{"id":76309,"date":"2022-02-28T00:55:16","date_gmt":"2022-02-28T04:55:16","guid":{"rendered":"http:\/\/dbsjeyaraj.com\/dbsj\/?p=76309"},"modified":"2022-02-28T20:06:11","modified_gmt":"2022-03-01T00:06:11","slug":"the-wests-plan-to-isolate-putin-by-targeting-russias-central-bank-with-sanctions-and-undermining-the-ruble","status":"publish","type":"post","link":"https:\/\/dbsjeyaraj.com\/dbsj\/?p=76309","title":{"rendered":"The West\u2019s Plan to Isolate Putin by targeting Russia\u2019s central bank with sanctions and Undermining the Ruble"},"content":{"rendered":"

<\/p>\n

By Patricia Cohen and Jeanna Smialek<\/strong><\/p>\n

By targeting Russia\u2019s central bank with sanctions, experts said, American and European leaders have taken aim at what could be one of President Vladimir V. Putin\u2019s greatest weaknesses: the country\u2019s currency.<\/p>\n

In Russian cities, anxious customers started lining up on Sunday in front of A.T.M.s, hoping to withdraw the money they had deposited in banks, fearful it would run out. The panic spread on Monday. To try to restore calm, the Bank of Russia posted a notice on its website: \u201cThe volume of bank notes ready for loading into A.T.M.s is more than sufficient. All customer funds on bank accounts are fully preserved and available for any transactions.\u201d<\/p>\n

Even before the sanctions were announced over the weekend, the ruble had weakened. On Monday it plunged further, with the value of a single ruble dropping to under 9 cents at one point. As the value of any currency drops, more people will want to get rid of it by exchanging it for one that is not losing value \u2014 and that, in turn, causes its value to drop further.<\/p>\n

In Russia today, as the purchasing power of the ruble drops sharply, consumers who hold it are finding that they can buy less with their money. In real terms, they become poorer. Such economic instability could stoke popular unhappiness and even unrest.<\/p>\n

<\/p>\n

\u201cIf people trust the currency, the country exists,\u201d said Michael S. Bernstam, a research fellow at the Hoover Institution at Stanford University. \u201cIf they don\u2019t, then it goes up in smoke.\u201d<\/p>\n

The sanctions aimed at the banking system were announced during a tense weekend in which Mr. Putin put his nuclear forces on a higher level of alert. The United States, the European Commission, Britain and Canada agreed to remove some Russian banks from the international system of payments known as SWIFT and to restrict Russia\u2019s central bank from using its storehouse of hundreds of billions of dollars\u2019 worth of international reserves to undermine the sanctions.<\/p>\n

Kicking banks out of SWIFT has gotten the most public attention, but the measures taken against the central bank are potentially the most devastating. Ursula von der Leyen, the president of the European Commission, said it would \u201cfreeze its transactions\u201d and \u201cmake it impossible for the central bank to liquidate its assets.\u201d
\nOn Monday, the U.S. Treasury Department offered more details on how the sanctions would work, saying they would paralyze the Bank of Russia\u2019s assets in the United States and stop Americans from engaging in transactions involving the central bank, Russia\u2019s National Wealth Fund or the Russian Ministry of Finance. As expected, there are exemptions for transactions related to energy exports, on which Europe relies.<\/p>\n

\u201cThe move on the central bank is absolutely shocking in its sweeping wording,\u201d said Adam Tooze, the director of the European Institute at Columbia University.<\/p>\n

On Monday, the British government banned transactions with the Russian central bank, the foreign ministry and the sovereign wealth fund.<\/p>\n

But if the allies were to impose a full-fledged freeze of the vast amount of dollars, euros, pounds and yen that are owned by Russia but held in Western banks, it could devastate the Russian economy, causing spiraling inflation and a severe recession.<\/p>\n

At the heart of the move to restrict the Bank of Russia are its foreign exchange reserves. These are the vast haul of convertible assets \u2014 other nations\u2019 currencies and gold \u2014 that Russia has built up, financed in large part through the money it earns selling oil and gas to Europe and other energy importers.<\/p>\n

The crux of why the Western allies have such leverage comes down to a reality of the modern financial system: Although Russia\u2019s central bank owns the assets, it doesn\u2019t control them.<\/p>\n

As Mr. Bernstam explained, the Bank of Russia has roughly $640 billion in foreign exchange reserves on paper \u2014 or rather as electronic entries. But a big chunk of that money is not in Russian vaults or financial institutions. Rather, it is held by central and commercial banks in New York, London, Berlin, Paris, Tokyo and elsewhere around the world.<\/p>\n

In countries like Russia, where the currency is not so stable, the ability to convert to a strong and trusted one like the dollar or the euro is crucial. It is evidence that the home currency \u2014 in this case the Russian ruble \u2014 has value. Russia\u2019s vast store of foreign exchange backs up that value. It assures households and businesses that they can convert their rubles whenever they want, and makes sure that the nation can protect its exchange rate with other currencies. The reserves also lubricate the day-to-day transactions of Russian businesses that export and import.<\/p>\n

