With baffling swiftness and unheard-of unanimity, the global community of states has lashed out to punish the Russian Federation for its war of conquest in the Ukraine. The embargo measures enacted so far have never been more far-reaching and have never been imposed on a country of the size of Russia, the 11th biggest economy on earth and one of its biggest commodity suppliers.
The country’s biggest banks have been cut off from essential, international payment systems. Russia’s sovereign fund and Russia’s central bank are dysfunctional now, cut off from its hard currency savings and investments abroad. Air traffic has been cut off, maritime transport curtailed, with travel and trade severely restricted. If you want to leave the country, you can only fly out via Turkey or South East Asia. Or you may have a minuscule chance to find a standing room on the train to Helsinki.
Assets of Russian entre-preneurs and corporations are frozen. Hard currency markets are closed for rouble trade, the Russian currency is in free fall, and the government of the RF had to introduce capital controls, making transfers abroad nigh impossible. Bonds denominated in roubles, dollars, Euro, the Swiss Frank or in Yen, held by international investors, became worthless. Russians find their savings devalued, supermarket shelves decimated and the economy on a war footing. Oligarchs see their erstwhile prodigious wealth melt like snow in spring.
International embargo measures have proven to be effective as a tool of economic destruction and as a means to inflict damage without military involvement. We have seen this before, albeit on a smaller scale, in North Korea, Iran, or Taliban Afghanistan, but never in a country so intrinsically interwoven with international trade and finance.
It is a severe form of punishment which comes at a high price for us who impose those measures, paid for with inflation, supply haemorrhages and economic stagnation. This price we are willing to pay for the sake of justice, appalled by the human suffering in the Ukraine and the callousness of the aggressor.
Embargoes are a form of warfare with other means. Like war, they need a clearly defined goal, an understanding of the enemy, a plausible strategy and an exit point. To wish for nebulous things like seeding democracy, or hoping for regime change is not sufficient. It’s not enough to know a ban’s mode of operation, in the same way as we know the effects of cluster bombs, napalm, or nukes. It is, or should be, a strategic tool. We have to question what we’d like to achieve beyond destruction or revenge. The calculus of embargo includes clearly formulated threats, realistic demands, unwavering implementation and guaranteed rewards for obliging.
There’s also a difference between a boycott and embargoes. A boycott is efficiently directed at corporations, by consumers refusing to buy their stuff. This is why state-orchestrated consumer boycotts in China, for instance, make corporations eat their words. If one dares to mention the Uyghur, Taiwan, or Hong Kong democracy protests, it will immediately eat into profits. This makes companies cautious. ESG investing is fine, as long as appropriate lip service is boosting sales. Dwindling revenue is another matter altogether. An immediate retreat is guaranteed.
Embargoes, as we have seen in Iran, and in Russia after 2014, have a tenacity to stick around- Andreas Weitzer
States don’t work that way. Dictators who do not immediately depend on public opinion or democracies who are guided by public opinion have no commercial calculus. They will react to financial punishment according to the rules of power. Only if their governance is endangered they will retract, as they can always heave the costs of embargoes onto the public and rally their citizenry to the flag.
In many cases, sovereign punishment is even cementing the leaders’ grip on power, rather than softening it, and enriching their entourage. Think of Iran, North Korea, or Syria. The hardship inflicted on their citizens has strategically failed. The mullahs nobody likes and the mass murderers who are imprisoning their own people get a second lease of life. Embargoes are a tit-for-tat, other than an outright war. You have to limit your demands wisely, as happened with the Iran Nuclear Agreement 2015.
Mere justice is sadly a depleted argument since we have destroyed Afghanistan, Iraq and Libya with no plan how to implement peace once we had won the war. We have a hard time explaining to Putin that we mean no harm when we gnaw on his power. When we lament the breakdown of the international order, which was based on non-involvement in the national affairs of sovereign countries, however deplorable they may act domestically, is hypocritical. This convention went to tatters when we bombed Serbia in revenge for its pogroms inflicted on their Bosnian and Albanian minorities.
In the case of Putin, the second coming of Stalin, who is adamant to destroy his fellow Slavs in the Ukraine, we have failed to quantify our threats in advance, to offer compromise and to weigh our demands. We still fail to declare how to guerdon de-escalation. Embargoes, as we have seen in Iran, and in Russia after 2014, have a tenacity to stick around. It seems impossible to calibrate them in tune with results.
As damaging as the short-term effects of economic gags may be, they will wear off over time. We have only a short window to bargain. The Soviet Union was banned from importing microprocessors, computers, and hardware for military use. Yet these were all successfully smuggled. Working for an Austrian trading company, I learned about the delivery of testing equipment for fighter pilots in 1980, for instance, and printed-circuit equipment in the 1970s. Embargo dodging is a time-acquired skill.
The escape window to China, keen on Russia’s abundance of raw materials and strategically interested to weaken its main opponent, the US, will make sure that Russia will continue to function as China’s supplier of choice. Blockchain technologies, designed for the black market, will replace dollar trade and blunt the once formidable weapons of SWIFT and dollar clearing, so effective today.
As much as I rejoice about the international solidarity intent to push back against Russia’s atrocities – I even feel unmoved about my own investment losses in Russia in light of the bravery and the suffering of Ukrainian people – I fear that, without a clear exit strategy, we will escalate beyond the point of no return.
The risk to appease Putin, as we appeased Hitler, we seem to have successfully circumnavigated. We should also make perfectly clear that we are willing and capable to risk war, if the integrity of NATO and the European Union is under threat. But Putin is cornered, by his own miscalculations for sure, and we should think hard what escape route we can offer and what sweetmeats to reward a pull- back. This is a test run after all on how to handle future conflicts with China, which is taking note.
My hopes are not high. The situation makes me think of Viktor Chernomyrdin, chairman of Gasprom, Yeltsin’s long-serving prime minister and Putin’s ambassador to Ukraine. Questioned about yet another governmental mishap in the 1990s, he sighed: “We aimed for the best possible outcome, but it ended as usual.”
We retail investors face a time of frightening unpredictability. Is the success or failure of an investment calculable or a roll of the dice? Is a mining and trading company like Glencore, profiting from ballooning energy and commodity prices, a sure winner, or are they stuck with billions of advance payments and other stakes in Russia, or perhaps soon even threatened by sanctions for massive embargo violations?
Nobody knows. Nobody knows anything. The only certainty is that defence companies will be money printing machines. Well, I’d prefer to sit on my hands.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com