Russian economy shakes after sanctions imposed by US and Europe

Overnight, European leaders imposed new measures that effectively cut Russia off from its financial reserves. The US Treasury Department followed suit with similar measures on Monday morning. Under the new regime, all US and EU citizens are banned from trading with Russia’s central bank. The sanctions also apply to Russia’s finance ministry and its sovereign wealth fund, to prevent the Kremlin from using loopholes to continue accessing reserves.

The restrictions amount to stifling Russia from the international financial system, depriving the country of assets that are likely needed to stabilize its economy. Sanctions experts say such a step has never been taken against a country with nuclear weapons or a military as powerful as Russia.

The Treasury also announced Monday morning sanctions against entities linked to the Russian sovereign wealth fund, including its management company and one of the subsidiaries of the sovereign fund, as well as a sanction against the manager of this management company.

“The unprecedented action we are taking today will significantly limit Russia’s ability to use assets to finance its destabilizing activities and will target funds [Russian President Vladimir] Putin and his entourage depend on enabling his invasion of Ukraine,” Treasury Secretary Janet L. Yellen said in a statement. “Today, in coordination with our partners and allies, we are delivering on key commitments to restrict Russia’s access to these valuable resources.”

Two senior administration officials, speaking on condition of anonymity to describe the White House announcement, said Monday the freeze was effective immediately and was intended to head off signs that Russia was aiming to recall its international reserves around the world.

The sanctions reflect the extraordinary outpouring of support for Ukraine in the west, but also carry the risk of a further escalation of hostilities with Moscow. Putin has reacted to Western statements in recent days by putting the country’s nuclear forces on high alert, although Ukrainian and Russian officials planned on Monday to hold their first diplomatic talks since the invasion began. The European Union also announced that it would close airspace to Russian planes and support Ukraine’s arms purchase.

The new banking restrictions are arguably the most severe form of economic retaliation ever approved by Western powers in response to Russia’s attack on Ukraine. They aim to prevent Putin from using his large financial reserves – totaling more than $600 billion – to stabilize Russia’s economy in the face of further sanctions and economic measures imposed by the West.

Already, the value of the ruble fell nearly 30% between Friday and Monday before paring some of its losses, according to trade data from Bloomberg.

As of June 30 last year, 32% of Russia’s foreign exchange reserves were in euros and 16% in US dollars, according to its central bank. About 7% was sterling, 13% Chinese renminbi and 22% monetary gold. The rest was held in other currencies.

The United States said it was also simultaneously issuing an exemption allowing “certain energy-related transactions” with Russia’s central bank, as the West tried to continue the flow of Russian energy exports to support the European economy and maintain gas prices.

“In one fell swoop, the United States and Europe have rendered Putin’s war chest unusable… The fact that the United States and Europe have done this in a unified way sends a message as clear as crystal water that Russia will face dramatic costs as long as Putin’s war of aggression continues.” said Edward Fishman, former head of Russian and European sanctions at the State Department. “This action represents a sea change in US and European strategy. Just 72 hours ago, a step like this was unthinkable.

The United States had already announced sanctions targeting almost 80% of the total assets of the Russian banking sector. His measures include separating Russia’s largest bank from the US financial system, in addition to cutting many technological inputs needed by parts of Russian industry. US sanctions have also targeted members of Putin’s inner circle and other business leaders in Russia.

The effect was dramatic. Russian scholarships suffered one of the worst declines in history, according to Bloomberg. Rating agency S&P also downgraded Russia’s debt to junk status shortly after the US stocks were released. There have been reports of Russians crowding ATMs to make emergency cash withdrawals. The Bank of Russia announced Monday morning that it would not open its stock exchange in the face of unprecedented pressure.

Putin’s bank reserves were intended to cushion the impact of such a blow. “The announced measures will undermine Russia’s ability to support the rouble,” said Richard Nephew, senior research fellow at Columbia University. “The Russians will not be able to defend the currency easily and its value will fall.”

Some critics wondered how Putin might react to the attack on Russia’s economy. Mark Weisbrot, a liberal economist and director of the Center for Economic and Policy Research, said sanctioning reservations could lead to “economic collapse”.

“The Biden administration must defuse this conflict and move toward a diplomatic solution before it’s too late,” Weisbrot said. “Zelensky wants to negotiate without preconditions; Washington should do the same.

But senior administration officials have defended their strategy as a necessary response to Putin’s aggression. They also said they were closely watching Belarus’ potential support for the war effort, which could trigger separate economic restrictions for that country.

Adam Smith, a partner at Gibson Dunn and a former Obama administration sanctions chief, said the attack on Russia’s central bank reflected how quickly events unfolded in Eastern Europe. Smith pointed out that such moves have generally been brushed aside because central banks play such a crucial role in a country’s economy, noting that pursuing them includes “serious and potentially unknowable side effects.” In this case, Smith said it’s possible the sanctions will make it harder for Europe to buy oil and gas while hurting the average Russian economically.

“It’s always been seen as almost beyond flying — the thing to do when sanctions and diplomacy have seemingly run out,” Smith said. “The fact that the international community has been willing to go this far and suffer the consequences…shows how far this crisis has gone in its first week alone.”

Mary I. Bruner