How The West Broke Russia's Economy

Well diversified war chest of foreign reserves.

I mean, only  months ago, I made a provocative video about how smart Russia’s strategy really was. Going on and on about how Europe had strong incentives not to go along with American sanctions, given its reliance on Russian gas..... And for the first few days of the war, this prediction actually held up pretty well.

European nations such as Germany and Italy were hesitant... That is untill they didn’t. And now, not only Europe, but also Japan, and likely even neutral Switzerland have announced that they will sanction Russia’s war chest directly.

As a consequence, the Russian Ruble is collapsing. So, did the West outsmart Russia’s central bank? And how is Russian central bank going to retaliate? Let’s get into it. Sanctions, sanctions, sanctions As it stands, Western sanctions targeting three groups in particular: The first group are wealthy and or well-connected Russian’s The second group are banks, potentially also through the Swift messaging system Finally, the third group is the central bank itself So, let’s talk about the lightest and most common form of sanctions: targeting wealthy individual Russians, especially those connected to the regime.

The idea here is that these are the most important supporters of Putin’s regime.

By hitting them where it hurts, they might turn against the War and therefore pressure Putin to back off. In this case, this could be extra effective since roughly 20% of Russian household wealth is held off-shore in nations such as Cyprus, Switzerland, and the United Kingdom. But, in all honesty economic historians typically find that such sanctions are not very effective at discouraging invasions such as these. So, that brings us to the sanctions that are putting the Ruble under pressure.

These will make it more difficult for Russia to fund its war. But, more importantly, a lower Ruble will hurt Russia by increasing inflation through more expensive imports.

And, even though Russia’s economy is pretty self-sufficient in some key sectors such as energy, and food, the country still imports a lot of goods such as machinery, cloths, and cars.

So, how does sanctioning the second group, Russian banks, hurt the Ruble? Well, by not allowing Western banks to do business with them, Russian banks can no longer facilitate international transactions.

On top of this, the much hyped exclusion of Russian banks from the Western SWIFT messaging system achieves the same thing. Sure, both of these could be worked around by Russian banks.

They could opt not to use the Swift messaging system and picking up a phone for example. Or they could use a less efficient system developed by China or Russia.

The same goes for individual sanctions. Banks could theoretically get around these by working via non-Western banks. 

Russian bankers are facing one of the worst disruptions of their business ever and now they are expected to change their biggest systems and client networks all at the same time? Yeah, that is not going to happen any time soon.

In my previous video, I discussed how it could use its massive war-chest of foreign currency reserves to cushion the impact of bank sanctions. Basically, selling reserve assets such as Treasuries and using these to buy a lot of Rubles.

And to counter a potential freezing of reserve assets by the USA, the Russian central bank was smart enough to keep most reserves in Europe, which depends heavily on Russia’s gas.

Booooom sanction immunity achieved. But, look, the thing in economics is that the participants in it act strategically. This means that an action by one player might evoke a counter action by another.  mean who knows, maybe European leaders had even seen my original video.

Okay let me present to you the one thing standing between Russia and Western economic sanctions Aha Really? In any case, after the war in Ukraine stalled, Europe did commit to sanctions. And together with Japan, the United Kingdom, and Switzerland, they assaulted Putin’s war chest directly.

Which is really quite unprecedented. You see, together these countries are threatening to freeze Russia’s Euro, Dollar, Yen, and Franc denominated reserves that fall under their jurisdictions.

And while this all sounds very complicated. In practice, it means that when the Russian central bank calls their broker to sell French Government Bonds or some other instrument, the broker will just say no.

Or if they want to access the accounts that they have at the German Bundesbank,the German