As Russia’s aggression in Ukraine escalates, so too have the deliberations in Europe and the United States over financial sanctions. It is only 48 hours, but it seems that we have come a long way since President Biden’s announcement on Thursday afternoon. As of the morning of midday Saturday 26 February east coast time, rumors were circulating of measures that would amount to a declaration of all-out financial warfare against Russia.
Severe economic sanctions demonstrate the seriousness of how we take Russia's resort to a large scale invasion of Ukraine. In the past Russia's provocations were too limited in scope to touch off an all out war, but now they have, and now with most of Russia's neighbors having joined NATO, there's no longer an appetite for tolerating Putin and his criminal gang. Putting into simple terms, we're taking ourselves out of the business of facilitating Putin's ambitions, and not coincidentally, trafficking in stolen wealth. This will be hard because banks make their numbers by turning a blind eye to what's going on under their noses. That's you, Deutsche Bank, who I'm referring to. Dealers in luxury goods are particularly affected by these sanctions. In this respect, a (loosely regulated) capitalism is our Achilles heel. The deeper the pockets, the less willing high end purveyors of expensive goods and properties will be to ask embarrassing questions about where the money comes from. To use the Mob vernacular, half the sovereign wealth of Russia 'fell off a truck'. Look for whole populations to be irked by having to pay double the earlier market price for gas and petroleum commodities. But the real tears that will flow will be shed by those who cater to the über wealthy. My prediction is that among the smart set, these sanctions will be as popular as wearing a covid mask in a wine bar. Enforcement is going to be a major problem.
Very interesting review of the potential effects of the monetary policy. As a former banker my biggest concern is that we appear to be repeating history of what we did to Japan before they bombed Pearl Harbor. We may have unleashed the hell of a cornered wolverine.
Let's suppose the EU did go maximalist in terms of the sanctions you describe in your excellently informative #87.
What might the Russian response be? Is one possibility that Russia would go maximalist in military terms vs. Ukraine?
And how does the "friendship" pact signed by Russia and China on 2/7 factor in?
One interesting note - Roman Abrmovich, one of the early kleptocrats to spend big in the West, transferred stewardship and care of Chelsea Football Club to its charitable foundation trustees.
Those 'in the business of facilitating Putin's ambitions' include those who are ideologically aligned with him, and those who do business with Putin for profit and influence. Dealing with Putin is having a high friend in court. Everyone needs a favor once in a while, and Putin operates a thriving bus in mutual hand washing and backscratching. Nobody likes effective competition, much as capitalism cheerleaders appear to celebrate its 'creative destruction, because the party that is insufficiently ruthless or nimble gets destroyed. Governments like Putin's buy and sell favors. Nothing is permitted as a matter of right or law; everyone gets squeezed, and bribery is normalized, because without palms getting greased, nothing gets done. Worse than that is the demoralization of society where right and wrong no longer matter. Anyone who objects has also given and accepted bribes. Society becomes a sewer of shame. Businesses that pay for favors or protection money need to squeeze their patrons and customers. Jobs are purchased, regardless of qualifications and competencies. Russia has a smaller economy than Texas, New York, or California. That means fewer jobs that pay decent wages, and more jobs where the fix is in. Exhibit A would have to be the sorry ass way Putin's been handling this invasion of Ukraine. Don't get me wrong. I'm counting on Russian incompetency to help save Ukraine. But you need to understand that all the tanks in Eastern Europe won't make the Russians better soldiers. I am expecting that a great deal of the supplies and materiél that Putin is planning to use will never reach their destinations, and I wonder how much of it has already been diverted into the black market. Times change, but essentially, Russia and Russians don't change.
Pozsar has just written that QE may need to be extended! Liquidity out elsewhere (even tho that be Russia), in the current post GFC plumbing network, requires addition of liquidity here. Else...GFC '22!
Where the CBR's reserves are held - and what may happen - is intimately tied not just to possible layers of swap contracts and collateral but the servicing of these contracts. If they can't be serviced then it all starts to unravel requiring fairly deep focus and involvement from Moscow. That alone won't be easy under current circumstances.
First the US makes Russia rich by throttling domestic gas and oil production, driving up prices to serve "green" interests. Now they want to make Russia poor, not by cutting into Russian energy exports, but by calling on the magic banking fairies who specialize in smoke and mirrors. Didn't we just have a recap of the Fed in #55? Who thinks our bankers can fleece a cold-eyed KGB guy who has been planning this scenario for years? https://adamtooze.substack.com/p/top-links-55-forever-is-composed
If Russia's dollar reserves are made useless by sanctions, would they be able to arrange some kind of credit swap with the Chinese? Dollars for yuan?
Thank you for your clear explanations of existing and possible sanctions. I'm not finance-literate, but even I can understand the - one might say - existential effects of a full financial war against Putin and his cronies. I do pity the Russian people, though.