Definition and Examples of a Central Bank Freeze
A central bank freeze is a type of economic sanction where one country prevents another country from withdrawing foreign assets.
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.
In the United States, central bank freezes are enacted by the Department of the Treasury’s Office of Foreign Assets Control (OFAC).
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.
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 currency
- Restricting its entry into the globalized economy
- Making it less equipped to handle national disasters or emergencies
- Deterring it from continuing conflict
- Encouraging 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.”
In 2019, the Trump administration issued a central bank freeze on Venezuelan government funds in an effort to oust President Nicolás Maduro from power.
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 companies
- Halting the issuing of debt and equity by U.S. persons to Russian state-owned enterprises
- Sanctions and licenses to protect third parties from the unintended consequences of Russian sanctions
- Sanctions 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
Used as a means to keep peace and de-escalate conflicts
A new form of global warfare that doesn’t involve weapons
Can directly impact the global economy
Sanctions can hurt innocent families more than government officials
- 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.
- 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.
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.
- A central bank freeze is when a country is cut off from its foreign currency reserves.
- Central bank freezes work much like personal bank account freezes — the government can’t withdraw funds until it complies with the orders to unfreeze them.
- In the United States, central bank freezes are enacted by the Department of the Treasury’s Office of Foreign Assets Control (OFAC).
- Central bank freezes can stay in effect for decades.
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