The Demolition of Russia's Economy

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gwb-trading

The sanctions from the West are impacting Russia's economy, but mostly it is hurting just common people rather than the government elites. Sanction will do little to stop the assault on the Ukraine in any type of timely manner that could save the country from Russian aggression.

The Russian billionaire oligarchs are feeling some pain with seized yachts, frozen bank accounts, and their international businesses under pressure -- yet don't seem to be discomforted much in their daily existence. They are still traveling, living in large homes, and enjoying extravagant luxuries.

Let's take a look at some of the economic pain Russia is enduring from sanctions.

https://twitter.com/x/status/1499639074814058499

The Russian Yandex Search Engine is going under...
Russia’s answer to Google warns it may not be able to pay its debts

https://www.cnn.com/2022/03/04/tech/yandex-russia-internet-warning/index.html

Russians start feeling the heat of Ukraine war sanctions
Ordinary Russians are feeling the painful effects of the West imposing sanctions on Russia over its invasion of Ukraine, including payment systems that won’t operate, problems in being able to withdraw cash and difficulty in purchasing certain items
https://www.independent.co.uk/news/russia-apple-pay-moscow-ukraine-nike-b2027273.html
 
Russian banks turn to China to sidestep cutoff from payments systems
The workarounds show Russia may increasingly rely on China.
https://www.foxbusiness.com/economy/russian-banks-turn-china-sidestep-cutoff-payments-systems

Russian banks that have been cut off from global payments networks are turning to China’s state-owned UnionPay system as the country tries to sidestep boycotts by Western businesses for its invasion of Ukraine.

Visa Inc. and Mastercard Inc. said they are suspending their Russian operations, making it difficult for Russians to buy goods from abroad. The moves by the two companies go beyond sanctions issued against many Russian banks.

Sberbank, Russia’s largest bank by assets, Alfa Bank and Tinkoff Bank said Sunday they were working on the possibility of issuing cards powered by China’s UnionPay. Another Russian lender, Gazprombank, said customers can do cross-border transactions by getting cards that use UnionPay or Japan’s JCB system.

The workarounds show Russia may increasingly rely on China in the face of isolation by the West. It wasn’t clear whether the move signaled a shift toward greater cooperation between China and Russia to help Moscow find alternative ways to connect to the global financial system.

UnionPay is ubiquitous in China and expanded globally as Chinese traveled abroad, often to buy luxury goods. UnionPay cards are accepted in stores in 180 countries and regions, and online in over 200 countries and regions, according to the company’s website.

Besides its card network, China has been developing its own global payments system as an alternative to the widely used global network known as Swift. That system, though, remains dependent on Swift for most of its transactions.

Beijing officials have opposed the Russian sanctions, while in the West, several companies are going beyond them, stopping business dealings even with non-sanctioned entities. It isn’t clear how Chinese companies will react. Spokespeople for UnionPay and Japan’s JCB couldn’t be reached for comment.

Visa and Mastercard both said Saturday that they were cutting ties with Russia in response to its attack on Ukraine. Among the debit and credit cards issued in Russia, Visa and Mastercard cards accounted for 74% of payment transactions in the country in 2020, according to the Nilson Report, a trade publication.

The move dealt another blow to Russia, which has seen many Western companies cut services to the country over the past week. Some Russian banks have been sanctioned by Western countries, meaning individuals and businesses there are forbidden from dealing with them. But several Russian banks remain free to do business around the world.

The U.S. and the U.K. have moved to cut Sberbank off from U.S. dollar and U.K. pound access, but companies and individuals are still allowed to deal with the bank.

Russian cardholders will still be able to use Visa and Mastercard cards inside Russia because the transactions will travel over Russia’s payments system, called Mir. But they won’t be able to use the cards abroad, except in a few countries that support Mir, including Turkey, Vietnam and Armenia.

Alfa Bank said Sunday that its customers’ Visa and Mastercard cards will face restrictions on their use outside Russia starting March 10. It urged users abroad to withdraw cash in the meantime.

Still, Alfa Bank said it would continue to issue cards attached to both Visa and Mastercard, given it has several million in stock. "We hope that the international payment systems will return to our country. Then the cards will automatically start working all over the world," it said.
 
MasterCard, Visa, and now American Express suspend operations in Russia.

American Express suspends operations in Russia and Belarus
https://www.cnn.com/2022/03/06/business/american-express-russia/index.html

American Express (AXP) is the latest credit card company to announce it is ending its operations in Russia as its invasion into Ukraine escalates.

On Sunday, the company said in a statement that globally issued American Express cards will no longer work in Russia, and cards issued in Russia won't work outside the country.

American Express also said it is ending its business operations in Belarus.

