Ukraine Special Report

Special Report

- By Peter Martin and Jennifer Jacobs

The war between Ukraine and Russia is playing out in two theaters: on the former’s soil and in the latter’s financial system.

The European Union, the U.S., and a handful of America’s allies in Asia have responded to Russia’s invasion of Ukraine with financial sanctions unprecedented for a target Russia’s size. The steps taken to isolate it within the global financial system are aimed at punishing President Vladimir Putin by sowing chaos in his country’s economy.

In the first week of the conflict, Russia’s central bank was struggling to contain the fallout on its own side of the border, while Ukraine’s was able to maintain a semblance of stability even as it rallied global financial resources around its defense effort.

Central banks have been key players in war finance since their inception. “You can go back to the establishment of the Bank of England in the 1690s, and you can see directly where that establishment was in large part in order to be able to finance wars against Louis XIV, and also to help stabilize the economy during those wars,” says Paul Poast, a political science professor at the University of Chicago.

The Central Bank of Russia was indeed central to Putin’s strategy in the years leading up to the invasion— since 2014, when he annexed Ukraine’s Crimea region and Western nations responded with sanctions aimed at making it more difficult for Russia to transact in the U.S.-dominated global financial system.