The US and European nations decided on Saturday to slap the most severe financial penalties yet on Russia for its continuous invasion of Ukraine, targeting the Russian economy’s central bank reserves and cutting some Russian banks out from a critical global financial network.
The decision, made as Ukrainian forces fought to keep Russian forces out of Kyiv and residents hunkered down in subway tunnels, basements, and underground garages, has the potential to spread the pain of Western retaliation for President Vladimir Putin’s invasion to ordinary Russians far more widely than previous rounds of sanctions.
“Putin set out on a road to destroy Ukraine, but in doing so, he is also undermining the future of his own country,” said EU Commission President Ursula von der Leyen.
The European Union, the United States, the United Kingdom, and other allies have gradually raised the severity of their sanctions since Russia launched its invasion late last week.
The steps were announced in a joint statement by the US and European allies as part of a fresh wave of financial penalties aimed at “holding Russia accountable and together ensuring that this conflict is a strategic failure for Putin.”
The central bank limitations are aimed at restricting access to the Kremlin’s more than $600 billion in reserves and are intended to limit Russia’s capacity to maintain the currency as it depreciates due to intensifying Western sanctions.
The moves taken on Saturday, according to US officials, were designed to throw the ruble into “free fall” and foster skyrocketing inflation in the Russian economy.
The ruble’s depreciation would very certainly cause inflation, hurting ordinary Russians as well as the Russian elites who were the original targets of the sanctions. If Saturday’s sanctions are as draconian as described, the resulting economic dislocation could lead to domestic political instability for Putin.
As Russians hurried to sell their targeted currency for safer assets, analysts projected increased Russian bank runs and decreasing government reserves.
According to US officials, previously announced sanctions have already had an impact on Russia, causing its ruble to fall to its lowest level against the dollar in history and its stock market to experience its worst week on record.
The move on Saturday also involves the exclusion of important Russian banks from the SWIFT financial messaging system, which transports tens of billions of dollars every day between more than 11,000 banks and other financial institutions around the world.
Over the weekend, officials said, the small print of the sanctions was still being sorted out as they worked to reduce the impact of the limitations on other economies and European purchases of Russian energy.
When Russia attacked and annexed Ukraine’s Crimea and backed separatist forces in eastern Ukraine in 2014, allies on both sides of the Atlantic evaluated the SWIFT option. Russia declared at the time that excluding it from SWIFT would be tantamount to declaring war. The allies shelved the concept at the time, after being chastised for their feeble response to Russia’s assault in 2014. Since then, Russia has attempted but failed, to build its own financial transfer system.
The US has previously succeeded in convincing the Belgium-based SWIFT system to expel a country — Iran — due to its nuclear program. However, excluding Russia from SWIFT might harm other economies, particularly those of the United States and its crucial partner Germany.
Rarely has the West and its allies unleashed the complete arsenal of financial weapons against a country. Iran and North Korea, two earlier targets, played far smaller roles in the global economy, whereas Russia, with its vast petroleum reserves, dominates global trade and supplies natural gas to sections of Europe.
The West’s Saturday announcement of a partial disengagement from SWIFT leaves Europe and the US room to escalate penalties later. Officials stated that they had not yet decided which banks will be shut down.
Von der Leyen, the EU Commission head, announced the steps in Brussels, saying she would fight for the group to “paralyze the assets of Russia’s Central Bank” so that its operations would be halted. She noted that removing certain commercial banks from SWIFT would “disconnect these institutions from the international financial system and damage their capacity to function globally.”
“Blocking banks will essentially prohibit Russian exports and imports by preventing them from completing most of their financial activities globally,” she warned.
Getting the EU on board for SWIFT sanctions on Russia was a difficult task, given that EU trade with Russia totaled 80 billion euros, roughly ten times that of the US, which had been an early proponent of such measures.
Germany has objected to the measure since it may have a significant impact on them. “After Russia’s shameful attack… we are working hard on limiting the collateral harm of detaching (Russia) from SWIFT so that it impacts the right people,” Foreign Minister Annalena Baerbock said in a statement. What we need are specific SWIFT functional limits.”
The partners also pledged to “take measures to prohibit the sale of citizenship — so-called golden passports — that allow affluent Russians linked to the Russian Kremlin to become citizens of our nations and get access to our financial systems.”
The group also announced the creation of a trans-Atlantic task force this week to ensure that these and other penalties on Russia are effectively implemented through information sharing and asset freezes.
“These additional measures, which include the exclusion of numerous Russian banks from SWIFT and the censure of Russia’s central bank, are certain to cause substantial harm to the Russian economy and banking system,” Clay Lowery, executive vice president of the Institute of International Finance, stated. “While details on how the new sanctions would affect energy are still emerging, we do know that restrictions on Russia’s central bank will make exporting energy and other commodities more difficult.”
Even without a comprehensive SWIFT ban, Rachel Ziemba, an adjunct senior scholar at the Center for a New American Security, argued that “these sanctions will still be devastating to Russia’s economy.” They make transactions more complicated and difficult, reinforcing the measures enacted earlier this week.”
According to Ziemba, the severity of the sanctions on the Russian economy will be determined by which banks are targeted and what steps are taken to limit the Central Bank’s ability to operate.
“Regardless, growing restrictions, such as banning banks from SWIFT and restricting the Central Bank, will make it more difficult to obtain commodities from Russia and create financial market pressure.”
Meanwhile, the US Embassy in Russia is warning Americans that non-Russian credit and debit cards are being denied in Russia, according to several sources. The problem appears to be tied to recent sanctions imposed on Russian banks following Russia’s invasion of Ukraine, according to a tweet from the US Embassy on Saturday night. According to the embassy, U.S. citizens in Russia should have a backup plan in case their credit cards are denied. It also advised citizens of the United States that the State Department warns against visiting Russia.
