Feb. 28, 2022, 7:30 a.m. ET3 hours ago
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The Bank of Russia headquarters in Moscow. The Bank of Russia decided to raise the key rate from 9.5 percent to 20 percent per annum starting Monday.
The Bank of Russia headquarters in Moscow. The Bank of Russia decided to raise the key rate from 9.5 percent to 20 percent per annum starting Monday.Credit...Sergei Ilnitsky/EPA, via Shutterstock
The Treasury Department on Monday moved to further cut off Russia from the global economy, announcing that it would immobilize Russian Central Bank assets that are held in the United States and impose sanctions on the Russian Direct Investment Fund, a sovereign wealth fund that is run by a close ally of President Vladimir V. Putin.
The moves are meant to curb Russia’s ability to use its war chest of international reserves to blunt the impact of sanctions that the United States and European allies have enacted in response to Russia’s invasion of Ukraine.
“The unprecedented action we are taking today will significantly limit Russia’s ability to use assets to finance its destabilizing activities, and target the funds Putin and his inner circle depend on to enable his invasion of Ukraine,” Treasury Secretary Janet L. Yellen said in a statement.
Russia has spent the last several years bolstering its defenses against sanctions, amassing $643 billion in foreign currency reserves in part by diverting its oil and gas revenues. New restrictions by the United States and its allies against selling rubles to Russia aim to undercut the country’s ability to support its currency in the face of new sanctions on its financial sector.
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As a result of the sanctions, Americans are barred from taking part in any transactions involving the Russian Central Bank, Russia’s National Wealth Fund or the Russian Ministry of Finance.
Any Russian central bank assets that are held in U.S. financial institutions are now stuck and financial institutions outside the United States that hold dollars for the Russian central bank cannot move them. Because the United States has acted in coordination with European allies, Russia’s ability to use its international reserves to support its currency has been curbed.
It is not clear how much of Russia’s currency reserves are held in U.S. dollars, and Biden administration officials declined to provide an estimate in a briefing with reporters on Monday.
Senior Biden administration officials said the actions were effective immediately. They noted that the value of Russia’s ruble had already fallen more than 30 percent over the weekend and that Russia’s central bank more that doubled its interest rate to try to mitigate the fallout. They also predicted that inflation would soon spike and economic activity would contract as the country’s currency lost value.
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The moves represent a significant escalation of U.S. sanctions, although the Treasury Department said it was making an exemption to ensure that transactions related to Russia’s energy exports can continue. It is issuing a “general license” to authorize certain energy-related transactions with the Russian Central Bank.
The carve-out means that energy payments will continue to flow, mitigating risks to global energy markets and Europe, which is heavily reliant on Russian oil and gas exports. U.S. officials said that they want energy prices to remain steady and that they do not want a spike in prices to benefit Mr. Putin, however they noted that they are considering measures that would restrict Russia from acquiring technology that it needs to be an energy production leader in the long term.
Understand Russia’s Attack on Ukraine
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What is at the root of this invasion? Russia considers Ukraine within its natural sphere of influence, and it has grown unnerved at Ukraine’s closeness with the West and the prospect that the country might join NATO or the European Union. While Ukraine is part of neither, it receives financial and military aid from the United States and Europe.
Are these tensions just starting now? Antagonism between the two nations has been simmering since 2014, when the Russian military crossed into Ukrainian territory, after an uprising in Ukraine replaced their Russia-friendly president with a pro-Western government. Then, Russia annexed Crimea and inspired a separatist movement in the east. A cease-fire was negotiated in 2015, but fighting has continued.
How did this invasion unfold? After amassing a military presence near the Ukrainian border for months, on Feb. 21, President Vladimir V. Putin of Russia signed decrees recognizing two pro-Russian breakaway regions in eastern Ukraine. On Feb. 23, he declared the start of a “special military operation” in Ukraine. Several attacks on cities around the country have since unfolded.
What has Mr. Putin said about the attacks? Mr. Putin said he was acting after receiving a plea for assistance from the leaders of the Russian-backed separatist territories of Donetsk and Luhansk, citing the false accusation that Ukrainian forces had been carrying out ethnic cleansing there and arguing that the very idea of Ukrainian statehood was a fiction.
How has Ukraine responded? On Feb. 23, Ukraine declared a 30-day state of emergency as cyberattacks knocked out government institutions. Following the beginning of the attacks, Volodymyr Zelensky, Ukraine’s president, declared martial law. The foreign minister called the attacks “a full-scale invasion” and called on the world to “stop Putin.”
How has the rest of the world reacted? The United States, the European Union and others have condemned Russia’s aggression and begun issuing economic sanctions against Russia. Germany announced on Feb. 23 that it would halt certification of a gas pipeline linking it with Russia. China refused to call the attack an “invasion,” but did call for dialogue.
How could this affect the economy? Russia controls vast global resources — natural gas, oil, wheat, palladium and nickel in particular — so the conflict could have far-reaching consequences, prompting spikes in energy and food prices and spooking investors. Global banks are also bracing for the effects of sanctions.
The measures announced on Monday were born from lessons that the United States learned since imposing sanctions on Russia following its annexation of Crimea in 2014. A senior Biden administration official said that Mr. Putin began amassing international reserves after 2014 to blunt the impact of future sanctions and that the United States, in preparing to exert new pressure on Russia’s economy, determined during months of preparation with European allies that it would need to target Russia’s central bank directly.
“The U.S. and other Western economies have deployed a set of highly potent financial weapons against Russia with remarkable speed,” said Eswar Prasad, a Cornell University economics professor and former International Monetary Fund official. “Cutting off access to global financial markets and to a country’s war chest of international reserves held in currencies of Western economies amounts to a crippling financial blow, especially to an economy like Russia’s that relies to such a large extent on export revenues.”
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The sanctions also replicate some of the economic warfare that the United States has used against Iran in recent years, which included sanctions on its central bank and blocking its financial institutions from the SWIFT financial messaging system.
On Saturday, the European Commission, Britain, Canada, France, Germany, Italy and the United States said they would remove some Russian banks from SWIFT, , essentially barring them from international transactions, and impose new restrictions on Russia’s Central Bank to prevent it from using its large international reserves to sidestep sanctions.
Biden administration officials said on Monday that the full list of Russian banks that are being cut off from SWIFT is still being finalized in coordination with European countries.