But once workers, managers, owners and financiers worry that they can\u2019t trade their rubles for dollars or euros \u2014 because banks don\u2019t have access to their foreign exchange reserves \u2014 they lose confidence.<\/p>\n

It is a point that Lenin himself reportedly made more than a century ago, which was repeated by the economist John Maynard Keynes: \u201cThere is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.\u201d
\nThe Bank of Russia can try to prop up the value of the ruble by using its reserves to buy up rubles that people are selling. But it can do that only as long as it has access to foreign reserves.<\/p>\n

The question is how long it can make those transactions. According to Mr. Bernstam\u2019s calculations, Russian individuals and companies have deposited $268 billion in foreign denominations in Russian banks.<\/p>\n

*************************<\/strong><\/p>\n


\nRussia\u2019s Attack on Ukraine and the Global Economy<\/strong><\/p>\n

A rising concern.<\/strong> Russia\u2019s attack on Ukraine could cause dizzying spikes in prices for energy and food and could spook investors. The economic damage from supply disruptions and economic sanctions would be severe in some countries and industries and unnoticed in others.<\/p>\n


\nThe cost of energy.<\/strong> Oil prices already are the highest since 2014, and they have risen as the conflict has escalated. Russia is the third-largest producer of oil, providing roughly one of every 10 barrels the global economy consumes.<\/p>\n

Gas supplies.<\/strong> Europe gets nearly 40 percent of its natural gas from Russia, and it is likely to be walloped with higher heating bills. Natural gas reserves are running low, and European leaders have accused Russia\u2019s president, Vladimir V. Putin, of reducing supplies to gain a political edge.<\/p>\n


\nFood prices.<\/strong> Russia is the world\u2019s largest supplier of wheat and, together with Ukraine, accounts for nearly a quarter of total global exports. In countries like Egypt and Turkey, that flow of grain makes up more than 70 percent of wheat imports.
\n
\nShortages of essential metals.<\/strong> The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world\u2019s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.<\/p>\n


\nFinancial turmoil.<\/strong> Global banks are bracing for the effects of sanctions designed to restrict Russia\u2019s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies crucial for trade. Banks are also on alert for retaliatory cyberattacks by Russia.<\/p>\n

Yet the central bank has just about $12 billion of cash in hand \u2014 an astonishingly small amount, he said. As for the rest of Russia\u2019s foreign exchange reserves, roughly $400 billion is invested in assets held outside the country. Another $84 billion is invested in Chinese bonds, and $139 billion is in gold.<\/p>\n

The central bank could trade in some of those bonds for renminbi, which would enable it to buy goods from China but not from other countries. It could also sell gold, although Mr. Bernstam argues that there will be few buyers for the tons that Russia has on hand.<\/p>\n

Other estimates put the amount of assets held outside Russia at closer to $300 billion. The potentially dire consequences for the economy are the same.<\/p>\n

\u201cIf the ruble collapses, it could usher in severe inflation and exacerbate a brewing recession,\u201d Robert Person, an associate professor of international relations at the United States Military Academy, said, noting that his views were his own and not those of the government or military.<\/p>\n

\u201cThe economic consequences of these measures could turn out to be far more severe than other measures that have gotten more attention in the media,\u201d he added. \u201cThis gets at the Russian government\u2019s basic tools to manage its macroeconomy.\u201d
\nThe United States and some of its allies previously imposed similar sanctions on Venezuela, Iran and Syria, but they all have much smaller economies than Russia.<\/p>\n

The Bank of Russia took steps on Monday to restore confidence, and more than doubled interest rates to 20 percent from 9.5 percent in order to offset the rapid depreciation of the ruble. The bank also released an additional $7 billion worth of reserves that had been set aside as collateral for loans and closed down the Moscow stock exchange for the day. Meanwhile, the foreign ministry moved to order companies to sell 80 percent of their foreign currencies, in a bid to gin up demand for rubles and prevent them from stockpiling dollars and euros.<\/p>\n

Mr. Bernstam warned that the West\u2019s attack on the Russian ruble needed to be handled with care. \u201cWe don\u2019t want to destroy them,\u201d he said. \u201cWe don\u2019t want the political system to collapse.\u201d<\/p>\n

Courtesy:New York Times<\/em><\/p>\n

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By Patricia Cohen and Jeanna Smialek By targeting Russia\u2019s central bank with sanctions, experts said, American and European leaders have taken aim at what could be one of President Vladimir V. Putin\u2019s greatest weaknesses: the country\u2019s currency. In Russian cities, anxious customers started lining up on Sunday in front of A.T.M.s, hoping to withdraw the …<\/p>\n

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