Over the weekend, the United States, the United Kingdom, and the European Union imposed another degree of sanctions against the Russian economy. Another economic attack – the freezing of Russian reserves – joined in a long-devouring and perhaps now launched plan to separate Russia from the international payment system SWIFT. A big shock awaits Monday morning when global financial markets begin to open up. So what can we expect?
While SWIFT is based in Belgium, which makes it easier to “order” something (in terms of international security), freezing Russian reserves “from abroad” may seem a more difficult task at first glance. But it is not, and both steps complement each other.
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How will the Russians be doing on Monday morning?
If you pay with cash, nothing at first. The value of one ruble in Russia will remain one ruble. On the contrary, cash could ironically become more scarce for some time, because it would (in addition to gold teeth) be one of the few valid mediums of exchange.
Those Russians who are accustomed to paying with a Visa or MasterCard issued by a Western bank are often refused. Cards issued in Russia may begin to encounter problems although the mere cut-off of the SWIFT system is “only” to prevent cross-border payments; Interbank payments within Russia will be able to use an alternative Russian system.
It will be basically impossible to pay in the usual way for anything from abroad – the Russians are probably also among the largest customers of online portals such as Aliexpress, well-known in the Czech Republic. But goods can still be purchased at local stores with cash. But if she had enough. In civilized countries, everyone in high school is already learning that the banks do not have all your money at their disposal: they lend it.
Thus, the slightest suspicion will lead to an attempt to withdraw funds, which will then run out to Russian banks. Not only accounting, but also physical, there are not enough pictures printed with landmarks and Russian awakening. Classic game “Run the Bank”. According to available reports, cash queues have already started. Some sanctions can work before the official launch.
This will squeeze the ruble “from below”. But the other two pressures, “from above” and “from the outside,” are probably stronger.
What happens after reserves are frozen?
Freezing the reserves is not aimed at the people (even if they take it from him), but rather the reserves of the central bank. Buying and selling are conducted by the government, and indirectly by the state’s energy giants. Russia’s reserves largely represent the accumulated profits for many years from Russian energy sales, especially to Europe. Not enough pipelines reach Asia, and Asia’s role in Russia’s energy trade is often overestimated. Even in the future, the argument that “Russia does not need to sell to Europe, it has Asia” is not materially feasible.
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Russia relied on these reserves in case it was cut off from international payment methods or international trade. You can always pay with gold, as the siege of Sarajevo showed (no one wanted money, it was exchanged for medicine, canned food and gold). Thus, the loss of the ability to use the reserves (or a significant part of them) will significantly limit the ability of the Russian state to purchase anything. For example, including the necessary Western technologies, without which nothing would be mined in Siberia today.
Although it will not be possible to pay from Russia after SWIFT closes, Russia can still pay with its reserves – through the state. Therefore, the two scales adequately complement each other.
How to freeze Russian reserves
Simply. According to the best estimates, Russia’s reserves now make up one-third of the euro, one-sixth of the dollar, and one-sixth of the Chinese yuan. Holds between a fifth and a quarter of gold. But neither gold nor foreign currency is largely present in Russia. Transporting a lot of gold around the world is expensive and dangerous. So the gold stays mostly where it is, in the safe havens of central banks, and only the label on it changes. So far, this has been an “inviolable rule” in the international system, even for problematic systems.
Logical. Once the world can’t be sure of this guy’s agreement, who will freeze the gold next time? From this point of view, the arrival of this sacred base would be a historical event, at least in this volume (Venezuela’s former precedent is incomparable in scale and meaning).
We can similarly say about the Russian countries in the form of foreign currencies. These also exist mainly in the form of entries in the tables of foreign central banks, which are so far untouchable as gold. Just as you can rewrite a label on bricks, you can change the notation in the tables. After all, let’s remember that because of this rewrite, the non-rewritable bitcoin was supposed to be created.
What happens when the markets open
Abroad, outside of Russia, the ruble has a value only that its holder knows that something is behind it. A liquid that can be exported or exchanged for gold or another currency. In fact, it does not cost much in any modern currency, since the seventies, no currency has been exchanged for gold, but in the unfrozen financial system, at least not everything is on the water.
But now yes, moreover frozen. So on Monday everyone will start selling the ruble, and since it is difficult to find buyers, the ruble is expected to depreciate rapidly, like shares of a bankrupt company. Russians will be able to continue exchanging rubles within the Russian economy, but they will not buy anything from abroad. This is the goal of the current wave of sanctions.
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Because of the lost purchasing power of the ruble, they immediately raise the prices of all imports, which will reflect on inflation, and people will find that even if they win the waiting list at the ATM and get some papers from it, they will. Don’t buy anything for those papers. Respectively, they will freely join the cans, and in Russia even the sprats that were there under communism will not be left on the shelves.
It remains to be seen whether and to what extent all of this will actually happen. Of course, it will largely depend on how China reacts and whether and how someone wants to buy gold from Russia – whether what is in Russia or what is frozen at a discount, hoping that the buyer will somehow melt. .
The Russian state could theoretically begin to issue official papers instead of banknotes – we have experience with this, for example, from the formation of Czechoslovakia, when the access of our new state to gold reserves was also problematic. The states will be a kind of bond directly from the Russian government that they will pay off the debt after the situation calms down.
But do you want to lend to someone whose economy could collapse? Maybe, but it might be expensive. It is also possible that Russia would have a Plan C in addition to Plan B.
hit the oligarch
The use of nuclear weapons as a trump card is independent of the freezing of reserves. Putin either depends on their use or not. But it certainly doesn’t put a stop to because freezing gold should be the last nail. For the West, a freeze will certainly have some economic consequences, and Russia will seek revenge.
Ultimately, it will depend on how well Europe is willing to ship ships to deliver LNG to European terminals rather than other global terminals. The EU’s willingness to take further steps depends on these ships.
It is still possible, in the end, that the most effective sanctions will be those aimed at freezing the assets of the Russian oligarchy. Due to the complex ownership structure, it would take special financial units to nibble on their real assets around the world, but in the end it can be a major attack.
The oligarchy logically owns most of its assets and investments outside Russia, not least because of the climate and living conditions. And because their families use these assets, they will feel more about them.
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