The US has taken its most aggressive step yet to cripple Russia’s economy and financial system, announcing a ban on transactions with Russia’s central bank and new sanctions on the Russian Direct Investment Fund and its chief executive Kirill Dmitriev, a key ally of President Vladimir Putin.
The move by the US Treasury on Monday morning follows a joint pledge by western nations on Saturday to block Russia’s ability to access roughly $ 630bn in foreign reserves and impose huge costs on its economy in the wake of its invasion of Ukraine.
A senior Biden administration official said the new measures would take effect immediately and were unveiled before US markets opened on Monday to prevent “asset flight”, after learning that the Russian central bank was trying to “move” some of its foreign reserves around.
“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 Putin and his inner circle depend on to enable his invasion of Ukraine,” said Janet Yellen, US treasury secretary.
The US Treasury said its Office of Foreign Assets Control would prohibit US individuals from engaging in any transactions with Russia’s central bank, its national wealth fund and its finance ministry. In addition, the US said it would place sanctions on the RDIF, Russia’s most prominent sovereign wealth fund, as well as Dmitriev to stop Putin and his inner circle from raising funds abroad, including in the US.
“This fund and its leadership are symbols of deep-seated Russian corruption and influence peddling globally,” a senior Biden administration official said.
US officials described the actions taken on Monday as an attempt to neutralize Russia’s efforts to create an economic buffer in recent years with the accumulation of foreign reserves. “If their currency was plummeting, they could use those reserves to support the ruble and to defend it,” said one senior Biden administration official, adding that the US steps would “nullify” that “insurance policy”.
However, the US Treasury said it would issue a license to allow “certain energy-related transactions” with the Russian central bank, as the Biden administration sought to mitigate some of the fallout on global energy prices and the US economy.
Despite Russia’s efforts in recent years to reduce its exposure to the dollar and its large domestic stockpile of gold, a large portion of its reserves reside overseas. The largest share is held in China, at more than 14 per cent, but the bulk of the remaining reserves are in the US, Germany, France, the UK, Austria and Japan.
Russia will continue to earn large amounts of foreign exchange, however, through its oil and gas sales, which have helped bolster its current account surplus to a record $ 19bn. The proceeds could then be used to shore up the economy and pay for imports.
Still, the move by the US and its allies to impose sanctions on Russia’s central bank led to a sharp drop in the value of the ruble on Monday, an emergency interest rate increase by Russia’s central bank, and a meeting between Putin and his economic advisers at the Kremlin.
In a speech delivered on Monday, Russia’s central bank governor Elvira Nabiullina said the condition of the Russian economy had “altered dramatically” but pledged to “use the necessary tools very flexibly” to deal with the “totally abnormal situation”.
A senior Biden administration official said inflation was likely to spike, while purchasing power and investment were likely to drop in the country. “This is a negative and vicious feedback loop that Putin has triggered,” the official said.