Russian Sanctions Analysis

The west led by the US has imposed very tough sanctions on Russia.  However, one of the key sanctions needs further explanation.  Thus, this analysis will focus on the sanctions against the Russian central bank.  In short, this is one of the most critical sanctions that has every been applied on a large country.

Why are the sanctions on the Russian central bank critical?

For one these sanctions include the dollar and gold reserves held by the Russian central bank.   In effect, the west has taken away the ability of Russia to support its depreciating currency.  This has fueled inflation within Russia and will be felt strongly by the citizens.  This strategy was designed to cripple the Russian economy.

Putin certaintly was taken by surprise with this move.  As a precaution, he did have some reserves in China in the form of the currency – Yuan.   Since the Chinese currency is pegged roughly at 7 to 1 with the US Dollar, we can say that these reserves can be considered safe dollar-like reserves.  The remaining US Dollars, Euros and Yen for example were frozen by the respective governments in the west.

In addition, Russia took the precaution of having its gold stored in Russia.  This move however made it illiquid since in order to be able to use this gold for Balance of Payments (BOP) purposes or to prop up the currency, the Russians would have to ship the gold to a corresponding country.  Unfortunately, many countries wanted no part of this since they might run the risk of secondary santions from the US and the west.

Normally, gold is stored in the vaults of the Bank of England for example.  This allows easy and safe transfer of gold among cuntries thus increasing liquidity.