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How sanctions will prevent Russia from using its $600 billion-plus rainy day fund to prop up the ruble

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An electronic sign with currency values in Moscow.

An electronic sign with currency values in Moscow. Russia's plan to bolster the ruble with foreign reserves isn't panning out. Alexander Nemenov/AFP via Getty Images

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The combination of the Ukraine war itself and the international sanctions it triggered caused the ruble to tank Monday morning. The Russian currency started the trading day by losing a quarter of its value.

​Russia’s central bank had a plan in place to prop up the ruble in case of emergency — a rainy day fund worth more than $600 billion, comprising assets parked in banks and institutions all over the world.

​On Monday, the U.S. Treasury announced it’s freezing central bank assets held in the U.S. Other major U.S. allies have done the same. ​It will be difficult, even impossible, for the Russian central bank to use those reserves to rescue the currency.

Russia began building up its foreign exchange reserves — now totaling nearly $650 billion — after it invaded Ukraine’s Crimea region in 2014 as a hedge against future financial sanctions. 

But how does that work?

“Central banks, they hold foreign exchange reserves,” said Ousmène Mandeng, at the London School of Economics. They hold these reserves in banks in foreign countries. “And the name is a little bit misleading — because it’s not foreign exchange in the sense of currencies, it’s not that there are bank notes in their vaults. But typically these are securities that they would have to liquidate first,” he said.

For example, U.S. stocks or German bonds that Russia could sell to turn them into dollars or euros.

“And then they can use these bank balances to intervene, for example, in the foreign exchange market,” Mandeng said, buying rubles with those dollars or euros to try to buttress the currency. 

“While in theory, you are the owner of the securities, well, in the event of sanctions, there are limitations as to your access to your securities,” he said. So Russia is blocked in, and no one — not international bankers, stockbrokers or currency traders — can break out.

“The point of these sanctions is to make it impossible for Russia to use its reserves,” said Karen Petrou, at Federal Financial Analytics.

She pointed out that U.S. and European authorities are freezing, not seizing, Russia’s foreign exchange reserves. “It doesn’t take anything from Russia. Russia still has its reserves, but it can’t use them. They’re useless, they’re meaningless, they’re no longer a resource for a stable Russian system and the war on Ukraine,” she said.

There is one significant loophole in these sanctions, and it’s for buying oil and gas. That gives Russia a little wiggle room, according to Patrick Honohan, former governor of the Central Bank of Ireland and now a fellow at the Peterson Institute for International Economics.

“Flows matter more importantly than reserves. So that this flow of revenue coming into Russia from gas and petroleum exports will keep them going,” he said.

That may help Russia keep food in stores and maintain the flow of some crucial imports. But, it won’t do anything to help the ruble. 

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