The Biden administration has frozen billions of dollars in Afghan reserves, depriving the Taliban of cash

The Biden administration on Sunday froze Afghan government reserves held in U.S. bank accounts, blocking the Taliban from accessing billions of dollars held in U.S. institutions, according to two people familiar with the matter.

The decision was made by Treasury Secretary Janet Yellen and officials in Treasury's Office of Foreign Assets Control, the people said. The State Department was also involved in discussions this weekend, with officials in the White House monitoring the developments. An administration official said in a statement, "Any Central Bank assets the Afghan government have in the United States will not be made available to the Taliban." The officials spoke on the condition of anonymity to discuss government policy not yet made public.

Cutting off access to U.S.-based reserves represents among the first in what is expected to prove several crucial decisions facing the Biden administration about the economic fate of that nation following the Taliban takeover. Afghanistan is already one of the poorest countries in the world and is highly dependent on American aid that is now in jeopardy. The Biden administration is also likely to face hard choices over how to manage existing sanctions on the Taliban, which may make it difficult to deliver international humanitarian assistance to a population facing ruin, experts say.

The Afghan central bank held $9.4 billion in reserve assets as of April, according to the International Monetary Fund. That amounts to roughly one third of the country's annual economic output. The vast majority of those reserves are not currently held in Afghanistan, one of the people familiar with the matter said. Among those, billions of dollars are kept in the U.S., although the precise amount is unclear.

Spokespeople for the White House and Department of Treasury declined to comment on the process for blocking the funds, or the fate of U.S. economic assistance to Afghanistan. A spokeswoman for the Federal Reserve Bank of New York also declined to comment.

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The U.S. did not need any new authority to freeze the reserves, because the Taliban is already sanctioned under an executive order approved after the Sept. 11, 2001, attacks, said Adam Smith, who served on the National Security Council and as senior adviser to the director of the Department of Treasury's Office of Foreign Assets Control during the Obama administration.

Beyond the reserves, the U.S. also currently sends roughly $3 billion per year in support for the Afghan military, or roughly 15% of the country's gross domestic product. The funding can only be spent if the Secretary of Defense "certifies to Congress that the Afghan forces are controlled by a civilian, representative government that is committed to protecting human rights and women's right," according to a Congressional summary of the legislation. This funding is expected to stop flowing as well, along with smaller pots of money, such as $20 million for recruiting women to the Afghan National Security Forces. About 80% of Afghanistan's budget is funded by the U.S. and other international donors, John Sopko, the special inspector general for Afghanistan reconstruction, told Reuters this spring. A spokesman for the White House Office of Management and Budget declined to comment on the status of Congressionally-approved funding for Afghanistan.

"Of course, it's dangerous," said Ian Bremmer, president and founder of Eurasia Group, a consulting firm, about restrictions on the Afghan economy, including the freezing of funds held in the U.S. "You'll see a lot more refugees on the back of this, a lot more radicalism on the back of this. But, on the other hand, Afghanistan will not be able to control this country for a very long period of time. I can't see us spending money on the Taliban."

Mark Weisbrot, co-director of the Center for Economic and Policy Research, a Washington think tank, added: "For the U.S. government to seize Afghanistan's central bank reserves would be a big mistake. It would be telling the Taliban that the U.S. government wants to destroy them and their country's economy."

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This is far from the first time the U.S. has cut off foreign governments from its assets, approving similar moves against Venezuela and Libya after leaders hostile to the U.S. gained power in those countries as well.

The Taliban staged a rapid advance on Kabul and other cities in recent days, prompting the Afghan government and security forces to surrender or collapse. Mark Sobel, who served as deputy assistant secretary for international monetary and financial policy at the Department of Treasury, said restricting the funding could at a minimum be used as "leverage on the Taliban to behave better."

"You have to have a known, reliable counterpart. There are questions about whether the successor government is internationally recognized," Sobel said. "This move makes sense."

Smith, the former Obama administration official, also said the more important decision would likely come when the U.S. decides how to handle sanctions against the Taliban given that they now control the country. Maintaining those sanctions might chill international efforts to help Afghanistan, but it could prove politically impossible for the Biden administration to moderate — let alone lift — sanctions on the Taliban now that they are in power.

International aid flows represented roughly 43% of Afghanistan's economy in 2020, according to the World Bank.

“It could be cataclysmic for Afghanistan if the administration does not handle the sanctions issue deftly,” said Smith, now a partner at Gibson Dunn, pointing to a similar situation in the waning days of the Trump presidency that threatened to deprive Yemenis living under the sanctioned Houthi government from aid. In that case, he said, Biden officials removed the Houthis from the terrorism sanctions list — an option that may prove unavailable in this case. “This is a potentially serious humanitarian issue that I am hoping people in our government are thinking long and hard about.”

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The U.S. Special Inspector General for Afghanistan Reconstruction said on Monday that half of Afghanistan's total population required humanitarian assistance in 20221, a sixfold increase from four years ago, citing U.N. statistics.

NATO Secretary General Jens Stoltenberg said at a news conference on Tuesday that it has suspended aid to the Afghan government as well. "We have of course suspended all support, financial and other kinds of support, to the Afghan government, because there is no Afghan government for NATO to support," Stoltenberg said. "No money is transferred; no support is provided."

International powers may also entertain new sanctions against Afghanistan, a suggestion already made by Britain's foreign minister earlier this week. Sanctions can help force foreign adversaries to adopt U.S. policy by penalizing their trade partners. However, they can also exact brutal humanitarian tolls on civilian populations.

Daniel Glaser, who served as assistant secretary for terrorist financing and financial crimes in the U.S. Department of the Treasury's Office of Terrorism and Financial Intelligence, said cutting Afghanistan off from the reserve funds is the obvious first move.

“It’s the least they could do. I, personally, would not trust the Taliban to be responsible custodians of Afghanistan’s reserves,” Glaser said.