What does sanctions on Russian Central Bank mean?

President Biden and the leaders of the European Commission, France, Germany, Italy, and the United Kingdom decided to take further measures to isolate Russia from the global financial system and the global economy by imposing among the rare of the sanctions on Russia’s central bank. ET outlines its implication on global financial system including India

What does sanctions on the Russian central bank involve?

Among the actions taken by the US and its allies, they have decided to disconnect sanctioned Russian banks from SWIFT- the global interbank payment settlement platform. Besides, the Russian Central Bank’s ability to defend the ruble to counter the impact of the sanction is curtailed

How will disconnecting Russian banks from SWIFT work?

SWIFT – the global Society for Worldwide Interbank Financial Telecom is a network that almost all banks in the world use to transmit financial information to each other as they make cross- border payments or receive payments. About 11,000 banks across the world are members of the SWIFT network. If one of these de-SWIFTed Russian banks wants to make or receive a payment with a bank outside of Russia, such as a bank in Asia, it will now need to use the telephone or a fax machine. In all likelihood, most banks around the world will simply stop transacting altogether with Russian banks that are removed from SWIFT, according to a media briefing by a senior White House official.

Is the ban already being implemented yet?

As a matter of regulation, the list of banks that will be de-SWIFTed will be finalized by the EU, since SWIFT is under Belgian jurisdiction, according to a US government briefing on Saturday.

Will Russia’s $ 600 billion plus reserves help in rescuing the ruble?

The sanctions renders Russia’s huge stock of forex reserves useless, put simply , the Russian central bank will not be able to sell thse reserves and buy rouble to meet the domestic cash and currency demand. If the Central Bank will lose the ability to offset the impact of the US sanctions and the ruble will fall even further, inflation will spike, and the central Bank will be left defenseless.

Has the move impacted global bond markets?

Though the market reacted sentimentally, fundamentally for example Russia does not have a major exposure in the US treasury bonds which is the most popularly traded instrument and influences global rates. Russia has stopped figuring in the list of major foreign investors in the US treasury securities since 2018, implying that it could be holding less than $30 billion of such instruments. Most of Russia’s foreign exchange reserves are reckoned to be in gold.

How has the Russian economy reacted to the ban?

This has been the worst week for the Russian stock market on record. This has been the worst week for the Russian Ruble since March 2020, and the currency hit an all-time low against the Dollar earlier this week. Russia’s government borrowing costs have more than doubled to almost 17 percent. The S&P credit rating agency has downgraded Russia to junk status. Within 24 hours of our actions, the demand for cash in Russia spiked 58-fold, according to reports, and the Russian government scrambled to deplete its own resources to try and shore up its banks and its currency, a media briefing by the White House said.

How could India benefit?

India could expand its rupee-ruble trade pact with Russia under which India presently cover mainly defense imports. It was stated as early as the sixties when Russian (then USSR) imports were settled in rupees which in turn was used by Russia to import goods from India. Though subsequently trade under this arrangement slowdown, it is said to have revived since 2014. This trade agreement could be used to route payments by other entities to Russian parties.

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