the latest official data. The share of the euro was up 32.2%.
Targeting the central bank could complicate the enactment of monetary policy, removing a potential source of cash for the US government.
Losing access to funds abroad would handcuff Russia’s central bank as it tries to shore up the ruble in the foreign exchange market by selling hard currency. The direct intervention was announced earlier this week after Putin ordered an attack on Ukraine, marking the first time the Bank of Russia entered the market since 2014.
According to Tim Ashe, strategist at Bluebay Asset Management in London, the move would be “disastrous” for Russia. “We will see the ruble crash.”
Iran, Venezuela
While the decision would be without precedent for an economy the size of Russia, the US has previously cleared opponents’ central banks. In 2019, the Treasury Department blacklisted the monetary authorities of Iran and Venezuela for funneling money that supported volatile activities in the respective sectors. North Korea’s central bank is also blacklisted.
The Bank of Russia kept 22% of its hoard in gold, most of which is held domestically and would be out of reach of Western sanctions, while the central bank held about 13% in yuan.
According to Credit Suisse Group AG strategist Zoltan Posser, Russia still has about $300 billion in foreign exchange offshore – enough to freeze currency markets by sanctions or abruptly disrupting them to avoid them.
In a report this week, which analyzed data from central banks and financial markets, Posser calculated that the dollar has a much larger share than official figures. Credit Suisse estimates Bank of Russia’s dollar exposure to be around 50%.
It would be far more difficult to track and target any unreported reserves with sanctions, although it increases the ability for the US and others to target more accounts – if they can identify where that money is. Posser said in his note that the offshore currency holdings he mentioned could be vulnerable to sanctions, or could be out of their reach, potentially leading to further de-dollarisation.
Allowing a central bank could impact a country’s ability to facilitate trade and hinder 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, little of the Islamic Republic’s economy was left unpunished, the US already has substantial sanctions on its banking industry. Was putting
It further exacerbated the chilling effect of sanctions on doing business with Iran, barred the central bank from accessing its special drawing rights under the International Monetary Fund, and harmed its ability to conduct humanitarian trade, including food and drugs. .
According to Oleg Vygin, a veteran Russian banker, should sanctions against the Bank of Russia be drawn up after sanctions imposed on Iran, they could freeze assets in dollars and euros and rise to the yen and other currencies except the yuan. can. and was formerly the first deputy chairman in the central bank.
‘last stage’
“The sanctions against the central bank are the last step,” he said. “This is a formula tried in Iran, which initially results in the deepest decline in the economy, output, household income. And then a country begins to adapt, build its settlements with people who are willing to cooperate. agree to.”
Russia may also not necessarily be able to trust all Chinese financial institutions. At least two of China’s biggest state-run banks are restricting financing to purchase Russian goods, Bloomberg reported on Friday.
According to BlueBay, other financial sanctions that may still be on the table include a ban on investments in Russian assets for Western public pension funds and excluding the country from JPMorgan Chase & Co.’s Emerging Markets Bond Index or the equivalent MSCI Inc. benchmark. is included. Ashes. He said a decision to remove Russia from Swift could be taken next week.
Biden administration officials are now debating whether an EU directive is needed to ban Russia from SWIFT, although a US and EU decision is not imminent.
Full blocking sanctions against some Russian banks should already have curtailed their ability to make dollar payments with US counterparts, even if they retain access to the global messaging service.
Atlantic Council Senior Fellow Julia Friedlander said banks could resort to alternative systems and also communicate via email to send payment instructions.
Still, “it’s like a kick in the shin,” she said. “Transactions with Russia will be slower and more expensive. Sudden cut-offs for corporations and banks will also put a lot of current assets in limbo.”
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