Historic sanctions on Russia had roots in Zelensky’s emotional appeal

After a perfunctory debate, the presidents and prime ministers quickly approved sanctions on Russian President Vladimir Putin, Foreign Minister Sergey Lavrov and some of Russia’s biggest banks. Talk of barring Russia from the global financial messaging system known as SWIFT, however, stalled amid skepticism on the part of Scholz and the leaders of Austria, Italy and Cyprus.

Then Ukrainian President Volodymyr Zelensky dialed into the meeting via teleconference with a bracing appeal that left some of the world-weary politicians with watery eyes. In just five minutes, Zelensky — speaking from the battlefields of Kyiv — pleaded with European leaders for an honest assessment of his country’s ambition to join the EU and for genuine help in its fight with the Russian invaders. Food, ammunition, fuel, sanctions — Ukraine needed its European neighbors to step up with all of it.

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“It was extremely, extremely emotional,” said a European official briefed on the call. “He was essentially saying: ‘Look, we are here dying for European ideals.”

Before disconnecting the video call, Zelensky told the gathering matter-of-factly that it might be the last time they saw him alive, according to a senior E.U. official who was present.

Just that quickly, the Ukrainian president’s personal appeal overwhelmed European leaders’ resistance to imposing measures that could drive the Russian economy into a state of near collapse. The result has been a rapid-fire series of developments boosting Ukraine’s long shot fight to hold off the Russian military and shattering long standing limits on European assertiveness in national security affairs.

The blitz culminated on Saturday, when the U.S., Canada, the United Kingdom and the European Union announced they would bar several major Russian banks from SWIFT, crack down on Russian oligarchs, and prevent the Russian central bank from bailing out the domestic economy. The actions led Russians to crowd ATMs in a desperate bid to withdraw cash and sparked a furious response from Putin, who called them “illegitimate” and ordered his nuclear forces to a higher state of alert.

The latest sanctions mean the western allies are effectively waging financial war against Russia, matching Moscow’s military offensive in Ukraine with attacks on the intangible assets comprising a $1.5 trillion economy.

“We’re not going to fight with bullets. We’re going to choke them financially,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

Economic sanctions will attempt to slow Putin's tanks

European and U.S. officials were expected to make public details of the new sanctions late Sunday, before financial markets open in Asia. But even before they have taken effect, the Russian financial system is wobbling.

The ruble, which already was near a historic low against the dollar, plunged in informal trading in Moscow.

On Sunday, the fraying of Russia’s ties with the global economy accelerated. The European Union closed its airspace to Russian aircraft and announced it would fund the purchase of weapons for the first time in what European Commission President Ursula von der Leyen called a “watershed moment.”

The oil giant BP said it would exit its 19.75 percent stake in the Russian energy company Rosneft. Two BP-nominated directors — CEO Bernard Looney and former group CEO Robert Dudley — have resigned from the Rosneft board, effective immediately. And FedEx and United Parcel Service both announced they have suspended shipments to Russia.

On Saturday, the credit ratings agency Standard & Poor’s cut Russia’s government debt rating to “junk.” That will force the managers of some western investment funds to dump their holdings and will likely raise borrowing costs for major Russian corporations as well.

Relations between Russia and the rest of the world have deteriorated at an astonishing rate in the four days since Putin unleashed a rocket and artillery barrage on neighboring Ukraine.

West takes aim at Russian central bank reserves, threatening blow to the economy.

After a slow start earlier this week that drew criticism from Republicans, the U.S.-led sanctions campaign is closing like a vise on the Russian economy.

“There’ll be a huge sudden spike in the cost of living. A huge change in the availability of imported products, including medicine and technology, and a huge jolt to the economic power structure,” said Adam Posen, president of the Peterson Institute for International Economics. “You are essentially directing a financial crisis in another country.”

Though the extent of the allied sanctions on Russia’s central bank are not yet known, they threaten to immobilize Putin’s main financial defense against outside pressure.

Since the U.S. and Europe imposed less comprehensive sanctions in 2014 following the Russian takeover of Ukraine’s Crimean peninsula, Putin has stockpiled foreign exchange reserves and shifted away from the U.S. dollar.

It was a costly strategy. Even as the Russian central bank accumulated $630 billion in reserves, up from just $356 billion in 2015, Putin presided over average annual economic growth of just 0.8 percent.

