Attachment #12: Sanctions Imposed on Russia by the West
Summary of what the Western world is supporting: a variety of strategies have been developed, and they continue to evolve. There also appears to be a broad consensus on the actions. They also will likely outlast the war itself for perhaps years or decades, as it will be very difficult to restore trust and economic ties and bring investments back. Some include:
- full range of financial sanctions (blocking some Russian banks from accessing the SWIFT international banking system. This by the way works both ways; also some exemptions exist for a number of big banks.(Also allowance is being made for Russia to pay off its debt and stave off technical default.) There is concern that in the future there will be a certain amount of “sanctions fatigue” in some European countries.
- sanctions of oil and gas distribution to inhibit sources of funding to sustain the war
- seizing the assets of oligarch, such as luxury yachts and expensive real estate shipping
- shipping arms and materials into Ukraine
- prohibition on Russian air traffic; the entire European Union and Canada has banned Russian-owned, Russian-registered, Russian-controlled planes (including private jets) from their respective airspaces. Albania and Iceland, while not EU members also closed their airspace. The US has not enacted a similar ban. While Canada has no direct flights, its airspace is often used for routes flying into the US. A retaliatory ban on Canadian flights has occurred
- the Kremlin-controlled propaganda machine RT television network (formerly known as Russia Today) and Sputnik newswire has been barred
- NATO has deployed additional forward units to member states bordering Russia and Ukraine
- downgrading Russia’s trade status by revoking Russia’s “most favoured nation” status (US plus EU and Group of Seven countries)
- thousands of offers have emerged from people around the world who want to join the fight. They are being accepted into the International Legion for the Territorial Defense of Ukraine, without pay
- What else: Russian tycoon Mikhail Khodorkovsky, who stood up to Putin and went to a gulag for years, believes there are only two ways to defeat him: fully block Putin’s bankers and energy exports. He also agrees that an immediate no-fly zone must be put in place
Financial exposure: A broad financial counteroffensive has been unleashed by Western governments across multiple fronts. This appears to be affecting the economy, and it could last for many years. On March 8, Fitch Ratings downgraded Russia’s credit rating to junk status and said a default on Russian foreign debt obligations is “imminent”.
Broader financial contagion cannot be ruled out. After the annexation of Crimea in 2014, and the sanctions that followed, many foreign lenders cut or reduced their exposure to the country. The latest set of punitive measures includes cutting some Russian banks off from SWIFT, a cross-border payments network, and restricting the central bank’s use of its $635bn stockpile of foreign reserves. Excluding Russia from SWIFT will make it harder for Western banks to collect payments on their loans. If the local economy tanks or the value of the rouble collapses further (against the dollar, the currency has already lost nearly a quarter of its value since the invasion began), such loans will become even less viable.
There is also the added risk that the investment-banking units of some big banks may suffer losses on securities linked to the Russian economy, or that wealth-management businesses are whacked by sanctions on Russian oligarchs. Western banks are significantly less exposed to Russia than they were a decade ago. But bank chiefs caution that broader financial contagion, though unlikely, cannot be ruled out.
Russian borrowers will shortly need to pay $9 billion: it is estimated that Russian companies (and government) are due to pay holders of foreign-currency bonds before the end of May. This will be also complicated because of the closing of platforms that typically facilitate such transactions (some Russian banks have been cut off from the SWIFT messaging system that facilitates international transfer). With the invasion, bond prices are down and there is a premium on access to US dollars.
According to Bloomberg, it is estimated that investors hold about $250 billion (US) of bonds issued by Russian companies (half of which are denominated in the ruble). All in, Russian corporate and government borrowers in international bond markets are on the hook for around $2 billion in coupon payments and $7 billion in principal in the next three months. There will be increased investor concerns about the prospect for non-payment of various debts.
Regarding Russian government debt, on March 17 Russia did in fact make a $117 million interest payment on its debt, avoiding, for now, a default. For all Putin’s talk of not needing the international financial system, in the end, he chose to honour the debt, and in dollars rather than in devalued rubles
The digital/crypto world is being unharnessed to support Ukraine: Donations are pouring in through crypto currencies, bitcoin, NTFs, digital art. It is estimated to total $55 million as of March 3. The other side of the digital equation has to do with the fact that cryptocurrencies are being used to build a parallel financial system that thumbs its nose at the existing world order. Digital currencies, alternative payment platforms and new ways of hiding cross-border transactional potentially reduce the efficacy of sanctions as they offer opportunities for major actors, like Russia, to hold and transfer funds outside the traditional dollar-based system. Examples of this include Venezuela with their “petro” crypto currency as a method of circumventing US sanctions
Sanctions: what have been applied and how effective are they? Pretty much every possible sanction be it legal, economic, or political has now been applied to Russia. Although so far it has failed to move Putin. The efficacy of sanctions has long been debated. They worked in Iran, bringing the country’s leaders to the table to negotiate regarding nuclear weapons. They didn’t however stop Putin from seizing Crimea in 2014. Commodity restrictions will affect supply thus prices will climb.
Canada will benefit in a number of product lines: grain, potash and phosphate. Russia and Belarus are the second and third largest potash producers in the world (close to 40%) behind Canada. Canada is the source of about 30% of the planet’s output of the fertilizer, making it the top producer.
Russia was the world’s largest exporter of lumber last year (almost half of which went to China), followed closely by Canada. Ukraine and Russia supply 80% of the world’s sunflower oil. It will be interesting to watch what happens to company’s that operate in Russia. Will they be nationalized, as a penalty for their country of origin. (An example might be Kinross Gold Corp. which has a large mine in the east part of Russia.)
Sanctions may lead to a bigger role for state-owned banks which are filled with KGB veterans. Also as the country descends into a near-permanent state of siege, the security services will be the most important pillar of the regime, further cementing Putin’s inner circle grip on the country.
