US, Canada ban transactions with Russian central bank

Russian bank

Russian bank

FILE

Agency Report

The United States and Canada on Monday banned all transactions with Russia's central bank, effective immediately, in an unprecedented sanction meant to punish the country for its invasion of Ukraine.

The moves, on top of penalties imposed earlier and those taken by allies in Europe, will make it harder for the Russian central bank to use its vast stockpile of hard currency to protect the ruble, the value of which collapsed against the dollar and euro.

Transactions to support the ruble, "will no longer be possible and fortress Russia will be exposed," a senior US administration official told reporters.

Canadian Finance Minister Chrystia Freeland said the ban is meant "to ensure that Russia's invasion of Ukraine will be a strategic failure."

"Canada is firmly on the side of the heroic resistance of the people of Ukraine and we will continue to take further action to ensure President (Vladimir) Putin does not succeed," she said in a statement.

The United States also sanctioned Russia's finance ministry and another sovereign wealth fund, but continues to exempt "certain energy-related transactions" from the bans targeting the central bank, Treasury said.

The US official said the package of coordinated sanctions will create a "vicious feedback loop," and Moscow "will be forced to deplete their domestic rainy day fund far more quickly, experience a weakening of their currency, making funding their war of choice much more expensive."

"Inflation is very likely to spike. Purchasing power is likely to plummet. Investment is likely to plummet," the official said.

- Going backward -

In the wake of the sanctions imposed by Western powers in response to the 2014 invasion of Crimea, Moscow had built up $630 billion in reserves of foreign currency and gold to buffer Russia, but the latest penalties, which include cutting the country's banks off from the SWIFT system critical to transferring funds between banks, could cripple the economy.

Edward Fishman, a nonresident senior fellow at the Atlantic Council who studies sanctions, said the actions are "without precedent" because they go after all the sources of wealth Moscow could have tapped to bolster its economy.

"As a result, the specific consequences aren't easy to predict with a high level of confidence. But the consequences will certainly be far-reaching. And it took a whole lot of courage for the US and Europe to take this step," he said on Twitter.

Researchers at the Institute of International Finance (IIF) predicted the sanctions could force Russia to institute capital controls or declare a bank holiday as citizens rush to withdraw savings.

"As a result, we anticipate seeing negative growth in an economy that has already been hindered by increasing isolationism," IIF wrote.

However, they warned in a paper released Monday that "even though we are seeing some of the most serious sanctions imposed on a country in recent history, there is still an escalation ladder and, if necessary, the United States and others can continue scaling up sanctions."

This could be done by ending the exemptions for energy transactions or further tightening down access to euros, the researchers wrote.

Washington also slapped sanctions on the Russian Direct Investment Fund, a state-owned institution that US Secretary of State Anthony Blinken described as a "known slush fund for President Putin and his inner circle.

It is run by Kirill Dmitriev, who is close to Putin.

"Our objective is to make sure that the Russian economy goes backwards if President Putin decided to continue to go forward with an invasion of Ukraine, and we have the tools to continue to do that," the administration official said.

"This fund and its leadership are symbols of deep-seated Russian corruption and influence peddling globally," the official added.

The United States has already sanctioned a number of Russian oligarchs, as well as Putin himself, and 24 individuals and organizations in Belarus, which Russia used as a launch pad for its invasion.

The official warned that "those costs will continue to ratchet much higher."

AFP

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