WASHINGTON - The Biden administration, Canada, and European allies vowed Saturday to remove certain Russian financial institutions from SWIFT, which is a key part of the global banking system, and also impose major restrictions on Russia’s central bank, a dramatic escalation of the coordinated effort to punish the Kremlin for its invasion of Ukraine.
In a joint statement, the countries announced they had come to the agreement on what appear to be unprecedented measures to “ensure that this war is a strategic failure for Putin.”
“As Russian forces unleash their assault on Kyiv and other Ukrainian cities, we are resolved to continue imposing costs on Russia that will further isolate Russia from the international financial system and our economies,” the statement said. “We will implement these measures within the coming days.”
SWIFT is short for the Society for Worldwide Interbank Financial Telecommunication, which is a messaging network that connects banks around the world. This consortium, based in Belgium, connects more than 11,000 financial institutions in 200 countries and is used as money is transferred through the banking system. Last year, SWIFT averaged 42 million messages a day.
President Joe Biden was asked by reporters a few days ago why the White House hadn’t decided to restrict Russia’s access to SWIFT, and he said the idea was under consideration but that some European countries had not yet agreed to take that step. That calculation appeared to have changed in the past few days as Russia’s attacks in Ukraine continued.
In their joint statement, the U.S., Canada and European allies said “we commit to ensuring that selected Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally.”
The statement did not specify which “selected Russian banks” would be removed, and the statement suggested that some Russian banks could be exempt from the action.
Both the action related to SWIFT and the move to target Russia’s central bank comes with little precedent. Targeting the central bank could mean attempting to freeze the foreign reserves of a country with nuclear weapons. Some experts believe such a step could carry risks if Moscow felt like its money was being held ransom.
Russia’s central bank has more than $640 billion in foreign exchange reserves, much of it held in the computers of western central banks in cities such as New York, London and Frankfurt. The effort to freeze or quarantine that money is likely to put tremendous pressure on Russia, one of the world’s largest economies, and could lead to domestic turmoil, triggering a bank run, cratering the ruble and causing Russian businesses to panic.
In the joint statement, the U.S. and its allies said “we commit to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions.”
Before the countries announced the measures, Michael S. Bernstam, a research fellow at Stanford University’s Hoover Institution, said full and immediate sanctions on Russia’s central bank would be not only the single-most impactful financial sanction, but the only sanction, in his view, that could get Moscow to stand down.
The White House has already sanctioned Russia’s largest banks, but Moscow could attempt to use its sizable foreign reserves to prop up those banks for a while. Removing that option, he said, would cripple Moscow’s ability to bail out its banks.
Cracking down on the central bank could prompt Russian people and businesses to “rush to get dollars,” Bernstam said. “They will run to exchange bureaus and banks to get $20 bills, $50 bills, but there won’t be enough. So there will be a huge panic, a run on the dollar. The exchange rate will collapse.”
The White House so far had relied on imposing sanctions against specific people and businesses in Russia as a way to create financial pressure. Targeting Russia’s central bank is a much more imposing step. Freezing Russia’s central bank reserves, if that’s the step the White House and others take, would amount to the type of measure only used a handful of times over the last half-century. The purpose could be to prevent the Kremlin from using its substantial financial reserves as a backstop for the mounting costs of the war, as U.S. and European sanctions kick in.
“If you were to do this in a coordinated fashion, you would impose dramatic sweeping costs on the Russian state. This would in one fell swoop say all the reserves of Russia are locked down and no longer usable,” said Richard Nephew, a senior research scholar at Columbia University.
“It could have a devastating effect on the Russian economy. it will be seen as a massive escalation regardless.”
But the strategy is not without its risks. The U.S. has never taken this step against any country with nuclear weapons. And it is possible the Kremlin reacts by escalating hostilities against Ukraine.
Mark Weisbrot, a liberal economist and co-director of the Center for Economic and Policy Research, warned that targeting Russia’s central bank could prove to be a mistake.
“This situation is dangerous and needs de-escalation to achieve a diplomatic solution. If there’s one thing that recent events have shown, it’s that threats to meet or deter military force with economic punishment are not working,” he said. “And if carried out, these threats have additional costs for all parties.”
The joint statement by the U.S. and its allies included three other commitments.
The countries said they would take action against people and entities responsible for the war in Ukraine “and the harmful activities of the Russian government.” They said they would “limit the sale of citizenship - so called golden passports - that let wealthy Russians connected to the Russian government become citizens of our countries and gain access to our financial systems.”
In addition, they said they were creating a task force that is meant to ensure that sanctions are implemented effectively.
“As a part of this effort we are committed to employing sanctions and other financial and enforcement measures on additional Russian officials and elites close to the Russian government, as well as their families, and their enablers to identify and freeze the assets they hold in our jurisdictions,” the statement said.
The statement also committed to stepping “up or coordination against disinformation and other forms of hybrid warfare.”