The United States and Europe are using finance as a weapon against Russia

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The invasion of Ukraine made it clear that modern warfare is not just about drones, cyberattacks and hypersonic missiles, it’s also about asset freezes, export controls and sanctions against billionaires. High finance has become a primary weapon in the West’s confrontation with Russia.

And over the weekend, Western leaders rolled out the financial equivalent of the bazooka, announcing new economic penalties on Russia, the type of which has only been applied to hostile regimes like Cuba, Iran and Afghanistan. They understand…

  • SWIFT Partial Ban: Western governments have put aside their hesitations and offered to ban some Russian lenders from SWIFT, the global messaging service that facilitates cross-border transactions. It is a move that could cause turbulence in global financial markets.
  • Targeting oligarchs: A task force is being set up to go after the precious luxury assets (cars, houses, yachts) of ultra-rich Russians, in the hopes they will pressure Putin to back down. Two Russian billionaires have already called for peace yesterday.
  • Central bank freeze: Western leaders said they would act to “cripple” Russian central bank assets, something that has never happened to a G20 central bank before.

The central bank freeze is worth unpacking, because despite all the talk of Russia leaving SWIFT as the “nuclear option”, targeting Russia’s central bank could be far more devastating.

Here’s why: Last week, we described how Russia prepared for war by building up its foreign exchange reserves, which can be deployed to keep its currency stable in the event of sanctions. But by freezing the central bank’s $630 billion in foreign exchange reserves, the West would prevent Putin from accessing them – and the consequences could be disastrous for the Russian economy: a plummeting rouble, runaway inflation and a run on the banks are some possible scenarios. Just yesterday, Russians lined up at ATMs to withdraw cash ahead of the ruble’s potential collapse.

What can Russia do? Not a lot. A potential solution would be to seek help from its buddy China, given that 14% of its reserves are held there. But China, whose financial support for Russia is already fraying, may be unwilling to help for fear of secondary sanctions.

Zoom out: Western sanctions come with a big asterisk, and that’s about energy. Europe and Russia depend on each other in this sector — Europe on supplying Russia and Russia on Europe as a customer. For this reason, the SWIFT ban should allow energy-related transactions between Russia and other countries to take place without interruption.

Mary I. Bruner