Sanctions, Sanctions - What Are They Good For?

Sanctions are pretty boring stuff normally.

We have deliberately avoided a deep discussion of them previously because they are long on minutiae and short on utility most of the time.

There was also our annoyance on the West's habit over the last few decades to impose sanctions only AFTER whatever we were trying to prevent from happening. What is the use of a deterrent that doesn't, by definition, deter?

President Zelensky's quote above summarizes both our feelings and the futility of the overall strategy.

Now, however, what has been brought to bear on Russia is so severe and so comprehensive that the opposite situation is the case. We would now be remiss not to discuss the sanctions on Russia and especially their outcomes and implications.

We will still not get too far in the nitty gritty. That is a very deep and detailed rabbit hole and one that can quickly distract from the big picture. If you are curious here is a good overview. Here is another. And here is one focused on the SWIFT system in particular.

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The big picture for the Russian sanctions is a belated but a sweeping attempt to isolate the Russian economy and then pulverize it.

Perhaps the best point might be a very Pebble-centric and simple one:

We began the week thinking we could make a list of companies still doing business in Russia and make them available to our clients in the event that you wanted to exclude them from your portfolio.

However that is nearly completely impossible. So many companies have so swiftly pulled out of the country that the list is practically nonexistent. Everyone from Exxon to Nike to Apple to Samsung to Visa to Ford to Twitter to Boeing has already left then there simply not a ton of point.

Here is a comprehensive list if interested.

If truly interested in boycotting any Western multinationals still operating in Russia then we have two for you: McDonald’s and Pepsi.

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The large companies leaving their Russian operations and barred or voluntarily opting not to to sell their products are only the tip of the sanction spear however.

The real story is that, in addition to the damage done to Russian companies (and especially tens of millions of innocent Russians), the country is also being ostracized from the global financial system to a degree that would have been hard to fathom, even a few weeks ago.

Western unity and fury is therefore having a profound impact on Russia but also the global financial system itself. Because the former is a relatively small % of global GDP and was never a big part of global trade we have focused our attention on the wider impacts rather than the Russian-centric outcomes with our 2nd, 3rd and 4th sections today.

There are a few Russian specific high level points to keep in mind, however.

The attempt to impoverish Russia as punishment for its invasion will likely work. In many ways it already has. Russian assets are not just universally lower in price, many are untouchable.

Additionally, the value of the ruble has imploded, the debt has been downgraded, the stock market shuttered and may struggle to re-open without the removal of these sanctions. One stock broker even held a funeral for the market on live television complete with an eulogy and toast.

So far, Russian energy has been carefully carved out and protected to allow Europe to continue to buy the gas but it won't necessarily work, or be sustainable (see next section).

Russia may themselves now pose counter sanctions, especially around stopping the export of some of their most valuable commodities (see two sections down). Markets are coming to terms with world markets without Russian supply and there are some nasty lessons involved.

Many Russian banks have been excluded from the famous SWIFT system and a ban has been imposed on transactions with the Russian central bank.

The most notable aspect of this campaign however, is just how punishing and severe exclusion from the monetary and financial system has been. Russia has discovered that it can lose access to foreign currency reserves it thought it controlled and the pain of relying on a global financial and monetary system it doesn't control.

There will be powerful lessons from all of the above but the last point may be the most significant over the longer term.

We will likely return to it in a future week but for now:

The vulnerability and in fact, profound danger of relying on the dollar based international monetary system and dollar denominated payments infrastructure has been clearly underlined and reinforced with every new measure.

A united and furious West may have made the cost of Russia's incredible and cowardly act extremely high.

They may also have ensured that the infamous counterparty risk of relying on fiat currencies and safe havens you don't control has been brutally exposed as a serious vulnerability for any person or state who doesn't control the international reserve currency.

Was the Russian invasion of Ukraine the single best sales job for the utility, safety and value of crypto assets of all time? We will hopefully return to this vital topic in the weeks ahead.

For now, China may be accelerating its efforts to create a rival to the US Dollar (the RMB) and SWIFT system (it has its own: the CIPS system) regardless of cost.

The rest of the world, however, may already feel like it has an answer.

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Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.