Economic war

 he West declares economic war on Russia

By KATE DAVIDSON and AUBREE ELIZA WEAVER

While Russia continued its halting military advance in Ukraine this weekend, united Western allies blew a massive hole in President Vladimir Putin’s financial defenses, the latest salvo in an intensifying global economic war.

Leaders in Europe, the U.S., the U.K. and Canada announced new restrictions on Russia’s central bank in a bid to cut off the Kremlin’s access to most of the roughly $630 billion in emergency reserves that it was going to use to soften the pain of sanctions.

The move stunned the world financial community — targeting a central bank is extremely rare, but freezing the reserves of a G-20 member bank, with backing from the entire Group of Seven nations, is unheard of. It also tightens the squeeze on Russia’s economy, and in turn Putin, much more than financial sanctions alone, experts say.

“It’s a major escalation,” said Adam Posen, president of the Peterson Institute for International Economics.

“As long as the central bank had foreign currency reserves, in the end it would be costly, it would be painful, but stuff could get done by swapping rubles at the central bank for foreign currency to buy whatever they needed,” Posen added. “And now that’s basically not going to be possible.”

As Sergei Aleksashenko, a former deputy Russian finance minister and deputy central bank governor, put it in a video blog: "This is a kind of financial nuclear bomb that is falling on Russia.”

How would it work?

While the implementation details are still unclear, the idea is to undermine Russia’s ability to prop up its currency by selling foreign reserve assets, as it did last week when the ruble began crashing on news of Western sanctions on Russian banks and oligarchs.

The goal? To take down what’s known as “Fortress Russia,” said Josh Lipsky, director of the Atlantic Council’s Geo Economics Center and a former adviser at the International Monetary Fund. Lipsky estimates the move will lock up $400 billion of Russia’s foreign reserves, which it can no longer use to mitigate the effects of sanctions.

“To put that in perspective, it's like losing the entire GDP of Austria from your bank account overnight,” Lipsky said.

In a joint statement, the U.S. and its allies in Europe also said they would ban selected Russian banks from the SWIFT international payment system, and would block the sale of so-called golden passports to people with links to the Russian government, among other measures. (It was an emotional plea from Ukrainian President Volodymyr Zelenskyy — who dialed into an emergency meeting of EU leaders Thursday night — that convinced reluctant countries to get on board, WaPo’s David J. Lynch, Michael Birnbaum, Ellen Nakashima and Paul Sonne reported.)

What happens next? 

The Russian currency is expected to hit new lows today, and inflation will likely spike. “With the currency losing value against foreign currencies, any imported goods and services will become extremely costly,” our colleagues Johanna Treeck and Douglas Busvine report from Brussels. “Russia can print more rubles, but that would spark runaway domestic inflation and an even sharper depreciation of the currency.”

U.S. officials have made clear their aim is to target Putin and his billionaire allies, not ordinary Russians. But the bigger and broader the sanctions, the bigger the impact on regular people.

“The problem is the people who suffer are everyday Russians, who are going to have soaring inflation, who are going to run out of physical cash,” Lipsky said. “And those are the things that are going to generate protests on the street.”

A senior Biden administration official put an even finer point on it this weekend: “This will show that Russia’s supposed sanctions-proofing of its economy is a myth.”

Russia still has (limited) options

Russia could liquidate its roughly $130 billion in gold reserves, but it takes time to find buyers on the international market.

It could also seek to sell about $60 billion of its Chinese yuan, along with some dollars and euros, to Chinese banks or China’s central bank. But it’s not clear that’s an opportunity China or Russia will want to take, Posen said. China may be wary of opening itself up to U.S. or European sanctions if it plays ball with Russia, and Russia may not want to be that beholden to the Chinese.

“If either of them decide not to do this, then they’re really out of options, and you’re looking at a real currency crisis,” Posen said. “Then you get into the really important question of, do we want to weaponize macroeconomic policy to be associated with potential regime change?”

“I don’t think there’s going to be a regime change,” he added, “but that’s what you’re threatening here.”

Remaining questions

We’re still waiting for more details on how the restrictions on Russia’s central bank would actually be implemented.

A source familiar with the matter said Treasury Secretary Janet Yellen and Deputy Treasury Secretary Wally Adeyemo spent the weekend in their offices, making calls to their counterparts overseas as the packages were coming together. (Asked about Treasury’s coordination with the Fed, an agency spokesperson said, “Treasury is keeping all regulators aware of the actions that are under discussion.”)

Also unknown is how the Russian central bank will respond to try to protect the currency and cushion its economy.

In an open letter this weekend, a group of émigré Russian economists — including Aleksashenko — urged Putin to end the war, warning of calamitous effects on the Russian economy.

“The economic cost to Russia will be an order of magnitude greater than the lost opportunities in the previous decade of economic stagnation," they wrote.