Sanctions shock-and-awe reverberates beyond Russia

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Ukrainians living in Greece hold Ukrainian flags and placards as they take part in a protest against Russia's massive military operation in Ukraine, in Athens Greece, February 27, 2022.

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LONDON, Feb 27 (Reuters Breakingviews) - The West is deploying the financial equivalent of “shock and awe” tactics against Russia. The United States and its allies on Saturday read more said they will limit Moscow’s ability to use a large chunk of its foreign-currency reserves and kick some of the country’s banks out of the SWIFT payment system in what looks like a deliberate attempt to undermine confidence in Russia’s financial system read more . The consequences will be felt around the world.

The statement from the United States, Germany, France, Italy and others marked an escalation of the financial assault against Russian President Vladimir Putin. The importance of the promise to exclude some as-yet-unnamed Russian banks from SWIFT, which manages the messaging system used for international payments, depends on which financial institutions are targeted. The United States and others have already frozen the assets of lenders like state-controlled VTB (VTBR.MM) and banned them from dealing with local banks. Switching to another communications system is a minor inconvenience by comparison. Meanwhile Gazprombank, which facilitates much of the country’s energy exports, has so far escaped the severest sanctions.

Going after Russia’s foreign-currency reserves has bigger consequences. The central bank’s $630 billion stash is vital to financing imports and defending the rouble in a prolonged standoff with the West over Ukraine. Though Russia has shifted reserves into the Chinese yuan and gold, about 45% of its assets were still in the United States, United Kingdom, France, Germany and Japan at the end of 2020, according to central bank data. If those were frozen, Putin’s ability to protect the economy would be diminished.

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It’s unclear how the West intends to restrict Russia’s reserves. Central bank assets deposited in other countries generally enjoy sovereign immunity. There have been some exceptions: The U.S. Congress in 2012 gave Americans the right to go after $1.75 billion belonging to Iran’s central bank. And the United States froze $7 billion of Afghanistan bank reserves after the country fell to the Taliban last year. But a coordinated attack on a large country’s overseas assets is unprecedented.

Russia’s central bank said on Sunday banks had sufficient capital and liquidity to function smoothly. However, Reuters reported there were long queues at cash machines. It’s far from certain that the latest sanctions will persuade Putin to change course. But they will doubtless prompt China to further examine its exposure to the U.S.-led financial system. The repercussions of the Western assault will reverberate for many years.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

- The United States and its allies on Feb. 26 moved to block certain Russian banks’ access to the SWIFT international payment system in further punishment of Moscow as it continued its military assault against Ukraine.

- The measures, which will include restrictions on the Russian central bank’s international reserves, will be implemented in the coming days, the nations said in a joint statement that also vowed further action to come.

- The statement from the European Commission, France, Germany, Italy, the United Kingdom, Canada and the United States said “selected” Russian banks would be removed from the SWIFT messaging system, which facilitates international payments.

- It added that the countries would impose “restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions.”

- The Bank of Russia on Feb. 27 said the country’s banking system was stable and had sufficient capital and liquidity to function smoothly.

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Editing by Swaha Pattanaik and Sharon Lam

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