At the point of writing (March 15), the economic fusillades directed at Russia are having an impact. The economy appears in a meltdown. The value of Russia’s ruble is collapsing and the cost of living skyrocketing. Its economy could shrink 15% this year (worse than the 2008-09 recession).
Attachment #13: The Russian “Oligarchs” are being Clipped
There’s a bunch of them and they have their money all over the world. To date, the EU has sanctioned 22 oligarchs, their families, and close associates, and begun seizing yachts and other assets. Roman Abramovich, owner of the Chelsea Football Club, was sanctioned by Britain, and his assets were frozen. President Biden, in his State of the Union address on March 1, stated that “we will find your yachts, your luxury apartments, your private jets. We are coming for your ill-begotten gains.” While a rather a sweeping moral statement, it does capture the temper of the time. America’s hit list now has a total of 19 oligarchs and 47 family members.
New targets include Yevgeniy Prigozhin, owner of the ruthless Wagner Group mercenaries behind terrorist activities around the world and Russia’s richest individual, Alisher Usmanov. He owns the world’s largest yacht, some 156 meters long, which has just been seized in Germany. Biden announced that his government was setting up a “klepto capture” task force to “go after the crimes of Russian oligarchs”.
Some of them (not many) are speaking up, for example, the Russian-born owner of London’s Evening Standard published a front-page statement “President Putin, please stop this war.” Metals magnate, Oleg Deripaska, considered an ally of Putin wrote that “peace is very important” and that talks to end the war should begin “as soon as possible”. He also warned of a possible nuclear accident during the fighting that would endanger all of Europe. It is generally accepted that their power is limited. Putin’s inner circle is extremely small. Oligarchs who have fallen out with Putin have often ended up exiled, in prison or dead.
Attachment #14: Oil and Gas Sanctions
What about oil and gas sanctions, availability and pricing? The Western democracies now no longer deem it morally defensible to fund Putin’s war machine with purchases of oil, gas, and coal. A Western oil embargo against Russia raises the stakes exponentially. However Europe is pathologically dependent on Russian oil and gas and will find it hard to bite the hand that heats it. Even if they really want to, finding alternative sources for Europe is not simple. Russia is the world’s third-largest crude producer – around 10% of the global supply (oil and gas comprise more than 60% of Russia’s export revenue), where it derives much of its confidence and resources to attack such a country as Ukraine. Europe relies on Russian oil for about one-third of its oil supplies and more than 40% of its natural gas. Consumer’s will watch the pump price climb as the war continues (and complain).
Does the West have the strategic depth to endure the sudden loss of around 5 million barrels a day of Russian crude? After weeks of mild weather and copious deliveries of US liquefied natural gas, things are easing up. As Andrew Evans-Pritchard wrote in the March 8 Daily Telegraph “Both sides are threatening to play the energy card, but the threats are not in reality equivalent. A crude blockade will make it impossible for Putin to continue waging serious offensive war in Ukraine beyond a few weeks. Oil and gas make up 40% of Russia’s state budget. It is what holds the patronage machine together.”
Evans-Pritchard goes on to cite a historical lesson – Benito Mussolini’s invasion of Ethiopia in 1935. Serious sanctions were considered “too provocative” by the League of Nations. They feared that cutting off fuel would lead to unacceptable economic blowback. However Mussolini later told Hitler that an oil embargo would have been the end of him. The lesson is that half measures are the worst of all worlds.
Regarding gas, the move by Germany even before Russia invaded Ukraine to stop the approval process for the Nord Stream 2 natural gas pipeline signals that Germany (which is the largest foreign client of Russian gas giant Gazprom) is prepared to pay a heavy economic price. At this point, this decision will not result in Germany suffering gas shortages, as the pipeline, while finished, had not delivered any gas. There is a parallel pipeline, Nord Stream 1, which has been delivering Russian gas to Germany for almost two decades, and counts for almost two-thirds of Germany’s imported supplies.
Some Iranian oil will start to come back into the market later this year as Tehran and Western powers move closer to a nuclear solution – the US is pushing for a quick deal. The US is embarking on emergency missions to Saudi Arabia (which may be problematic). The Gulf states and Iraq have up to 2.5 million barrels per day in spare capacity that could be mobilized within 30-60 days. The US are also headed to the pariah Nicolas Maduro in Venezuela to get him to up deliveries of sulphurous heavy oil to balance the mix in US refineries, replacing those from Russia. Canada has suggested that it will look at ways to export renewable energy, like hydrogen. We’ll need to stop our virtue-signaling and fence sitting and worry a lot less about our “climate change commitments” and more about stopping Putin from plunging humanity into World War 3.
The long term direction the EU (and of course ultimately the rest of the world) is embarking on is one of fossil fuel reduction. This crisis will speed up the eventual demise of big oil, as high prices will alienate consumers and investors. The EU is targeting overall net-zero greenhouse emissions by 2050. Germany wants all of its electricity to come from renewable sources by 2035. It’s also not just about money. To execute their plan also requires solving such practical problems as increasing solar panel manufacturing capacity and finding qualified installation workers. But the real problem is obviously that the transition takes time.
The US crude ban will not have much impact because American refiners are already finding ways to optimize around the loss of Russian imports. At a recent energy conference in Houston, Canadian energy firms claimed they could increase output to replace a third of the lost Russian imports “tomorrow”.
Russian crude oil is almost unsellable. Two thirds of it is currently shut in. Tankers will not go to the Black Sea ports. Spot oil transactions have stopped. They cannot easily switch their surplus oil to China as the infrastructure is in the wrong place. Millions of unsold barrels are piling up. Russia has no storage in ports or inland so production will be shut down.