U.S., European allies freeze ‘Putin’s war chest’ as Russia careens toward economic crisis

The U.S. Treasury Department on Monday morning released details of its new economic restrictions against Moscow.

The headquarters of Bank Rossii, Russia's central bank, in Moscow, on Wednesday, Feb. 23, 2022. Western allies took unprecedented aim at the institution on Monday. Andrey Rudakov / Bloomberg

The U.S. government and its European allies put into effect on Monday sweeping new penalties aimed at crippling Russia’s economy, as the west escalates its financial war against the Kremlin over the invasion of Ukraine.

Russia’s economy was already showing signs of severe distress before the new measures were implemented, with crowds of Russians rushing to withdraw cash from ATMs and the value of the nation’s currency plunging dramatically.

Overnight, European leaders imposed new measures that effectively cut Russia off from its financial reserves. The U.S. Department of Treasury followed suit with similar steps on Monday morning. Under the new regime, all people in the U.S. and Europe Union are banned from trading with Russia’s central bank. The sanctions also apply to Russia’s finance ministry and its sovereign wealth fund, to prevent the Kremlin from using loopholes to continue to access the reserves.


The restrictions amount to choking off Russia from the international financial system, depriving the country of assets that are likely necessary to stabilize its economy. Such a step has never been taken against a country with nuclear weapons or one with as powerful a military as Russia, according to sanctions experts.

Treasury also announced sanctions on Monday morning on entities that are tied to Russia’s sovereign wealth fund, including its management company and one of the sovereign wealth fund’s subsidiaries, as well as a sanctioning the leader of that management company.

“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 [Russian President Vladimir] Putin and his inner circle depend on to enable his invasion of Ukraine,” Secretary of the Treasury Janet Yellen said in a statement. “Today, in coordination with partners and allies, we are following through on key commitments to restrict Russia’s access to these valuable resources.”

Two senior administration officials, speaking on the condition of anonymity to describe the White House’s announcement, said on Monday that the freeze was immediately effective and intended to head off signs Russia aimed to recall its international reserves from around the world.


The punishments reflect the extraordinary outpouring of support for Ukraine in the west but also carry the risk of a further escalation in hostilities with Moscow. Putin has responded to western statements in recent days by putting the country’s nuclear forces on alert, although Ukraine and Russian officials planned on Monday to hold their first diplomatic talks since the invasion began. The European Union has also announced it will shut down airspace to Russian planes and support Ukraine’s purchase of weapons.

The new banking restrictions are arguably the most serious form of economic retaliation yet approved by the western powers in response to Russia’s attack on Ukraine. They are aimed at preventing Putin from using his sizable financial reserves – totaling more than $600 billion – to stabilize the Russian economy in the face of other sanctions and economic measures imposed by the west.

Already, the value of the ruble fell by close to 30 percent between Friday and Monday before paring back some of its losses, according to Bloomberg trading data.

As of June 30 last year, 32 percent of Russia’s foreign currency reserves were euros and 16 percent were U.S. dollars, according to its central bank. About 7 percent were British pounds, 13 percent Chinese renminbi, and 22 percent monetary gold. The remainder was held in other currencies.


The U.S. said that it is also simultaneously issuing an exemption allowing “certain energy-related transactions” with the central bank of Russia, as the west has tried to continue the flow of Russian energy exports to sustain the European economy and maintain gas prices.

“In one fell swoop, the U.S. and Europe have rendered Putin’s war chest unusable . . . That the U.S. and Europe have done this in unified fashion sends a crystal-clear message that Russia will face dramatic costs so long as Putin’s war of aggression continues,” said Edward Fishman, former Russian and Europe sanctions lead at the State Department. “This action represents a sea change in U.S. and European strategy. Just 72 hours ago, a step like this was unthinkable.”

The U.S. had already announced sanctions targeting nearly 80 percent of the Russian banking sector’s total assets. Its steps include cutting Russia’s largest bank off from the U.S. financial system, in addition to cutting off many technological inputs necessary for parts of Russian industry. U.S. sanctions have also targeted members of Putin’s inner-circle and other business leaders in Russia.

The effect has been dramatic. Russia’s stock markets suffered one of the worst drops in history, according to Bloomberg. The S&P credit rating agency also downgraded Russia’s debt to junk status shortly after the U.S. actions were released. Reports have emerged of Russians crowding ATMs to make emergency cash withdrawals. The Bank of Russia announced Monday morning that it will not open its stock exchange in face of the unprecedented pressure.


Putin’s bank reserves were intended to buffer the impact of such a blow. “The steps being announced will undermine Russia’s ability to prop up the ruble,” said Richard Nephew, a senior research scholar at Columbia University. “The Russians wont be able to defend the currency easily and its value will tank.”

Some critics have wondered how Putin may react to the attack on Russia’s economy. Mark Weisbrot, a liberal economist and a director at the Center for Economic and Policy Research, said that the sanctioning of the reserves could lead to an “economic collapse.”

“The Biden administration needs to de-escalate this conflict, and move toward a diplomatic solution before it is too late,” Weisbrot said. “Zelensky wants to negotiate without preconditions; Washington should do the same.”

But the senior administration officials defended their strategy as a necessary response to Putin’s aggression. They also said they are closely monitoring potential support by Belarus for the war effort, which may trigger separate economic restrictions on that country.

Adam Smith, a partner at Gibson Dunn and a former Obama administration sanctions official, said that the attack on Russia’s central bank reflected just how quickly events have moved in Eastern Europe. Smith emphasized that such moves have typically been off the table because central banks play such a crucial role in a nation’s economy, noting that going after them includes “severe and potentially unknowable collateral effects.” In this case, Smith said it’s possible the sanctions make it more difficult for Europe to buy oil and gas while also hurting the average Russian economically.


“It has historically been viewed as almost beyond the plane – the thing to do when sanctions, and diplomacy, have been seemingly exhausted,” Smith said. “That the international community was willing to go this far, and suffer the consequences of doing so . . . suggests just how far this crisis has gone in just its first week.”


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