Central bank freezes are typically used in times of conflict or war. For instance, after the Russia-Ukraine war started in February 2022, the U.S. government enacted a central bank freeze on Russian assets held in the U.S.
How Does a Central Bank Freeze Work?
Central bank freezes work much like individual bank freezes—but instead of a person not having access to their money, it’s an entire government entity. Imagine for a moment that you keep most of your assets at one bank. You have your emergency fund there, your 401(k), your kids’ college savings plans…pretty much everything. Now imagine that this bank gets word that you’re acting unethically or illegally. In response, they freeze all your accounts, halting your ability to use your assets. Now you’re left with nothing 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 in foreign banks in an effort to prevent conflict and restore peace. Governments use their foreign reserves for all types of things: to help stabilize the economy, strengthen their currency, pay debts to other countries, and provide critical aid in times of need. But when another country thinks they’re imposing a threat to humanity, they can enact a central bank freeze—typically through government sanctions—to effectively suspend that country’s access to its currency and reserves. The suspensions can last as long as multiple decades. The suspensions can last more than a decade. For example, the U.S. imposed a round of economic sanctions on Iraq in 1990 that ended in 2010. As a result, a central bank freeze can impact a country by:
Stripping away its ability to stabilize its currencyRestricting its entry into the globalized economyMaking it less equipped to handle national disasters or emergenciesDeterring it from continuing conflictEncouraging it to restore the peace
For example, after 9/11, the U.S. (together with the United Nations) ordered all U.N. member nations to freeze assets held by the government of Afghanistan “to prevent access to the assets by the Taliban.” Central bank freezes often come as part of a larger body of economic sanctions leveled against a country. In 2022, for example, the OFAC’s central bank freeze on Russian assets was a part of a wide array of sanctions that included:
Pausing dealings with major companiesHalting the issuing of debt and equity by U.S. persons to Russian state-owned enterprisesSanctions and licenses to protect third parties from the unintended consequences of Russian sanctionsSanctions on specific oligarchs close to the Russian president and those influential in the Russian financial sector.
Since 1979, the U.S. has issued central bank freezes on Afghanistan, Angola, Burma, Haiti, Iran, Iraq, Libya, Panama, Sudan, Syria, Russia, the former Yugoslavia, Venezuela, and Zimbabwe, among other countries. Some were done unilaterally, while others were imposed in conjunction with the United Nations.
Pros and Cons of Central Bank Freezes
Pros Explained
Used as a means to keep peace and de-escalate conflicts: The main benefit of a central bank freeze is that it can be used to cripple a country’s economic power and deter them from continuing hostile actions. A new form of global warfare that doesn’t involve weapons: Unlike Cold War-era times, central bank freezes allow countries to level the playing field using economic sanctions rather than weapons.
Cons Explained
Can directly impact the global economy: When central bank freezes are enacted, it’s not just the country in question that feels the consequences. If enough sanctions are put in place on an economically influential country, it can affect the entire global economy.Sanctions can hurt innocent families: Sanctions including central bank freezes may have more of a negative impact on working-class and impoverished citizens than it does on government leaders or those in power.
Notable Happenings
Central bank freezes like the one the U.S. imposed on Russia are a type of economic warfare that is more effective today than it was in decades past In an interview with Washington University in St. Louis’ (WUSL) Newsroom publication, Mark Taylor, a business professor at WUSL, said economic sanctions like the ones used 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 whole Soviet bloc was largely a sealed, communist economic area,” Taylor said. “Today, however, Russia is a capitalist economy that relies on global trade and international finance, making them more vulnerable to sanctions.” In other words, central bank freezes hold more weight today in certain circumstances than they did several decades ago. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
