EU to sanction Russian Central Bank and destabilize the ruble

Senior European Union officials announced on Sunday (February 28) new EU sanctions against the Central Bank of Russia (BCR), which will severely limit the central bank’s ability to access its reserves and thus destabilize the Russian ruble.

The sanctions were approved at an informal meeting of EU foreign ministers on Sunday night.

“We are going to […] ban Russia’s central bank transactions and freeze all its assets, to prevent it from financing Putin’s war,” European Commission President Ursula von der Leyen said Sunday, referring to Russian President Vladimir Putin and the invasion of Ukraine he had ordered.

EU High Representative Josep Borrel said this would “effectively cripple the Russian financial market.”

Already on Saturday, the EU, the UK, the US and Canada had announced “restrictive measures” against CBR. It is now clear that this means a total freeze of CBR assets by the EU.

“The freezing of CBR assets is probably the most important sanction,” Piotr Arak, director of the Polish Economic Institute, told EURACTIV, comparing it to previously announced economic sanctions against Russia.

“It means that the CBR will be very limited in conducting market operations to influence the ruble exchange rate,” he said, arguing that the ruble exchange rate will fall substantially.

So much money, so far away

The BCR has international reserves worth some 630 billion dollarswhich could normally be used to back up the Russian currency when it gets into difficulties. However, these reserves are of little use if they cannot be accessed.

Most of the reserves are held in foreign securities, many of them denominated in euros, which will now be blocked and cannot be used by the BCR. Another significant portion of the reserves is held as foreign currency deposits, mostly euros.

According to estimates by Chris Marsh, a global macroeconomics and finance analyst, many of these foreign currency deposits are likely to be held by Germany’s national bank, the Bundesbank.

Bundesbank chief Joachim Nagel has said he fully supports sanctions against the CBR.

Marsh estimated that the CBR still has access to about half of its reserves, mainly gold and Chinese renminbi securities. This increases the dependence of the Russian economy on China, which could be exploited by the Chinese government.

“China is very good at extorting money and concessions from countries in distress,” Piotr Arak told EURACTIV.

The exclusion of some Russian banks from the SWIFT interbank messaging service, announced on Saturday (27 February), could increase this dependency, as Russia’s only other international interbank communication system is the one that connects it to Chinese banks.

Insecurity on the rise

However, financial sanctions have not yet fully isolated the Russian financial sector from the European and North American economies.

Payments for gas and oil deliveries are still possible under the most recent sanctions package, meaning that, for the time being, the Russian government’s most important source of revenue and foreign exchange remains open.

“We are still one step before full sanctions as in Iran in 2012,” Arak said, stressing that the most effective sanction would be a ban on gas and oil imports from Russia.

However, videos uploaded to social media over the weekend showing long lines of customers withdrawing cash from ATMs seem to hint at the first signs of a bank run, as Russians try to get their hands on as much cash and, if possible, foreign currency while they can.

A bank run would destabilize Russian banks, which would negatively affect the entire Russian economy.

In addition, a much weaker ruble would increase the price of imports for Russian consumers, which in turn could lead to high inflation during an economic downturn.

According to Arak, the Russian government will likely be forced to impose capital controls, limiting both cash withdrawals and the exchange of the ruble into foreign currency.

In addition to the sanctions against the CBR, the EU decided to close European airspace to Russian aircraft, ban major Russian media outlets and sanction some oligarchs close to Putin’s regime, after including Putin himself and his foreign minister, Sergei Lavrov, on the sanctions list on Friday.

[Edited by Zoran Radosavljevic]