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Behind the push to freeze Moscow’s foreign cash

MONTREAL, Que. — As Russian forces readied to steamroll into Ukraine, Canada’s finance minister began drumming up support for a move that could be devastating for Russia’s economy.

Chrystia Freeland, who also serves as the deputy prime minister, spent much of last week “pushing the idea of sanctioning the central bank,” said a senior Canadian official who spoke on the condition of anonymity.

The finance minister began floating the idea Tuesday, as speculation over whether President Vladimir Putin’s military build-up was a bluff. As his intention became clear, and the invasion began in earnest, Freeland began working on “building some momentum” behind targeting the central bank in Moscow and cutting off the Putin regime from billions in foreign currency reserves.

“The response by Canada and our allies will be swift and it will bite,” Freeland swore after Putin’s forces crossed the border. “This barbaric attack cannot and will not be allowed to succeed.” Freeland was born in Canada to Ukrainian parents — her mother helped draft Ukraine’s constitution.

Prior to Saturday evening, European leaders had been steadily ramping up sanctions but remained hesitant to bring in measures that could cause collateral damage to their own economies. The U.S., meanwhile, has deployed round after round of harsh sanctions — but, on this most recent package, insisted it was weighing its options as of early Saturday, according to The Wall Street Journal.

The Canadian official said Trudeau and U.K. Prime Minister Boris Johnson had been advocating, on behalf of Kyiv, for the so-called nuclear option against the Russian banking sector.

The West’s gradual increase in penalties clearly agitated those in Kyiv.

On Friday, Ukraine’s foreign affairs minister called for an immediate increase in those consequences: “Here is your ‘never again’ test,” he wrote on Twitter. The Canadian official said Freeland has been in frequent contact with President Volodymyr Zelenskyy’s government as she tried to “bring it to a consensus,” and slap the Kremlin with the significant new penalties.

The effort would block the Russian central bank’s ability to do transactions with their foreign exchange reserves, a move that could further pummel the ruble.

Moscow has roughly $300 billion in foreign cash stashed around the world. Effectively cutting the Russian central bank from that money will be crucial in propping up the ruble should it slide further.

As economist Adam Tooze wrote in his newsletter in January: “Foreign exchange reserves give the regime the capacity to withstand sanctions on the rest of the economy. They can be used to slow a run on the rouble. They can also be used to offset any currency mismatch on private sector balance sheets.”

Locking the Kremlin out from that money required buy-in from across Europe and the United States.

While it is hard to say whether Ottawa’s intervention was primarily responsible for its allies’ change of heart — certainly, domestic pressure and images of gunfights in a major European capital had a substantial impact — the official said Freeland had made a particular appeal to the Americans in recent days. Prior to the Saturday evening announcement, President Joe Biden remained noncommittal on the need for stricter measures against Russia’s central bank.

Sanctioning the central bank hasn’t received as much attention as another significant proposed consequence for Moscow: exiling it from the SWIFT system.

SWIFT is a secure and reliable messaging system that allows member banks to communicate messages — such as money transfers — between each other. It is used by some 11,000 banks across 200 countries.

The Canadian official said that Trudeau was also supportive of a proposal, spearheaded by Johnson, to cut Russia from the SWIFT payment system. The Guardian reported that the British and Canadian prime ministers were alone around the table in their support for such severe financial penalties.

On Saturday, Freeland and Trudeau spoke to Ukrainian Prime Minister Denys Shmyhal to report progress on building consensus on stricter measures.

By the evening, consensus finally arrived, as strikes on Kyiv ramped up for the third straight day. European Commission President Ursula von der Leyen announced that the EU would support “imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions.”

Von der Leyen also announced plans to ensure “a certain number of Russian banks are removed from SWIFT.”

Saturday’s announcement, signed by the European Commission, France, Germany, Italy, the United Kingdom, Canada, and the United States, seems to be a compromise — cutting off only parts of the Russian economy from the financial transaction system.

