Authored by James Rickards via DailyReckoninig.com,
Putin’s Options
There’s no doubt that the financial sanctions put on Russia by the U.S., the U.K., EU members and others are the most severe ever imposed. The U.S. Treasury has announced 15 separate sanctions programs in recent days and no doubt more are on the way.
The targets of these sanctions include Russian banks, Russian stocks and bonds and various payment channels. Most significantly, the U.S. froze the accounts of the Central Bank of Russia. That’s the first time a major central bank’s assets have been frozen since the Cold War, and possibly ever.
Yet the financial attacks on Russia go far beyond official sanctions.
Numerous private companies including Microsoft, Exxon Mobil, Shell and some major airlines have ceased their business activities in Russia. Visa and Mastercard have stopped accepting credit card charges from Russia. Google and Apple have turned off the mobile payment apps on phones held by Russian citizens.
Shipping giant Maersk has stopped its vessels from unloading or taking cargo from Russian ports. Stock index funds are pushing Russian companies out of their indexes and the Norwegian sovereign wealth fund is divesting Russian stocks. The list of public and private embargoes and boycotts goes on.
The financial impact on Russia will be extreme. The Russian economy may be expected to collapse by 20% or more in the first half of 2022, an amount comparable to the economic collapses in the second quarter of 2020 during the first lockdown stage of the pandemic.
The Sanctions Boomerang
But Russia has not stood still. The Central Bank of Russia imposed capital controls so that Russian companies cannot pay interest or principal on international debts. That means those loans and bonds may soon go into default.
Many such securities may be stuffed into 401(k) plans of Americans under the umbrella of “emerging markets” funds or ETFs. Even more important is the possibility that interbank lending may start to dry up as Russian banks are frozen and Western banks reduce leverage and shrink balance sheets in order to reduce risk.
This will lead to defaults in the West and could even mark the beginning of a global liquidity crisis that can only be contained by Federal Reserve currency swap lines, like we saw in the early stages of the pandemic when markets were collapsing.
But even that technique may not work since there are no swap arrangements in place between the Fed and the Central Bank of Russia. The shooting war may or may not be over soon, but the financial war has just started and will continue after the shooting stops.
For that matter, a global financial panic may emerge even before the shooting stops. We all see what’s happening on the surface. Here’s what you don’t see: Someone is on the wrong side of every one of those trades. Hedge funds and banks are losing billions and are sinking. It takes about a week for bodies to float to the surface.
