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Demonstrators rally in London on Feb. 25 to protest Russia's invasion of Ukraine. Saturday, the U.S., Canada, Britain, France, Germany, Italy and the European Commission said they would impose “restrictive measures” on Russia’s central bank.TOLGA AKMEN/AFP/Getty Images

Western governments announced new sanctions on Russia over the weekend, targeting the foreign reserves of the country’s central bank in a move that could spur a currency crisis for the ruble and destabilize the Russian banking system.

In a joint statement on Saturday, the United States, Canada, Britain, France, Germany, Italy and the European Commission said they would impose “restrictive measures” on Russia’s central bank to prevent it from using foreign reserves to undermine sanctions. Japan joined the group on Sunday.

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Russia’s central bank has around US$630-billion in foreign-exchange reserves, much of which is deposited with foreign institutions in the form of euros, U.S. dollars and government securities. The aim of the new sanctions is to prevent the central bank from using these assets to buy rubles on international foreign-exchange markets to prop up the external value of the currency. This could result in the ruble plummeting, making imports more expensive, fuelling inflation and sending a shockwave through the country’s financial system.

“In the history of sanctions and economic statecraft, this may be one of the strongest things that has ever happened,” said Julia Friedlander, director of the Economic Statecraft Initiative in the GeoEconomics Center at the Atlantic Council.

“The G7 … are playing a calculated gamble with the global economy and with the core of certain areas of domestic industry in the interest of foreign policy, in the interest of hurting Russia,” she said in an online discussion Saturday.

The announcement is the most significant step in a series of rapidly escalating sanctions by Western governments in response to Russia’s invasion of Ukraine.

The six governments and the European Commission also said on Saturday that they would bar several unnamed Russian banks from the SWIFT messaging system – the main global conduit for financial transaction orders – and start freezing assets held by Russian officials and elites. Last week, they introduced heavy sanctions on a number of financial institutions, including Russia’s two largest banks, Sberbank and VTB.

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The value of the ruble compared with other currencies dropped over the weekend, even as trading desks were closed. Some Russian financial apps were quoting 150 rubles for a U.S. dollar, according to social-media posts by Elina Ribakova, deputy chief economist at the Institute of International Finance. That’s sharply down from 83.5 rubles to a U.S. dollar at the end of the trading day on Friday.

“This is like a full blown currency crash like we’ve seen in places like the Latin American debt crisis in the 1980s,” said Mark Copelovitch, a professor of political science at the University of Wisconsin-Madison who studies the political economy of international finance.

Reuters reported on Sunday that there were long queues outside of ATMs in Moscow, as people rushed to take out cash, fuelling fears of widespread bank runs. Russia’s central bank urged calm, saying in a statement that it had the necessary resources to maintain financial stability.

“Russia prints rubles, they don’t print dollars. So they can print more rubles to fill the ATMs at home, but that’s going to fuel further inflation. And then the currency crash is going to fuel further inflation, because you know Russia imports most things that are not petroleum and metals,” Dr. Copelovitch said in an interview. Russian inflation was already running high, hitting an annual rate of 8.73 per cent in January.

Central banks use foreign reserves to protect the external value of their currencies by buying or selling their domestic currency on international markets. Russia has greatly expanded its foreign reserves since 2014, when Western governments imposed financial sanctions in response to Russia’s invasion of Crimea. It also diversified its holdings, moving away from U.S. dollar-denominated assets to assets denominated in other currencies, most notably euros.

This led some observers to conclude that Russia was increasingly impervious to sanctions; theoretically, it had the ability to stabilize the external value of its currency and to provide foreign-denominated cash to Russia’s banking system.

Iikka Korhonen, head of the Bank of Finland’s Institute for Emerging Economies, said the sanctions announced over the weekend show that Russia’s war chest is not impervious.

“In a real crisis situation, if you have investments outside your own borders, then those investments are vulnerable,” he said in an interview.

He said he expects the ruble to “drop like a rock” on Monday. Going forward, this could have a devastating effect on Russia’s economy and could do significant damaging to the country’s banking system.

“In terms of euros or dollars, the savings of Russians will be that much smaller. Also, purchasing power, vis-à-vis the rest of the world will shrink, they are less able to buy foreign goods, both households and corporations,” he said.

Central banks have been hit by sanctions in the past, most recently Iran’s central bank, which the U.S. targeted in 2019. But the move to punish the central bank of the world’s 11th-largest economy is on a different scale, according to Brian O’Toole, senior vice-president and director of sanctions and screening with Truist Financial Corp.

“This is unprecedented. The largest asset freeze in history that the U.S. has undertaken, aside from World War II, was Libya back in 2011. That was about $37-billion, $38-billion. This is an order of magnitude larger than that,” Mr. O’Toole said in the online discussion held by the Atlantic Council.

Prime Minister Justin Trudeau has announced Canada’s new sanctions against Russian President Vladimir Putin personally, as well as foreign minister Sergeĭ Lavrov, as the Russian invasion of Ukraine continues. Trudeau also announced Canada’s support of removing Russia from the international banking system SWIFT, and said personal donations from Canadians to Ukraine relief efforts would be matched by Ottawa up to $10-million.

The Globe and Mail

Ottawa appears to be operationalizing these sanctions by adding Russia’s central bank, Ministry of Finance and sovereign wealth fund to its list of entities that Canadian financial institutions are not allowed to transact with, said William Pellerin, a partner with the law firm McMillan LLP, who specializes in international trade law.

“My understanding is what this is meant to do is really stop commercial banks from dealing [with the Russian central bank],” he said in an interview.

“Canadian banks may also be required to freeze Russian foreign-currency deposits. That would require the banks, for example, to transfer the funds into separate blocked accounts,” he added.

The Bank of Canada has notified the Russian central bank that it will not facilitate any transactions for them, according to a statement from BoC spokesperson Paul Badertscher.

“The Bank of Canada does not hold any of the Russian central bank’s reserves, nor does it transact with any Russian banks,” he said.

Other G7 governments have not yet outlined how they intend to operationalize the sanctions. A senior U.S. official said in a briefing on Saturday that the U.S. government was still finalizing its plans.

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