Now it may become the financial markets equivalent of the Maginot Line fortifications that failed to halt the Nazi advance into France in the Second World War.

Russia sold off most of its U.S. Treasury securities in recent years and bulked up on gold, which now accounts for 20 percent of its total reserves, according to the Institute for International Finance.

But Russia would need to sell that gold for dollars, euros or yen before it could use those reserves to support the ruble. And the sanctions, which Japan joined on Sunday, make that impossible.

“It’s still legal tender, but you can’t spend it,” said Posen, a former member of the Bank of England’s policymaking committee.

For millions of Russians, the looming economic calamity threatens to turn the clock back.

Russians have a visceral memory of the country’s 1998 financial crisis, when Moscow devalued the ruble and defaulted on its foreign debt. The economic blow wiped out the savings of millions of people.

On Sunday morning, Russians were standing in lengthy lines at ATMs across the country to withdraw money, hoping to act before the currency market opened on Monday and the ruble formally collapsed.

The informal currency market was already flashing red. The website of the Russian bank Tinkoff offered to exchange rubles for dollars at a rate of 171 rubles per dollar, down from about 83 before the announcement regarding the measures against the Russian central bank.

As a result of the 1998 crisis, many Russians hold their savings in dollars or euros. But according to the Levada Center polling group, only 32 percent of Russians had savings as of October. Because Russians are paid in rubles, the value of their salaries in real terms stands to drop dramatically.

Even before the war in Ukraine, prices were rising at an annual rate of nearly 9 percent. Russia’s central bank earlier this month raised interest rates by a full percentage point as it sought to cool off an overheating economy. As the ruble collapses, making imported goods more expensive, the need for additional hikes will be overwhelming. But they will land on an already wounded economy.

Putin has long presented his rule as the stable alternative to the chaos of the 1990s. In an interview two years ago with the Russian state news agency Tass, Putin said that during the 2008 global financial crisis, he thought, “What I will not allow is a repeat of the 1998 situation, when all citizens completely lost their savings.”

In 2014, Russia’s first invasion of Ukraine coincided with a precipitous drop in oil prices. In December of that year, the government faced a currency crisis that saw the ruble plummet and forced the Russian central bank to raise its key interest rate from 10.5% to 17% in a single day.

Since then, Russia has tried to build an economy that is less dependent on imports, particularly in the food sector, to soften the blow of such shocks. But Russia largely doesn’t manufacture consumer goods such as cars, electronics, computers and appliances, leaving consumers vulnerable to sudden price hikes as the ruble sinks.

“The Russian ruble has been crushed and it’s going to get crushed further,” said Chandler.

Russian markets plummet amid broader sanctions fears

If it does, the seeds of Russia’s latest economic catastrophe will have been sown over the past week, as European officials gradually faced a reckoning.

Over the past week, as European and American officials met in daily video calls to develop a response to the Russian aggression, it became clear that Putin was not backing down and that an invasion was imminent.

By Thursday and into Friday, once the invasion had begun and images of Russian tanks closing in on Kyiv, of buildings shredded by rockets, and metro stations jammed with Ukrainians seeking shelter appeared on television and social media, the mood palpably shifted.

German officials, who had just weeks ago been reluctant to endorse harsher sanctions and to send lethal aid to Ukraine, now were visibly moved by images of residents of Kyiv holding placards saying “Ban Russia From SWIFT.”

At the same time on Friday, President Biden during a White House news conference, when asked why the west had not taken action to lock Russia out of SWIFT, replied: “Right now, that’s not the position that the rest of Europe wishes to take.”

He had publicly called out Europe.

The increased popular demand for a strong response — including by kicking Russia out of SWIFT — and Biden’s calling out of Europe “really ramped up the pressure on [the Europeans] to act,” said one person familiar with the discussions, who spoke on the condition of anonymity because of the matter’s sensitivity.

One European official said that there had been “uninterrupted communication” between the technocrats of the European Commission and the White House in recent days as they tried to coordinate the complex choreography of the sanctions measures.

The official said that Europeans are trying to hit Russia with tough sanctions but not to be so drastic that the Kremlin starts shooting at them.

“Everyone understands this is a situation that has conflict potential and that has to be taken into account,” the official said.