"Biden Considers Ultra-Strong Sanctions Including Blocking Dollar Transactions if Russia Invades Ukraine"

Dollar-Based Oil Market... Russian Exports Worsen if Payments Blocked
Strengthening Cooperation with European Allies... Russia's Invasion of Ukraine Likely to Become Difficult

[Image source=AP Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] Major foreign media outlets have reported that U.S. President Joe Biden is considering strong economic sanctions against Russia, including blocking dollar transactions, ahead of a virtual summit with Russian President Vladimir Putin. The Biden administration is also reportedly preparing coordination with European allies to implement immediate economic sanctions if Russia invades Ukraine.

If the economic sanctions against Russia are actually enforced and dollar transactions are blocked, Russia is expected to face severe economic difficulties. This is because Russia, a major oil-producing country, is likely to have its oil export routes blocked in the oil market, where dollar transactions hold a high proportion. Although Russia has been trying to reduce its reliance on dollar transactions in preparation for such U.S. sanctions, dollar transactions still account for more than half of its total trade, leading to expectations that a full-scale confrontation with the U.S. will be difficult.

According to foreign media including CNN on the 6th (local time), a senior U.S. official explained at a White House press briefing about the virtual summit between President Biden and President Putin scheduled for the 7th, stating, "President Biden will warn President Putin that severe economic sanctions will be imposed if he attempts to invade Ukraine," and emphasized, "Over the past few weeks, we have extensively communicated with European allies and partners, including Ukraine, about the need to respond firmly to Russia's aggression against Ukraine, and fundamentally agreed that diplomacy is the way to resolve this issue."

The White House did not disclose specific economic sanctions against Russia, but the U.S. government is reportedly considering ultra-strong sanctions including blocking dollar transactions. Bloomberg News, citing government sources, reported, "Various sanctions are under review, including sanctions on Russia's major banks and the Russian Direct Investment Fund (RDIF), restrictions on Russia's government bond purchases, and prohibitions on extending debt limits," adding, "We are examining multifaceted sanctions including blocking access to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) dollar payment system."

Blocking access to the SWIFT dollar payment system is an ultra-strong economic sanction that completely excludes a country from international financial transactions. The European Parliament approved a resolution in April to block dollar transactions if Russia invades Ukraine, and Iran and North Korea are currently under similar sanctions. Once these sanctions begin, export and import transactions using the dollar will be fundamentally blocked, potentially plunging the country into severe economic hardship.

In particular, for Russia as an oil-producing country, oil exports, which are mostly conducted through dollar transactions, will face significant restrictions. Since the 1975 Petro-Dollar agreement between the U.S. and Saudi Arabia, which stipulated that oil transactions would be conducted exclusively in dollars, the dollar has been the primary payment method in the oil market.

The Russian government has also been reducing its reliance on dollar transactions in preparation for U.S. sanctions blocking dollar payments, but its dollar dependence remains high. According to data compiled by the Russian Central Bank last year, the proportion of dollar transactions in Russian trade was 60%.

As the U.S. government is expected to strengthen cooperation with European countries to impose economic sanctions, Russia's invasion of Ukraine is anticipated to be significantly deterred. According to intelligence data obtained earlier by The Washington Post (WP), Russia is reportedly preparing to mobilize a force of 175,000 troops to carry out military actions against Ukraine early next year.