Definition and examples of a central bank freeze
A central bank freeze is a form offinancial penaltywhere one country prevents another country from attracting foreign assets.
Central bank freezes are typically applied in times of conflict or war. For example, after the war between Russia and Ukraine began in February 2022, the US government imposed a freeze on Russia's central banks.activaheld in the US
Remark
In the United States, central bank freezes are administered by the Treasury Department's Office of Foreign Assets Control (OFAC).
How does a central bank freeze work?
Freezing central banks works much the same wayfreezing of individual banks– but instead of one person not having access to their money, it's an entire government agency.
Imagine keeping most of your assets in one bank. You have yoursemergency fundof,your 401(k), vansavings programs for schoolchildren… Almost everything.
Now imagine that this bank is notified that you are acting unethically or illegally. In response, they freeze all your accounts, preventing you from using your assets. Now you have nothing left unless you comply with their requests.
On a simplified scale, this is how a central bank freeze works. It cuts off a country's access to its assets held in foreign banks in an effort to prevent conflict and restore peace.
Governments use theirsforeign exchange reservesfor all kinds of things: to help stabilize the economy, strengthen their currency, pay off debts to other countries, and provide crucial aid in times of need.
But when another country believes they pose a threat to humanity, they can impose a central bank freeze – usually through state sanctions – to effectively suspend the country's access to its currency and reserves. The suspensions could last decades. The suspensions can last more than ten years. For example, the United States imposed a series of economic sanctions on Iraq in 1990, which ended in 2010.
As a result, a central banking freeze can affect a country by:
- Removes his ability to stabilize his currency
- Restricting access to the globalized economy
- Make the country less equipped to deal with national disasters or emergencies
- Preventing the conflict from continuing
- Encourages the country to restore peace
For example, after September 11, the US (along with the UN) ordered all UN member states to freeze assets belonging to the government of Afghanistan 'to prevent the Taliban from gaining access to its assets'.
Remark
In 2019, the Trump administration issued a freeze on Venezuelan government funds by central banks in an attempt to remove President Nicolás Maduro from power.
Central bank freezes are often part of a larger set of economic sanctions aimed at a country. For example, in 2022, the central bank's OFAC freeze on Russian assets was part of a wide range of sanctions, including:
- Disconnect from larger companies
- Suspension of debt and equity issuance by US residents to Russian state-owned enterprises
- Sanctions and licenses to protect third parties from the unintended consequences of Russian sanctions
- Sanctions against specific oligarchs close to the Russian president and against those influential in the Russian financial sector.
Since 1979, the US has issued a central bank freeze on countries including Afghanistan, Angola, Burma, Haiti, Iran, Iraq, Libya, Panama, Sudan, Syria, Russia, the former Yugoslavia, Venezuela and Zimbabwe. Some were done unilaterally, while others were imposed in collaboration with the UN.
Pros and cons of a central bank freeze
Benefit
Used as a means to maintain peace and de-escalate conflict
A new form of global warfare that does not involve weapons
Cons
Can directly affect the global economy
Sanctions can harm innocent families more than public officials
Benefits explained
- Used as a means to maintain peace and de-escalate conflict: The main advantage of a central banking freeze is that it can be used to paralyze the economyeconomic power of a countryand to deter them from perpetuating hostile acts.
- A new form of global warfare that does not involve weaponsUnlike the Cold War, central bank freezes allow countries to create a level playing field through economic sanctions instead of weapons.
Disadvantages explained
- Can directly affect the global economy: If a central banking freeze is implemented, it is not only the country in question that will feel the consequences. If enough sanctions are imposed on an economically influential country, it could have consequences for the entire global economy.
- Sanctions can harm innocent families: Sanctions, including central bank freezes, can have a more negative impact on the working class and poor citizens than on government leaders or those in power.
Notable events
Central bank freezes like those imposed by the US on Russia are a form of economic warfare that is more effective today than in decades past
In an interview with Washington University in St. Louis' (WUSL) Newsroom publication Mark Taylor, professor of business administration at WUSL, said economic sanctions like the one in 2022 would not have worked during the Cold War.
“These types of sanctions would not have been effective during the Cold War because Russia and the entire Soviet bloc were largely a closed, communist economic zone,” Taylor said. “Today, however, Russia is a capitalist economy dependent on global trade and international finance, making them more vulnerable to sanctions.”
In other words, central bank freezes carry more weight today under certain circ*mstances than they did decades ago.
Key learning points
- A central bank freeze occurs when a country is cut off from its foreign exchange reserves.
- Freezing central banks works much like freezing personal bank accounts: the government cannot withdraw money until it obeys orders to release it.
- In the United States, central bank freezes are administered by the Treasury Department's Office of Foreign Assets Control (OFAC).
- The central bank freeze could last for decades.
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