I found this piece by Julia Friedlander at Politico on the potential consequences of the financial war the U. S. and European Union are waging on Russia interesting and commend it to your attention. I’ll quote some passages I found particularly telling.
Western leaders have chosen to match the severity of Russia’s war of choice with severe financial pressure, dwarfing the “maximum pressure†campaigns of the Trump era.
But the West’s response is no longer just pressure — it’s financial war. As opposed to previous sanctions campaigns, which sought to use pressure over time to bring a country to the table or prompt a longer-term behavior change, the goal of these Russia sanctions is to change military strategy in a war that is already happening.
Can financial pressure force a leader bent on war to alter battle plans — a decision that would need to play out in days, not months or years? Can the U.S. and its partners wreak enough havoc on the Russian economy in time to make war unsustainable? No one can answer that.
Note her point: Russia’s war on Ukraine is an issue rather than a risk.
President Joe Biden’s team initially saw their predecessors’ aggressive use of sanctions as ineffective and potentially counterproductive. Treasury Secretary Janet Yellen promised a review of U.S. sanctions practices during her confirmation hearings. What resulted was a carefully drafted but none-too-daring policy document, promising to coordinate with allies and consider how the overuse of U.S. financial pressure could over time unwind the primacy of the U.S. dollar and erode U.S. legitimacy.
But observers rightly noted that whether this restraint would stick depended on the churn of international events. First came Belarus President Alexander Lukashenko’s brutal repression in Belarus and a coup in Myanmar. Then came Ukraine. The Treasury’s principled reframe faded quickly. Despite its intentions to do the opposite, the Biden administration took financial pressure to a level unprecedented in the history of U.S. sanctions. The idea that we had already seen “maximum†pressure was blown to bits.
Although Ms. Friedlander couches the use of sanctions as a risk (what if it fails?) I see it more as potentially debunking the notion of sanctions as an effective tool which I would consider a positive risk if anything.
Economists are only able to speculate what the rapid collapse of a G-20 country means for the rest of us. Energy prices may rise to unaffordable levels despite the release of strategic reserves. Soaring commodity prices could send developing countries reliant on Russian and Ukrainian grain into even deeper debt after Covid. Financial and debt contagion could pop up in unforeseen places, revealing new corners of interconnectedness and dependencies in a globalized economy. This is likely to begin in Central Asia, where economies are closely bound by finance and trade to Russia, and potentially extend to North Africa and even areas of Europe, where Russian subsidiaries have filed for bankruptcy.
Actually, I’m more concerned about the risks of prospective policies put in place in reaction to the consequences in Ms. Friedlander’s litany above. But what sort of risks would that litany pose?
Debt crises, inflation and human need are known to spur confrontation, most famously through the economic instability in Germany that led to the rise of Nazism, but also the bread riots in Egypt during the 1970s and the breakdown of the antebellum economy in America. None of this is fated to happen, but the collateral damage of the current strategy could be larger than we know.
She concludes:
It’s arguably the biggest geopolitical objective economic measures have been tasked with achieving, certainly in the shortest amount of time. If the campaign has serious impact on regional or even global economies but still prevents future aggression against eastern Europe, that is a consolation prize worth winning. But if the West impoverishes Russia as an unhindered, unhinged Putin flattens his neighbor, no one can say the gamble was won. And it will be hard to see how governments can keep their faith in sanctions.
Read the whole thing.
I think the invasion of Ukraine is both an issue and a risk. The issue is all that is happening in Ukraine and in some point in time we will reach a new status quo, and I share the concern that all of the secondary financial measures are seemingly perpetual regardless of the most likely outcomes.
But the invasion also raised the risk that Russia poses to future invasions of NATO countries (particularly in light of Putin’s explanations). I think NATO policy has to be to make sure Russia pays as high a price as possible to discourage that possibility.
I think it is worse. We are moving into a pre-Westphalian financial era.
Here is a quick primer for those who have not delved into the innards of the financial systems:
There is no reserve currency. With the demise of Bretton Woods and the advent of free floating currency, a reserve currency is not possible. The dollar is used for most foreign transactions because there are so many eurodollars available.
Eurodollars are simply dollars or dollar assets on the books of non-US banks. There are not “offshore assets” of “the rich”. These dollars are owned by foreign entities, and since they started in Europe, they are eurodollars. Today they would be asiandollars.
A free floating currency has no intrinsic value. Dollar financial assets are only worth what everybody agrees they are worth, and that worth is based upon the dollar return of them. When the asset cannot return any dollars, it is worthless.
Financial assets only exist on paper, and they are created on balance sheets. These balance sheets include non-financial institutions, and anybody with a bank account or loan has one.
Financial assets obtain their worth from trust. Your bank does not have a spot in its vault with your money. Your money is an entry on the bank’s balance sheet, and until the bank becomes insolvent, you trust that it will remain there. (NOTE: The bank does not guarantee your purchasing power.)
Financial institutions have similar interactions with other financial institutions, with countries, with companies, with investors, with traders, with companies, etc. All of these entities must trust that their assets will be available. Financial assets and the returns must be available. Otherwise, they are worthless.
