It was the third day of the war in Ukraine and on the 13th floor of the European Commission headquarters Ursula von der Leyen had hit an obstacle. The president of the Commission had spent the whole Saturday working the telephones in her office in Brussels, seeking consensus among Western governments on the most extensive and punitive series of financial and economic sanctions ever imposed on an opponent. An agreement was imminent, but in Washington, Finance Minister Janet Yellen was still considering the details of the most dramatic and market-sensitive measure – imposing sanctions on Russia’s own central bank. The US was the driving force behind the impetus for sanctions. But as Yellen looked at the fine print, the Europeans, worried that the Russians might get the air of the plans, looked forward to advancing the plans over the finish line as quickly as possible. Von der Leyen called Mario Draghi, the Italian prime minister, and asked him to tell the details directly to Glenn. “We all waited around, asking, ‘What does it take so long?’ recalls an EU official. “Then came the answer: Draghi must do his magic for Helen.” An agreement had been reached by nightfall.
The arming of funding
This is a two-part FT series on sanctions against Russia’s central bank and a new era of economic warfare. Thursday’s article will ask: will the international financial system ever be the same? Yellen, who was president of the US Federal Reserve, and Draghi, the former head of the European Central Bank, are veterans of a series of dramatic crises – from the 2008-09 financial collapse to the euro crisis. All this time, they have exuded calm and stability in the nervous financial markets. But in this case, the plan agreed by Yellen and Draghi to freeze a large part of Moscow’s $ 643 billion foreign exchange reserves was something very different: they were essentially declaring an economic war on Russia. The stated intention of the sanctions is to significantly damage the Russian economy. Or, as a senior U.S. official said later Saturday night after the announcement of the measures, sanctions would push the Russian currency “into free fall.” European Commission President Ursula von der Leyen, EU effort coordinated directly from its office through Bjoern Seibert, Chief of Staff © Frederick Florin / AFP / Getty Images Chrystia Freeland, Canada’s finance minister, reportedly sent a written proposal to the US Treasury Department and the State Department with a plan to punish the Russian central bank © Blair Gable / Reuters This is a very new kind of war – arming the US dollar and other Western currencies to punish their opponents. It’s an approach to two decades of conflict. As voters in the US grow tired of military intervention and so-called “endless wars,” economic warfare has partially filled the void. In the absence of an obvious military or diplomatic choice, sanctions – and increasingly economic sanctions – have become the national security policy of choice. “This is a complete shock and awe,” said Juan Zarate, a former senior White House official who helped shape the financial sanctions imposed by the United States over the past 20 years. “The disconnection of the Russian financial and commercial system is about as aggressive as you can imagine.” The armament of economics has profound implications for the future of international politics and economics. Many of the basic assumptions about the post-Cold War era are overturned. Globalization was once sold as a barrier to conflict, a web of dependencies that would bring former enemies closer and closer. Instead, it has become a new battlefield. The power of financial sanctions comes from the ubiquitous presence of the US dollar. It is the most widely used currency for commercial and financial transactions – with the US Bank often involved. America’s capital markets are the deepest in the world, and US government bonds act as a backstop for the global financial system. As a result, it is very difficult for financial institutions, central banks and even many companies to operate if they are cut off from the US dollar and the US financial system. Add the euro, which is the second most held currency in the central bank’s reserves, as well as the pound sterling, the yen and the Swiss franc, and the impact of such sanctions is even more appalling. The United States has imposed sanctions on central banks in the past – North Korea, Iran and Venezuela – but has been largely isolated from world trade. Sanctions on Russia’s central bank are the first time this weapon has been used against a large economy and the first time it has been used as part of a war – especially a conflict involving one of the world’s leading nuclear powers. Of course, there are huge risks to such an approach. Central bank sanctions could provoke reactions against the dominance of the dollar in world finances. In the five weeks since the measures were first imposed, the Russian ruble has regained much of what it initially lost, and officials in Moscow say they will find ways to circumvent the sanctions. Whatever the outcome, moves to freeze Russia’s stockpile mark a historic shift in foreign policy. “These economic sanctions are a new kind of economic state with the power to inflict damage that rivals military might,” US President Joe Biden said in a speech in Warsaw in late March. The measures “wipe out Russian power, its ability to replenish its army and its ability to assert power.” George W. Bush speaks to rescuers, firefighters and police from the rubble of Ground Zero on September 14, 2001 © Eric Draper / White House / Getty Images
Global financial police
Like much else in American life, the new era of economic warfare began on 9/11. In the aftermath of the terrorist attacks, the United States invaded Afghanistan, advanced on Iraq to overthrow Saddam Hussein, and used drones to kill suspected terrorists on three continents. But with far less control and fanfare, it has also developed the powers to act as a global financial police force. Within weeks of the attacks in New York and Washington, George W. Bush vowed to “starve the funding terrorists.” The Patriot Act, the controversial law that provided the basis for the use of surveillance and indefinite detention by the Bush administration, also gave the Treasury Department the power to cut off virtually any financial institution involved in money laundering from its financial system. USA. Coincidentally, the first country to be threatened under this law was Ukraine, which the Ministry of Finance warned in 2002 that its banks were in danger of being violated by Russian organized crime. Shortly afterwards, Ukraine passed a new law to prevent money laundering. Treasury officials also negotiated access to data on suspected terrorists from Swift, the Belgium-based messaging system that distributes international financial transactions – the first step in an expanded money information network. moving around the world. The financial toolkit used to track al Qaeda’s money was soon implemented on a much larger target – Iran and its nuclear program. Stuart Levey, who had been named the first deputy finance minister for terrorism and financial intelligence, recalls hearing Bush complain that all conventional trade sanctions on Iran had already been imposed, leaving the United States without leverage. “I gathered my team and said, ‘We have not started using these tools, let’s give him something he can use with Iran,’” he said. The United States has sought to suppress Iran’s access to the international financial system. Levey and other officials would visit European banks and briefly inform them of accounts linked to the Iranian regime. European governments hated the fact that an American official was essentially telling their banks how to do business, but no one wanted to violate the US Treasury Department. During the Obama administration, when the White House faced pressure to take military action against its nuclear facilities, the United States imposed sanctions on Iran’s central bank – the latest in a campaign to strangle its economy. Levey argues that the economic sanctions not only put pressure on Iran to negotiate a 2015 agreement on its nuclear program, but also paved the way for action this year in Russia. “In Iran, we used knives to cut the path step by step, but now people can go down it very quickly,” he says. “Chasing the central bank of a country like Russia is as powerful a step as you can take in the area of financial sanctions.” Central banks are not just printing money and monitoring the banking system, they can also provide a vital financial reserve in a crisis – by defending a currency or paying for key imports. Soldiers pass through damaged Russian tanks in Bucha, near Kyiv, on Sunday © Rodrigo Abd / AP Russia’s stockpile has risen since the annexation of Crimea in 2014 as it sought insurance against future US sanctions – earning the term “Fortress Russia”. China’s large holdings of US government bonds were once seen as a potential source of geopolitical leverage. “How do you treat your banker harshly?” asked then-Secretary of State Hillary Clinton in 2009. But Western sanctions on Russia’s central bank have undermined its ability to support the economy. According to the Official Forum of Monetary and Financial Institutions, a central bank research and advisory group, about two-thirds of Russia’s reserves are likely to have been depleted. “Action against the central bank is more like if you have savings for use in an emergency and when the emergency arrives the bank says you can not take them out,” said a senior European economic policy official.
A renewed transatlantic alliance
There is an irony behind a …