During a call with the European Commission president after the decision, Trudeau and von der Leyen “praised the transatlantic cooperation that led to today’s joint statement,” an official readout reports. The sanctions heralded by Freeland, they agreed, would mean “enforcing additional restrictive measures against Russian banks, companies, officials, and elites.”

Getting consensus from the European leaders has been difficult. Various European leaders have resisted measures that would limit their ability to sell luxury goods to Russia, and have feared anything that could block energy shipments into Europe.

The Canadian official said Zelenskyy has particularly leaned on Trudeau for help and advice during the crisis. The two have spoken frequently in recent weeks.

Pressure is mounting in Canada, home of the world’s largest Ukrainian diaspora after Russia, to do more. Heritage Minister Pablo Rodriguez tweeted Saturday that he is looking into removing state propaganda outlet RT from Canadian airwaves. On Sunday morning, Ottawa closed its airspace to Russian planes. The official opposition Conservative Party is calling on Ottawa to push for Russia’s removal from the G-20.

As Canada looks to increase pressure, it has significant Russian-owned or -controlled assets within its own borders that it could sanction — a fact Freeland likely knows well. Long before she entered politics, after earning a degree in Russian history and literature from Harvard, Freeland joined the Financial Times as its Moscow bureau chief. There, she helped identify corruption in Russia’s oligarch class, getting her a big break exposing misdealings at oil company Sidanco.

Freeland went on to write “Sale of the Century,” about the mass sell-off of Soviet assets after the fall of the Berlin Wall: It “remains a must-read for those of us who still care about what the hell went wrong with the naive best intentions for Russia’s forward journey,” wrote former Canadian ambassador to Moscow Jeremy Kinsman in Policy.

In 2014, when the West levied penalties against Moscow for its invasion of Crimea and eastern Ukraine, Freeland herself, then just an opposition member of Parliament, was slapped with a retaliatory Russian travel ban.

The man who gave her the tip about Sidanco, Bill Browder, has gone on to become one of Putin’s fiercest critics, lobbying governments worldwide to adopt sanction regimes targeting corrupt officials. Browder started his crusade in honor of his friend and former lawyer, Sergei Magnitsky, who died in a Russian prison, the result of a politically motivated prosecution.

While her predecessor had been cool to a so-called Magnitsky Act, after Freeland became Canada’s foreign minister she championed legislation, which passed unanimously in the House of Commons.

The act allows Ottawa to sanction any individual or corporation responsible for, or complicit in, corruption. There are ample assets in Canada owned by some of Russia’s richest men — who may not be complicit in corruption, but who benefit from it on a countrywide scale.

EVRAZ, a major London-based steel company, owns five plants in Canada — its Regina facility is the largest steelmaker in western Canada. Its largest single shareholder is Roman Abramovich who, amid pressure, announced Saturday that he would cede control of the Chelsea football club.

Buhler Industries, a farm equipment factory headquartered in Winnipeg, is majority-owned by Russian agricultural company Rostselmash. In September, Rostselmash paid $12 million to acquire a greater share of the Canadian company: It now owns 97 percent, according to corporate filings. Buhler’s board consists of a number of Russian captains of industry, many of whom are outwardly supportive of Putin’s regime. Ottawa considered sanctioning the company in 2014 but did not.

Calgary-based natural gas producer Spartan Delta Corp., meanwhile, recently had a third of its shares acquired by Russian oligarch Igor Makarov — another billionaire who runs in Putin’s circles — according to a report in the Financial Post. His name appeared on a Treasury Department list of major Russian oligarchs close to Putin.

Thursday, as she announced Canada’s second set of sanctions, Freeland relayed a message from a former colleague.

“One of my Russian friends — a Russian economist who actually worked in the government under [Boris] Yeltsin, but also under Putin — sent me an email this morning saying now he knows how it felt to be a good German in 1939,” Freeland said.

The finance minister said her aim in pushing for these economic penalties has been about “targeting the people who have been Putin’s fellow travelers. People who have been able to become extremely rich, enjoy all of the pleasures of the West, of Western democracies, while aiding and abetting Vladimir Putin.”

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