After imposing partial Iranian type SWIFT sanctions, west to target Russian Central bank, Fx reserves and investments

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Joseph P Chacko
Joseph P Chacko
Joseph P. Chacko is the publisher of Frontier India, portal publishing news and current affairs. He holds an M.B.A in International Business from the Maharishi University of Management, Iowa, USA. Twitter: @chackojoseph *views are Personal.

U.S. and E.U. are considering taking additional restrictive measures against the Central Bank of Russia, which is being finalized over the weekend. It was announced to journalists by a high-ranking representative of the Washington administration at a special briefing on Saturday on sanctions against Russia.

The representative said that there are other measures that the U.S. can take regarding the Central Bank. “You will learn about this later,” he said. The official explained that these measures related to the Central Bank of Russia might also be presented. “We will finalize them over the weekend,” the official explained.

The measures may concern both the movement of funds that it will carry out and assets.

Earlier, the United States, Great Britain and Canada, and the European Union, agreed to impose restrictions on the Russian regulator. “We have agreed to introduce restrictive measures that will prevent the Central Bank of the Russian Federation from using its international reserves in a way that would undermine the effectiveness of our sanctions,” the joint statement said.

Sanctions against the Central Bank of Russia

The official said that the U.S. and other Western countries intend to collectively impose sanctions on the Central Bank of Russia to prevent it from using its reserves to support the ruble.

“The other [task] is to undermine the ability of the Central Bank of Russia to protect the ruble. <…> We are committed to the idea of ​​introducing measures against the Central Bank, which is the most important financial institution in Russia,” the official said. “We plan to collectively introduce measures so that Russia does not could use central bank reserves to support its currency in order to undermine the effect of our sanctions.”

As per the official, this will show the failure of resisting restrictions. “More than $600 billion of Russian foreign exchange reserves are valid only if [the Russian leadership] can use them,” the administration official said. “Without the ability to buy rubles from Western financial institutions, the Central Bank will lose the ability to compensate [damages] from sanctions.” 

According to the official, this will lead to a further fall of the ruble and an increase in inflation.

Disconnecting from SWIFT

A U.S. official said that western countries have decided to apply the “Iranian model” to Russia and disconnect its “major sanctioned banks” from the SWIFT international interbank system.

(Also read – Explained: What happens if Russia is disconnected from SWIFT?)

The E.U. is implementing a decree that will exclude Russian banks under sanctions from the SWIFT international payment network, effectively closing their access to the world’s most important financial system, said the spokesman.

The official said the United States, Great Britain, Germany, Italy, France, and the European Commission “decided to take further measures to isolate Russia from the global financial system and the world economy.” He said that SWIFT is used by almost all banks globally to transfer financial information to each other when making payments or to receive payments. Approximately 11 thousand banks worldwide are included in this system. 

According to a U.S. executive, if one of the sanctioned Russian banks wants to make or receive a payment at a bank outside of Russia, for example, at a bank in Asia, he will now have to use the phone or fax. The U.S. hopes most banks around the world will simply stop doing business with Russian banks.

The West seeks to keep in the SWIFT system those Russian banks through which the bulk of transactions related to the supply of energy resources from the Russian Federation to world markets. 

The measures are expected to be implemented in two ways. The first is to find out whether the interbank SWIFT system allows one to determine the “type of product” through which the transaction passes. “And we’re trying to figure out if messages sent [via SWIFT] from one bank to another to make payments or receive them have a flag indicating that an energy-related payment is being made. If so, then we can deduce these payments [from sanctions]. This is one way,” he said.

The second way is to wisely choose the institutions that we disconnect from SWIFT. “We know where the main flow of energy passes (of banking operations related to the purchase and sale of energy resources – Frontier India note), through which banks it passes. And if we choose this approach, we can simply select institutions through which the main flow does not pass energy,” the spokesman said.

The official said that the list of Russian banks that will be disconnected from the SWIFT international interbank system would be finalized by the E.U. since the system is based in Belgium.

In 2012, there was the first and only case of disconnection from SWIFT as a sanction measure. The U.S. Senate Banking Committee then threatened to sanction the system unless it cut off Iran’s major banks, which the United States accused of servicing Iran’s nuclear program. On March 15, 2012, these measures were approved by the E.U. Council. Although the SWIFT leadership initially opposed the unilateral shutdown of Iran, after the decision of the European body, they nevertheless took this step and denied access to Iranian banks.

Full blocking sanctions against RDIF

A U.S. official said that U.S. President Joe Biden has ordered “total blocking sanctions” against the Russian Direct Investment Fund (RDIF) in the coming days.

“Yesterday (Friday – Frontier India note), the president also instructed the U.S. Treasury Secretary [Janet Yellen] to impose full blocking sanctions on the Russian Direct Investment Fund in the coming days. This is a state-owned financial structure that functions as a sovereign wealth fund and raises capital in the Russian economy into fast-growing and high-tech sectors,” he said. According to the official, “sanctions against this structure will further limit the strategic ambitions of [Russian President Vladimir] Putin to expand the range of means of war and repression,” he said.

Foreign exchange reserves

A Washington administration official said that the U.S. and its Western allies would extend their sanctions to all $630 billion of Russia’s central bank foreign exchange reserves.

The official said that the United States and other Western countries intend to collectively impose sanctions against the Central Bank of Russia so that it cannot use its reserves to support the ruble. One of the journalists asked to clarify what part of the $630 billion will be subject to restrictions. “Everything,” the administration official replied.

“Now, all $630 billion of Russia’s foreign exchange reserves can theoretically be used to sell them and buy rubles. This would compensate for some of our sanctions. <…> Such a measure, among other things, does not allow Russia to make transactions with Western banks, < …> what it needs to carry out foreign exchange interventions. It needs to buy rubles <…> to support its currency,” the official added.

According to U.S. administration personnel, the Russian authorities will not be able to effectively resist the sanctions applied by the West in the financial sphere, which will lead to a free fall in the ruble exchange rate. “I have high confidence that the consequences of these [punitive] measures [of the West] will be felt in the Russian financial markets immediately. Market participants understand that in the absence of Russia’s ability to protect its currency, it will go into free fall,” the presenter said during the briefing.

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