"This is in addition to the previous steps we have taken, which include halting our relationships with banks in Russia impacted by the US and international government sanctions," American Express said in a statement Sunday.

(More at above url)
 
Maybe this is the start of the new warfare where we cripple a country economically instead of sending troops to die. Takes time but can be way more effective.
 
El OchoCinco said:
Maybe this is the start of the new warfare where we cripple a country economically instead of sending troops to die. Takes time but can be way more effective.
More...

It can. There's always a rub, though.

Breaking The System
MARCH 7, 2022 / JOSEPH WANG / 3 COMMENTS
The banking system is built on trust that the money one places in the care of others will be there when needed. This is as true for the retail investor with deposits at the local commercial bank, as it is for the sovereign with FX deposits at a foreign central bank. Hard earned trust is part of the magic that enables developed market sovereigns to massively deficit spend with limited consequence. The world happily holds their liabilities, be it in the form of deposits or sovereign debt. But that trust is weakened when sovereigns are seizing the assets of their own citizens and other sovereigns without due process of law. The liabilities of the banking sector and sovereign then cease to be risk free assets. Foreign sovereigns must now diversify as a matter of national security, and some citizens must now diversify as a matter of self preservation. This regime change can force a wild scramble into stores of value outside of the banking system including gold, real estate and even crypto.

Financial WMDs
Western sovereigns appear to increasing view the banking system as an efficient weapon for enemies both abroad and within. Targeted financial sanctions have the advantage of quickly subduing without the death and destruction of conventional weapons. The Russian economy was brought to its knees overnight through sanctions that effectively confiscated the deposits the Central Bank of Russia (“CBR”) held at major central banks. There is even ongoing discussion of confiscating the CBR’s assets held at the IMF. Without access to its foreign reserves, the CBR was unable to defend the ruble from significant outflows and watched helplessly as it collapsed by 50%.

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Ruble depreciated 25% against the dollar overnight then continued to bleed
Canada also recently deployed similar measures against its own citizens. Canadian Prime Minister Trudeau invoked emergency powers to seize the bank accounts of truckers protesting pandemic related restrictions. Reports also suggested that donors who made legal donations to the protestors were prosecuted based on a retroactive application of the order. Protestors lost assets without any warning, due process of law, or potential recourse. Although this happened in Canada, many outside Canada took note and interpreted it in light of the rapid expansion of government power they see in their own countries. They realize that money in a bank can go poof at anytime regardless of deposit insurance.

Just in Case
Sovereigns across the world are now all alerted to sizable tail risk that they must manage. Foreign reserve managers are a risk averse group who are far, far more interested in safety than profit. They will happily accept -5% real yields, but even a remote prospect of losing all their assets is completely unacceptable. They now understand that the US and EU view banking sanctions as an effective tool that can even be deployed against prominent members of the global community. Risk free assets are no longer risk free.

Just as the unveiling of nuclear weapons in WWII set off a global arms race, so this revelation will start a scramble for alternatives. Any sovereign who aspires to conduct its affairs without kowtowing to foreign powers must be able to survive the confiscation of its foreign reserves. A quick glance shows enormous vulnerabilities for China and India, who both interestingly voted “abstain” on the UN resolution condemning Russian actions. Fiat currencies will continue to be essential for global trade, but there is no point in keeping so much if they may disappear when most needed. A much larger gold allocation is a necessary safeguard against the existential risks posed by financial sanctions.

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China and India hold only a sliver of their fx reserves in gold.
Some members of the public will also hedge their assets in fear of government seizure. At least in the U.S., a sizable percentage of the population already perceive that they will lose their job or be “cancelled” for holding dissenting opinions. Trudeau’s actions confirmed their worst suspicions – “debanking” as a tool to suppress dissent. The public’s potential alternatives are broader than reserve managers and include gold, but also assets like real estate, crypto, and paper currency. Dollar currency in particular has long been a favorite of those evading government.

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Dollar currency outstanding has been surging with $100 bills the most common denomination outstanding
Safety is Priceless
Safe asset status plays a key role in underpinning the the ability of advanced economies to run loose monetary and fiscal policy with limited consequence. In 2020, advanced economies spent 12% of their GDP on pandemic related fiscal stimulus while the emerging market economies only spent 6%. Poorer countries understand that they could not follow the US and spend 25% of their GDP without imploding their currency. Global investors happily hold newly printed dollars, but would quickly get rid of less established currencies.

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Exorbitant privilege in action
This privilege can fade even without affecting the relative dominance of the dollar and euro. Investors could simply follow a well trodden playbook of shifting out of currencies and into tangible assets. This is common behavior in any country with weak institutions and increasingly relevant as advanced economies tarnish their halos. For the typical country, forever deficits and zero interest rates imply high and persistent inflation.
 
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