The United States, the European Union and the United Kingdom surprised almost everyone this week by sanctioning the Central Bank of Russia (CBR). By freezing the bank’s assets in their jurisdictions, the Western allies hope to deprive Moscow of one of the key elements of its “Fortress Russian” self-sufficiency strategy: the CBR’s $630 billion in reserves.

Over the past six days, the CBR has been innovating rapidly to keep at its disposal the widest possible set of monetary policy tools, including foreign exchange reserves. But it has also forced her to break taboos – from capital controls and closed stock markets to allowing banks to delay asset revaluations. That’s why the bank could quickly run out of options as sanctions start to weigh in and the credit market seizes up.

Although authorities declared every business day since Monday a public holiday, the ruble still fell to new lows in the currency markets. As I predicted last week, the CBR’s main reaction was to drive up interest rates rather than intervene directly in the foreign exchange market. I hadn’t anticipated that sanctions would drastically reduce his ability to do so anyway.

An underestimated key factor in this crisis is that the CBR has not had a mandate to stick to a fixed exchange rate or a particular corridor since late 2014. At that time, Russia was struggling against the fall in oil prices and new sanctions following its annexation of Crimea. It became clear that even a large stock of reserves was finite and could not be used to prevent depreciation indefinitely. Since then, the bank’s primary mandate has been to control inflation and monitor a healthy domestic credit market through an independent interest rate policy.

Of course, the sanctions and the resulting depreciation also weaken the bank’s ability to fulfill these priorities. Inflation was already well above the 4% target and will be further accelerated by the sudden depreciation of the rouble. Domestic banks and corporations also have dollar-denominated liabilities and rely on the CBR to provide them with liquidity in dollars as well as rubles.

The BCR has faced many challenges since the global financial crisis, but it has never lent more than it backed in foreign currency and other safe assets, even in emergency loans. Now, with a conservative estimate of 53% of its assets frozen and the central bank unable to buy swaps from Western banks, the CBR might suddenly seem far less credible as a lender of last resort.

In just one week, its claims on banks quintupled to reach 5.2 trillion rubles, or 20% of its available reserves. demand. Expect emergency lending to rise in the coming days and weeks as markets reopen and new sanctions begin to bite.

Although nothing prevents the CBR from lending more rubles than it can access in foreign currency, its objective in an environment of high inflation is to use the money it has available wisely. It also faces a currency mismatch problem, since Western banks will not provide swaps. The People’s Bank of China has a swap line with CBR, but only for the renminbi. Chinese state banks have also been reluctant to finance the purchase of Russian commodities in dollars, so they are unlikely to offer dollar swaps.

The measures announced by CBR Governor Elvira Nabiullina since Monday combine emergency loans with more innovative policies. To keep banks’ balance sheets healthy, the CBR effectively stopped the clock by allowing them not to update their asset valuations to reflect the latest market turmoil. To ensure that the CBR still has enough dollars to lend to the banking system, the bank requires exporters to convert 80% of their income into rubles. It also stems the flow of foreign currency leaving the country by limiting the ability of non-residents to withdraw capital and the ability of Russians to transport cash across the border.

The government has also introduced a set of policies to support CBR’s efforts to replace frozen reserves. The Ministry of Finance has introduced a “capital amnesty” allowing residents with savings abroad to bring them back to Russia with few questions asked about taxes or criminal activity. On March 1, Prime Minister Mikhail Mishustin announced a temporary ban on foreign investors selling their Russian assets. And in a subsequent announcement, the CBR prohibited the transfer of coupon payments to foreign holders of ruble bonds.

Missing interest payments bring Russia closer to sovereign default territory, but don’t quite cross the line.

Naturally, these emergency policies will hurt Russia’s long-term attractiveness to investors, but that’s not really a political priority anymore. The CBR did not expect to be punished so quickly and was clearly forced to prepare its response in a hurry, without having time to consider the long-term implications for its frozen reserves. The United States and its partners have not yet defined any conditionality for the lifting of the new sanctions. They hope that economic pressure will force Russia to withdraw its troops.

At CBR, at least, this pressure manifests itself.

Charles Lichfield is deputy director of the GeoEconomics Center at the Atlantic Council.

Further reading

Image: Russian presidential aide Maxim Oreshkin, right, and Russian Central Bank Governor Elvira Nabiullina, left, attend a meeting on economic issues hosted by Russian President Vladimir Putin in Moscow February 28. Photo by Alexei Nikolsky/Russian Presidential Press and Information Office/TASS via REUTERS