After the West’s initial sanctions failed to stop Russian President Vladimir Putin from his military offensive, the West joined European allies Saturday as they imposed severe financial penalties on Russia for its invasion of Ukraine.
Two of the new key measures are directed at Russia’s central bank and will cut off unspecified numbers of Russian banks from the SWIFT financial network. SWIFT, which moves money from one bank to another around the globe, is an essential element of global commerce.
Officials from the U.S. as well as Europeans made it clear that they were still working to implement the sanctions and promised not to affect European purchases of Russian natural gasoline.
According to U.S. officials, the move would cause Russia’s ruble currency to plummet in value and increase its financial isolation. This is the most severe and recent set of sanctions in place since Russian forces entered Ukraine late last week.
Here’s a look at the measures taken Saturday and those that were previously taken. They could be some of the most severe sanctions ever imposed on any country in modern times.
HITTING AT RUSSIA’S CENTRAL BANK
The Kremlin will be unable to access more than $600billion in Russian reserves due to the new restrictions the United States, European Union, and United Kingdom have placed on Russia’s Central Bank. The West must implement the Central Bank restrictions in the way it intends to. This will make it impossible for Russia to maintain its ruble’s value amid tightening Western sanctions.
According to U.S. officials, the likely outcome was that the Russian ruble would fall in freefall, which will trigger spiraling inflation.
The Central Bank measures would limit Russia’s ability sell off its international reserves. This would mean that the Kremlin’s best tool to support Russia’s currency would be lost.
According to Clay Lowery (executive vice president of The Institute of International Finance), bank runs will worsen as Russians queue up at banks to convert their ruble deposits into the more secure dollar. The central bank’s reserves would be drained by a run on Russian dollars.
Lowery stated that the Central Bank’s new SWIFT limits, announced by the United States and Europe, will “likely cause serious damage” to Russia’s economy and banking system.
The international community is not known for its rare, but powerful, move to pursue a country’s central banks.
SWIFT PUNISHMENT
Saturday’s action includes removing key Russian banks from the SWIFT financial messaging network. This system transfers billions of dollars daily among over 11,000 financial institutions worldwide.
Both the Atlantic allies and the Russian side considered the SWIFT option when Russia invaded Ukraine’s Crimea in 2014. They also supported separatist forces in eastern Ukraine. Russia declared that the expulsion of SWIFT from Russia would constitute a declaration war. After being criticized for their weak response to Russia’s 2014 aggression, the allies abandoned the idea. Russia has since tried to create its own financial transfer system with limited success.
The U.S. has successfully persuaded the Belgia-based SWIFT system in order to expel Iran from its network. This was due to Iran’s nuclear program. However, kicking Russia from SWIFT could cause economic damage to other countries, such as those of key allies Germany and the U.S.
The West announced Saturday that SWIFT was disconnected. This leaves Europe and the United States with the possibility of increasing penalties.
Officials from the West resisted including the SWIFT ban as part of the initial rounds of sanctions due to the potential collateral effects it would have on other countries that purchase Russian oil and natural gas.
Officials stated that they would do everything possible to minimize the negative impact of the restrictions on other countries and European purchases for Russian energy.
RUSSIAN BANKS OFFICIALLY CURED FROM THE U.S. DOLLAR
The Treasury Department stated that earlier sanctions were also imposed last week within hours of Russia’s announcement. They targeted big Russian banks, which hold nearly 80% of the country’s banking assets.
This includes Russia’s largest state-owned banks, SberBank and VTB. They together hold nearly $750 billion of assets, according to the U.S., more than half the total Russian assets.
Thursday’s bank sanctions exemplify the unmatched power that the U.S. enjoys through the dollar, which is the preferred currency for business transactions all over the globe.
These banks typically do business in dollars worth tens to billions of dollars each day. They are being cut off from the U.S. currency and financial system. Russia and the banks are trying to make it more difficult to do business as well as international transactions.
Other U.S. measures are targeted at key Russian state-owned or private businesses, in an effort to make it more difficult for them to raise funds to invest and run.
The U.S. also pursued more Russian elites by sanctioning bankers as well as other powerful associates of Putin within Russia’s top political, financial and security circles.
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STARVING RUSSIA’S BUSINESSES, MILITARY OF U.S. HIGH-TECH
Biden’s earlier announcement of export controls this week highlighted another strong piece U.S. leverage — America’s semiconductors, and other high-tech gear.
According to President Joe Biden, Russia will be deprived of more than half its high-tech supplies by the new U.S. export restrictions. He declared that it will “strike an blow” to Russia’s plans to modernize its military and its lauded aerospace industry, as well as its shipping industry and other industries.
Biden stated that the high-tech limitations will “reduce their ability to compete economically” and “majorly impact long-term strategic ambitions”.
U.S. export restrictions are likely to deprive Russian industry and military of high-tech U.S. parts that help warplanes fly and make smartphones intelligent, as well as other software that makes the modern world work.
The U.S. stated that the European Union and Japan, Britain, and other countries are also participating in the effort to eliminate high-tech components from Russia.
The U.S. could respond by adding Russia to the most restrictive countries for export control purposes. This would place them alongside Iran, North Korea, Syria, and Cuba.
Russia is unable to acquire integrated circuits or products containing integrated circuits due to the dominance of U.S. technology, software and equipment. This could impact aircraft avionics and machine tools, as well as smartphones, tablet computers, gaming consoles, televisions, and tablets.
Export restrictions by the United States could encourage businesses to seek alternatives, including China.
