Washington and Brussels Let Slip the Dollars of War

Unprecedented economic sanctions have sent shock waves through the Russian economy as the ruble fell 30 percent to an all-time low against the dollar on Monday, while the Russian central bank more than doubled interest rates to 20 percent in a bid to stabilize the currency. 

On Monday, the Biden administration and its allies in Europe announced sweeping new sanctions on Russia’s central bank, finance ministry, and sovereign wealth fund, essentially freezing Russia out of the international financial system. The move will severely limit the Kremlin’s ability to tap into its record-high reserves of $630 billion, once seen as an integral part of Moscow’s efforts to sanction-proof its economy. 

“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,” U.S. Treasury Secretary Janet Yellen said. 

The move is just the latest in a bevy of measures taken by Ukraine’s Western allies that seek to isolate Russia, disrupt Russian President Vladimir Putin’s ability to finance the war, and drain the pockets of the Russian elites who have bolstered and benefited from the Putin regime.

Some European countries were initially hesitant to remove Russia from SWIFT, the financial messaging system that underpins much of the world’s global bank transactions. But on Saturday, the United States, Canada, the United Kingdom, and the European Union announced in a joint statement that a number of Russian banks would be removed from the system. “This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally,” the joint statement said. 

In the initial wake of Russia’s invasion on Thursday, the Biden administration announced sanctions on Russia’s two biggest banks, VTB and Sberbank, while dozens of members of the Russian elite, including Putin himself and a number of his close lieutenants, have been subject to U.S. and European sanctions. In Russia, there are reports of long lines at cash machines and banks, while the country’s central bank chief Elvira Nabiullina imposed capital controls to limit the amount of money able to leave the country. The Russian stock exchange was closed on Monday and is expected to be closed again Tuesday. 

Russia’s invasion of Ukraine early Thursday stunned the world and provoked an array of responses beyond financial penalties. On Sunday, Ursula von der Leyen, president of the European Commission, announced that the EU will ban Russian aircraft from its airspace, would take Russian state-funded broadcasters RT and Sputnik off the air, and, for the first time, would finance the purchase and delivery of weapons to a country under attack—in this case, Ukraine. FIFA, the world soccer governing body, said that Russia would be banned from playing in the 2022 World Cup in Qatar, and the Eurovision Song Contest is also barring Russia from this year’s event. 

Other countries took similar measures to limit Russia’s ability to conduct transactions in pounds, yen, Swiss francs, and other currencies. The broad-based nature of the economic chokehold means that Russia’s war chest is largely inaccessible—and it will make it harder for the Russian central bank to prop up a currency in free fall.

The United States did provide a carve-out for energy-related transactions with Russia in a bid to limit the collateral damage to European economies still dependent on Russian gas and oil. But Russian energy firms, tarred with the broader sanctions brush, are finding it hard to offload some shipments. The Biden administration’s rapid move, coupled with the EU’s quick decision to ratchet up financial pressure on Moscow, stands in contrast to 2014, when Putin first invaded Ukraine. Then, sanctions were incremental. U.S. National Security Advisor Jake Sullivan vowed last month that the United States would take a tougher stance this time.

The Western reaction has had knock-on effects beyond central banks and SWIFT. BP and Shell, two of the world’s biggest oil companies, announced in recent days that they will unload their stakes in Russian oil companies, a sign of a loss of investor confidence in Putin’s Russia. Other big energy companies are expected to follow.

In some countries Russia’s unprovoked attack has prompted an even bigger change in long-standing policies. Last week, German Chancellor Olaf Scholz announced the country would freeze the Russian Nord Stream 2 gas pipeline, long a source of geopolitical tensions between Germany, Ukraine, and the United States, in response to Putin’s decision to recognize Ukraine’s Russian-backed separatist regions as independent. Over the weekend, reversing decades of cautious defense policy, Germany announced plans to deliver lethal weapons to Ukraine and a to make a $113 billion investment in the German military.

On Monday, Switzerland, long a no-questions-asked financial haven for the wealthy, announced that it would freeze any assets held by Putin, Russia’s Prime Minister Mikhail Mishustin, and Foreign Minister Sergey Lavrov, as well as hundreds of oligarchs sanctioned by the EU last week. The move was a marked departure from Switzerland’s long-standing policy of neutrality.