(Having a bank account with one trillion dollars is worthless if you cannot access the money, and without access, nobody will accept it as collateral.)
For another currency to replace the dollar in foreign trades, there needs to be enough of that currency available outside that country, and that requires financial assets valued in that currency. The euro is the only other currency that could replace the dollar.
Unless foreign trade between two countries is exactly equal, one country will have the other country’s currency, and domestically, the foreign currency is mostly useless. Until there is enough currency abroad, the most available use is investing in the originating country, most likely public or private debt.
When dollar based financial assets can become instantly worthless because the US deems a country unfit for polite society, trust cannot be guaranteed, and they are worthless.
De-dollarizing means it becomes more expensive or impossible to run a trade deficit.
Now, I await my PE Investor friend to tell me why I am wrong.
I don’t want to sound like a broken record. But let’s step back. Russia’s primary strategic assets (in the current context) are its raw materials (especially oil), its nuclear arsenal, and its relatively robust military.
We can only diminish the raw materials issue. This Administration refuses, for crass political reasons, to do so. Its horrible policy of the highest order.
We should start today, as we have lost a year under Team Biden, (heh, or is it Team Squad). It should be a constant policy perhaps in perpetuity. Why are we giving blow jobs to Iran, Suadi Arabia, Venezuela……….. Joe’s political base, that’s why.
Tasty – I’m not here to tell you why you are wrong. But I do believe you are too doctrinaire and over the top. (and that’s coming from me – heh) But come back later for any comments I have. I have an early tee time and need to go to bed. This group is better with your commentary than without.
“I think NATO policy has to be to make sure Russia pays as high a price as possible to discourage that possibility.”
How high a price exactly?
Regardless of your answer, I disagree with the sentiment. I think what we’ve already done is more than enough to deter Russia from invading a NATO country – and I think the fears that Putin might, for example, attack the Baltics were always fanciful before this war and at this stage are laughable.
At this point, I’m more worried about going too far and there are already signs of it. The US, EU, and NATO have done unprecedented things and so far Russia has not done much in the way of retaliation for those actions. Just put yourself in Russia’s shoes for a minute and consider what our reaction would have been had Russia backed Iraq in 2003 like we are backing Ukraine today.
That’s not to argue that we shouldn’t back Ukraine, but one must consider and factor in Russia’s potential reactions. Just like with NATO expansion where warnings of Russia’s reaction were basically ignored, we are assuming that Russia can and will do nothing in response to our actions and that everything we are doing will pressure Russia to do what we want. Dumb assumptions.
Another thing I’m concerned about is that we’re not just targeting the Russian government, we’re targeting Russia generally including Russian culture, media, language, and even the Russian people. Banning Russian cat breeds from cat shows and refusing to play Tchaikovsky are two of the more dumb and bizarre examples of a disturbing trend that is counterproductive and not well thought out. Facebook is now allowing posts advocating violence against Putin and Russia. I’m sure that will turn out just dandy.
All this kind of stuff does is provide Putin and the Russian government with a compelling narrative that is more likely to increase support for Putin among regular Russians than decrease it. It’s beginning to resemble a modern version of the anti-German hysteria that was fomented in WWI, complete with blacklists and compelled denunciations.
And the various forms of public and private censorship combined with veneration of Ukraine and the doe-eyed belief in every piece of pro-Ukrainian propaganda is not a recipe for clear thinking and analysis, much less action.
And pretty much everyone seems to be 100% on board with this, even those who long complained about “collective punishment” in foreign policy and expressed concern about conflicts causing bigoted actions.
And what happens when, as I think is inevitable, Russia loses this war – will a Versaille be demanded? It seems likely Ukraine will join NATO regardless and the alliance will be expanded to the maximum extent possible, a whole bunch of new protectorates for Americans to defend. Why shouldn’t the Tuva Republic be liberated and protected from Russian hegemony?
Anyway, in my view these are dangerous times and the future will be dangerous regardless of what happens.
I agree with that.
We’ve been doing the wrong things with respect to Russia for 30 years and many of the wrong things with respect to the Soviet Union before that. Countries, like individual people, respond to incentives. Is isolating Russia really the right strategy? Or does it increase the risks?
End the slaughter, end the sanctions.
@Drew
What happens when The Squad realizes that they can use the international financial system to change the domestic policies of other countries? Until a few years ago, nobody imagined a company would intentionally exclude customers.
These are spoiled brats, and the `supposed adults have been encouraging them.
@Andy
I think you are correct, and the WW1 & Versaille analogies are profound. I agree that these are dangerous times, but the implications far exceed Russia.
I guess it depends on what you mean by “lose this war”. If you mean that the Ukrainian military will defeat the Russian military and the Ukrainian government will extract terms from the Russians (what we generally mean by “losing a war”), that’s not going to happen.
If you mean that the Russians will not benefit from whatever victory they achieve, I agree. I think we’re all going to lose this war in that sense.
If you mean that they may win but they won’t accomplish their strategic objectives, I honestly have no idea of what will happen. I don’t think we can tell.