After Europe and the United States surrounded Russia’s central bank and its major financial institutions, the ruble collapsed, and the one-day drop set a historical record.

In this regard, The Economist pointed out that the economic weapons of the West targeting the central bank will frighten the Chinese regime, which may now have to figure out how to resist the pressure from Western sanctions if it dares to use its forces against Taiwan.

The Financial Times reported that Europe and the United States announced their sanctions on the Russian central bank on Sunday, Feb. 27, and expelled some Russian banks from SWIFT, blocking the country’s connection with the global financial system and destroying Russia’s economic stability.

A senior U.S. government’s footstep official added that the new measures amounted to Russia being kicked out of the international financial system as a “global economic and financial pariah.”

Elina Ribakova, deputy chief economist at the Institute of International Finance, said that if Russia cannot sell significant foreign assets in exchange for local currency, its ability to defend the ruble will be hampered, eventually leading to a bank run. Russians have flocked to banks to withdraw cash.

The Washington Post reported that the ruble sank about 30% against the U.S. dollar early Monday before steadying.

The Economist also analyzed that the crucial step in the European and American strategy is to target the Russian economic fortress—the country’s central bank. The Russian central bank has a foreign exchange reserve of 630 billion dollars, equivalent to 38% of Russia’s GDP. Even if the Russian central bank has shifted the composition of its foreign exchange reserves away from the dollar, as of June 2021, it held only 16% in dollars, 32% in euros, 22% in gold, and 13% in yuan.

However, most of its securities holdings, bank deposits, and other instruments, regardless of currency, may be held in accounts at financial institutions or in jurisdictions that will enforce Western sanctions. This means that most of Russia’s state funds will be frozen due to sanctions.

The Economist pointed out that the central bank of Russia has taken measures to stabilize financial markets. Still, the sanctions are “daunting,” and the central bank may not provide foreign currency liquidity to sanctioned banks, thereby increasing the possibility of their default. The Russian financial system is currently in panic. Russians are losing confidence in the banking system. If their withdrawals are denominated in rubles, the central bank can offset this by providing ruble loans to banks.

However, Russia has a current account surplus and earns more from abroad than it buys from abroad thanks to oil revenues. In the event of panic and capital flight, unable to tap its reserves, it may be forced to introduce strict capital controls to prevent currency collapse, or it may opt to shut down financial markets temporarily.

The Economist concludes that Europe and the United States are too late to prevent Russia from invading Ukraine. Still, to cause financial chaos in Russia, especially the Russian central bank, which marks a change in sanctions, the West’s deployment of this economic weapon may scare China.

China has a 3.4 trillion U.S. dollars foreign exchange reserve, most stored in Western financial instruments or held by Western companies. According to The Economist, China must rethink how it can withstand Western sanctions if it dares to attack Taiwan.

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