EU, UK, Canada, US plan to sharply cut some Russian banks

Joint statements in Washington and Brussels late on Saturday – as Ukrainian and Russian forces battle for control of Ukraine’s capital, Kyiv – gave a powerful signal to the debate over how to respond to the Russian offensive. After all, how can the West flex its collective muscles? He marked a significant step in Western Capitals’ efforts to punish Russia for its invasion of Ukraine and pressured Russian President Vladimir Putin to seek a diplomatic off-ramp to the crisis.

Announcing the steps, European Commission President Ursula von der Leyen said the EU would commit to eliminating several Russian banks from the SWIFT network, a global payments system that links international banks and facilitates cross-border financial transfers. provides.

“This would ensure that these banks are disconnected from the international financial system and harm their ability to operate on a global scale,” she said.

The EU, US, Canada and the UK will also target Russia’s central bank to prevent it from deploying a war chest of its reserves. According to a senior EU official, the idea would be to encourage Russian banks and firms affected by sanctions to stop selling their foreign assets for the local currency. It could effectively store a large part of Russia’s reserves abroad.

Those reserves – which are made up of gold, bonds, deposits and securities denominated in foreign currencies – are critical to Russia’s efforts to halt the depreciation of the ruble and slow inflation from the currency’s weakness.

“We will cripple the assets of Russia’s central bank,” Ms von der Leyen said.

The moves announced also created a task force to attempt to curb the so-called golden passports from sanctioned companies and the physical assets of Russian oligarchs, as well as their yachts, luxury cars and homes, which the Russian elite had to offer. Essentially allows the purchase of citizenship. in other countries.

The latest measure is the third set of Western sanctions issued in response to Russia’s invasion of Ukraine.

In recent days, the US, Britain, the European Union and some of its partners have called for measures to sanction some Russian banks, ban sales of Russia’s debt, and ban some technology exports to Russia’s energy sector and other major companies. has announced. They have also targeted a large number of Russian officials, lawmakers and Russian business executives.

Ukrainian President Volodymyr Zelensky has been lobbying Western capitals to strengthen sanctions against Russia. Saturday’s announcements uncovered some loopholes. Most notably, by shutting down some but all Russian banks from SWIFT, the EU has kept payment channels open for purchases of Russian natural gas, on which it relies heavily for its energy needs. US measures have also carved in for oil purchases.

Several capitals, including Berlin and Rome, have opposed the option to separate Russian banks from SWIFT. Critics have worried that this could have unintended consequences, including complicating energy payments to Russia and leaving European banks exposed to money owed to them by Russian financial firms. There are also concerns that it could encourage closer financial ties between Russia and China.

Both Germany and Italy were opposed to such a move. EU foreign policy chief Josep Borrell said on Friday, however, that cutting banks off SWIFT was likely to lead to further sanctions. Ukraine’s Foreign Minister Dimitro Kuleba and Mr. Zelensky have increased pressure on the European Union, urging governments to do the same. On Saturday, German and Italian officials said their governments’ position on the issue was changing.

Diplomats said that as part of an agreement designed to keep a channel open for making energy payments and other important transactions, the EU decided to instruct SWIFT to leave some Russian banks on the system.

SWIFT, or Society for Worldwide Interbank Financial Telecommunication, is a global messaging system for financial transactions that connects more than 11,000 banks and other organizations in more than 200 countries and territories.

The SWIFT network, based in Belgium, is a bank-owned consortium that handles millions of daily payment instructions. Money moving from one account to another often passes through multiple banks before reaching the final destination, especially if it involves foreign currency. SWIFT transmits messages from one bank to another, allowing them to know where the money should ultimately reach.

Swift said she is working with European officials to understand the details of the sanctions and is preparing to comply.

The exit from SWIFT would significantly complicate the management of Russian trade, foreign investment, remittances and the central bank’s economy. European Union-sanctioned Iranian banks were cut in 2012.

Part of the debate about how to fix Russia’s SWIFT cutoff is how to open some financial channels to buy Russian oil and natural gas. The European Union imports 40% of its gas from Russia. There’s also the issue of the West Bank’s exposure to Russia – money owed that would be difficult to collect if SWIFT was unplugged. According to the Bank for International Settlements, foreign banks have about $121 billion in assets owed by Russian-based entities. Of these, about 14.7 billion are owed by US banks. A large chunk—$25 billion each—was owed to Italian and French banks.

There are workarounds for SWIFT that can allow Russia to make payments even after disconnecting from SWIFT. Fitch Ratings said banks may use other—albeit less efficient and more expensive—messaging systems such as Telex. Russia has also developed its own payment system. While there are currently only 23 foreign banks associated with it, more could be involved if SWIFT is no longer an option.

China is another option. Beijing also has its own payment system, with more being acquired by international banks than Russia. Critics say that by driving Russia and China together, a swift cutoff could destroy the supremacy of the dollar-denominated global financial system.

Richard Nephew, a former sanctions official at the US State Department, said “cutting off Russian banks completely from SWIFT” would have an immediate big impact that Russia would quickly reduce along with other messaging vehicles. “It will cause a lot of headache to the Russians, but I think its value has been increased dramatically.”

Russia’s central bank also began to shy away from reserves in Western-denominated currencies, which comprise much of global trade and finance, in an effort to protect US firms from new sanctions, which have forced US firms to hold their positions after Russia’s 2014 invasion of Crimea. The loan was stopped from buying.

The Treasury Department on Tuesday expanded those restrictions to include central bank loans traded in secondary markets where intermediary institutions sell central bank bonds.

US officials said they were still finalizing the central bank’s action. “It would show that Russia’s sanctioning of its economy is a myth,” said a senior Biden administration official.

The composition of Russia’s foreign exchange reserves is unusual by global standards. According to the International Monetary Fund, of all 149 countries that detail their reserves, the US dollar accounted for 59% in the three months to September, while China’s yuan accounted for just 2.7%. Gold reserves held inside Russia now total 21.7%, up from 17.2% in the early months of 2018.

In contrast, Russia’s central bank holds just 6.6% of its reserves in US assets, with Chinese assets at 13.8%, French assets at 12.2%, Japanese assets at 10% and German assets at 9.5%. Before moving away from dollar assets in mid-2018, 2018’s US asset reserves were just under 30%, and Chinese assets were just 4.7%.

Despite Russia’s efforts to shield its economy from sanctions, the US could impose powerful financial tools on the Russian central bank that sidestep the bank’s move.

In its options to extend sanctions on the Russian central bank, the administration could ban any dollar transaction—and complement similar actions against allied euro, pound and yen trading. Such a move could affect the ability of the central bank to sell foreign exchange reserves. Another option might be a complete blacklisting that freezes any assets in US jurisdictions—and jurisdictions of other countries where allies join Washington—and prohibits any transactions. This could affect not only the bank’s currency-stabilization operations but also transactions important to the country’s international trade.