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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 the Bank of Russia, the country's central bank, in Moscow on Feb. 23. Western allies have taken aim at the institution to an unprecedented degree. (Andrey Rudakov/Bloomberg News)
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The U.S. government and its European allies on Monday imposed sweeping new penalties aimed at crippling Russia’s economy, as the West escalated 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 the value of the ruble plunging and crowds of Russians rushing to withdraw cash from ATMs. But the situation deteriorated markedly on Monday, with the Russian central bank raising its key interest rate from 9.5 percent to 20 percent, a move that could be seen as a way to deter people from withdrawing more money from domestic banks. And officials also kept the Moscow stock exchange closed Monday and Tuesday, a step that delayed an even greater flight of money.

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European and U.S. officials had announced most of the sanctions Saturday, but many of the details were not released until Monday, when the restrictions were implemented. Additional measures also were rolled out.

Under the new regime, all people in the United States and European Union are banned from trading with Russia’s central bank. The sanctions also apply to Russia’s Finance Ministry and its sovereign wealth fund. The United States and its allies were executing a hastily assembled strategy meant to squeeze Russia’s economy and make it very difficult for Russian leaders to tap money.

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The restrictions amount to choking off Russia from the international financial system.

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Private businesses have joined governments in the isolation of Russia. Facebook, Google and YouTube have announced plans to stop Russian state media outlets from monetizing off their platforms. Twitter announced Monday it would begin adding labels to tweets containing content from Russian state media websites. Oil giant Shell said Monday it plans to dump its joint ventures with Russian gas giant Gazprom, making it the third major oil company to announce such a step. FedEx and UPS have announced they are halting deliveries to Russia and Ukraine, and the U.S. and foreign governments have moved to block much of the Russian banking system from key international markets.

The E.U. has also announced it will shut down airspace to Russian planes and support Ukraine’s purchase of weapons.

The United States and its allies have not blocked Russia from exporting energy, however, as Europe in particular heavily relies on Russian gas.

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The U.S. government said it was 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.

The U.S. Treasury Department also announced sanctions Monday morning on entities tied to Russia’s sovereign wealth fund, including its management company and one of the sovereign wealth fund’s subsidiaries. It also put sanctions on 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,” Treasury Secretary Janet L. 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 Monday that the freeze was immediately effective and intended to prevent Russia from recalling its international reserves from around the world.

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The punishments reflect the extraordinary outpouring of support for Ukraine in the West, but they also carry the risk of further escalating hostilities with Moscow. Putin has responded to Western statements in recent days by putting the country’s nuclear forces on alert. Ukrainian and Russian officials on Monday held their first diplomatic talks since the invasion began, and they plan to continue discussions in the coming days.

The banking restrictions are arguably the most serious form of economic retaliation yet approved by Western powers in response to Russia’s attack on Ukraine. They are aimed at preventing Putin from using his nation’s 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.

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

“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 Russia 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.”

Even before Saturday, the United States had 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 restricting access to technology that could be used to help Russian companies. U.S. sanctions have also targeted members of Putin’s inner circle and other business leaders in Russia.

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The effect has been dramatic. The S&P credit rating agency has downgraded Russia’s debt to junk status, making it even more expensive for Russia to borrow money and forcing some investors to unload the debt.

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 won’t 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 putting sanctions on 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. “[Ukrainian President Volodymyr] 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.

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Adam Smith, a partner at Gibson Dunn and a former sanctions official in the Obama administration, said the attack on Russia’s central bank reflects 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 will 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 pale — 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.”

Mary Ilyushina, Jeanne Whalen, Steven Mufson and Cat Zakrzewski contributed to this report.

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