Russian Central Bank
In coordination with European allies, the United States has also targeted investment in Russian funds. It has prohibited any U.S. individual or entity from engaging with the Central Bank of the Russian Federation and frozen any assets of the Bank held in the United States or by Americans elsewhere. On a larger scale, the G-7 countries announced that Russia will be restricted from accessing its reserve holdings in G-7 jurisdictions, freezing about half of Russia’s foreign reserves.
The measures the United States has taken against the Central Bank are most significant in the imposition of limits on employing international reserves, which otherwise would be used to bolster the Russian economy in the face of U.S. sanctions. Moscow’s financial defense system against international economic sanctions has been referred to as a “fortress Russia” economy. Moscow’s efforts to sanction-proof the Russian economy have included amassing $630 billion dollars in foreign currency reserves. The foreign currency reserves were built up by over 75% since 2015, intended to enable Russians to exchange rubles for foreign currencies in the case of foreign sanctions. Despite a concerted attempt to shift towards the Chinese yuan, 45% of those assets were held in Western currencies. Preventing Moscow from selling foreign currency reserves to stabilize the ruble curtails its ability to protect its domestic economy from international economic sanctions.
Nord Stream 2
A significant development in the sanctions against Russia is within the energy and gas sector: Germany’s agreement to halt certification of the Nord Stream 2 pipeline, worth $11 billion. After Russia recognized two breakaway regions in Ukraine, the United States terminated a previous waiver that exempted Nord Stream 2 AG, the parent company of the natural gas pipeline project, and its CEO from sanctions under U.S. law. Nord Stream 2 AG is a company under Gazprom, a Russian state-owned gas company. Despite pressure from the United States to reduce energy reliance on Russian suppliers, Berlin has resisted discontinuing the Nord Stream 2 project. Russia produces about 10% of the world’s oil, and concerns have arisen over the dependence of Europe on Russian gas. Europe’s significant economic interdependence on Russia’s gas companies has made this sector difficult to sanction as concerns emerge about rising gas prices. However, sanctions stopped short of the Nord Stream 1 pipeline, which is operational and has transferred gas to Germany since 2011.
SWIFT Sanctions
The most recent sanctions blocking Russian banks from the global financial network SWIFT have the potential to cripple the Russian economy. Just days before Russia invaded Ukraine, disconnection from the SWIFT financial system was not included as a potential sanction, and the move seemed unlikely. A measure restricting banks from SWIFT has only been used once before against the Iranian government in 2012. SWIFT, or “Society for Worldwide Interbank Financial Telecommunication” is the world’s primary international payment network and is central to participation in the global financial system. Restricting banks from using SWIFT blocks international trade flow and undermines transfers and messaging across borders. Cutting Russia off from SWIFT was floated as a potential economic sanction in the aftermath of the 2014 annexation of Crimea, but it was ultimately not implemented because these sanctions could hurt the economies of the U.S. and its allies by stymying Russian participation in the global financial system. However, a day after the invasion, a joint statement by the U.S., European Commission, France, Germany, Italy, U.K., and Canada announced that certain Russian banks would be subject to a disconnection from SWIFT, marking an approach that would allow further expansion of SWIFT sanctions and protect against outsized economic harm in the rest of Europe. This measure marks a distinct escalation in sanctions against Russia.
Consequences
Isolating Russia economically in this way may put pressure on Moscow to temper or halt its actions in Ukraine and Eastern Europe. As the situation in Russia and Ukraine continues to develop, additional sanction measures may be introduced by the United States and the EU as a deterrent and political punishment for Russia’s violations of the Minsk Protocol and international law regarding Ukraine’s sovereignty, especially the 1994 Budapest Memorandum, signed by the U.S., U.K., and Russia. Under that agreement, the United States provided assurances that it would not only respect Ukraine’s conditions to denuclearize but respond if Russia were to violate its security. By providing military assistance and imposing sanctions on Russia, it fulfills those assurances.
The economic consequences of the sanctions have already begun to take effect on Russia’s domestic economy. The Kremlin’s “fortress economy” has been put to the test: after sanctions were introduced there was a run on central banks as Russians attempted to withdraw foreign currencies. The Russian rouble collapsed against the dollar, depreciating to record lows—losing more than 40% of its value, settling at less than a U.S. penny. This depreciation has accelerated inflation in Russia; the central bank has more than doubled interest rates (to 20%), introduced capital controls, and blocked interest payments to foreign investors.
While sanctions on Russian financial institutions and industries imposed by governments have damaged the Russian economy in the immediate aftermath of the conflict, economic consequences are emerging from the private sector as well. Disruptions in the supply chain and the volatility and depreciation of the ruble have created an unattractive and risky business environment. As the Russian economy begins to face the repercussions of a swift Western response, it has become increasingly difficult for private companies to operate there. Those who stay risk violating sanctions, reputational damage, and logistical complications. American credit rating agency Fitch downgraded its evaluation of the Russian economy from ‘B’ to ‘C’, indicating that a sovereign debt default is “imminent.” Many Western investors and companies have pulled out of Russia or announced their intentions to do so, severing sometimes decades-long business ties. This includes multinational corporations such as Paypal, ExxonMobil, BP, Visa, Mastercard, IBM, Amazon Web Services, Goldman Sachs, Apple, and Disney. In addition to the loss of consumer goods trade, many of these entities have significant financial and industrial clout. The loss of international business has more long-term implications than sanctions imposed by Western governments; private trepidation to operate in Russia could last far longer after sanctions have been lifted.
However, it is unclear whether sanctions and their economic ramifications will be effective in swaying Moscow’s decision-making regarding Ukraine. Just as the economic impact of sanctions in the past has been debatable in altering Russia’s behavior, it is difficult to evaluate how much of an effect the 2022 sanctions will have. As of this moment, the fighting continues to escalate, as does the intensity and urgency of the international response to the conflict. Whether the economic damage will influence the Kremlin to back away from military action is yet to be seen.
