Sanctions: an act of war

by Alex Davidson

The United States provoked the war in Ukraine and now has clear aims in prolonging it, namely: of severely weakening Russia economically by the imposition of historically unprecedented sanctions; of isolating Russia in all areas of life including culture and sport; of encouraging Russophobia; and of promoting social unrest in Russia with the intention of effecting regime change in order to produce a more compliant regime in Moscow.

The White House spelled it out: “…The United States and more than 30 allies and partners across the world have levied the most impactful, coordinated, and wide-ranging economic restrictions in history. Russia will very likely lose its status as a major economy, and it will continue a long descent into economic, financial, and technological isolation.” (1)

The US House of Representatives approved the “Ukraine Democracy Defense Lend-Lease Act” through which the US will provide more armaments to Ukraine over an indefinite period with no re-payments asked for until well into the future. (2) It is questionable if Ukraine could ever pay this money back. (Britain made its final World War 2 Lend-Lease re-payment to the US in 2006). In addition, the Ukrainian government is currently asking the US and EU for $7.5 billion per month just to keep paying salaries and pensions. The Lend-Lease Act is separate from the ongoing US effort to send Kiev weapons from the Pentagon stockpile. Biden has already spent $3.7 billion since February 2022 authorised by Congress for the purpose. The American armaments manufacturers are not complaining. (3)

Western sanctions initially sent the rouble plummeting with it plunging about 30% against the US dollar. However, Russia’s central bank moved quickly and increased interest rates (from 9.5% to 20%). This helped to stabilise the rouble and since then it has recovered its value to pre-war levels allowing the Russian central bank to lower interest rates to 17% and then to 14%.

GAS AND OIL

The US has been intent on killing Nord Stream 2, designed to bring more gas from Russia to Europe, and to replace it with American Liquefied Natural Gas (LNG). The Americans have been working on this for some years and had managed to wean a number of European countries (eg Poland, Lithuania, Croatia) off Russian gas and get them to start importing American LNG. The US succeeded in getting Germany to shut down Nord Stream 2, one of its early successes in the ongoing conflict in Ukraine.

However American LNG and other gas suppliers cannot fully replace Russian gas in the short-to-medium term. Europe is currently still importing 40% of its gas from Russia, even during the war, as it has done for decades. US Treasury Secretary Janet Yellen said that a complete European ban on Russian oil and gas imports would “clearly” raise global prices and may inflict harm on Europe and other parts of the world. Yellen stated, “It could actually have very little negative impact on Russia, because although Russia might export less, the price it gets for its exports would go up.” (4) The high price of gas was already hitting European consumers prior to the war in Ukraine. The price will go even higher with a gas shortage and American gas is far more expensive than Russian. Europe could lose thousands of industrial jobs as businesses curtail output because of energy shortages. The sanctioning of Russian gas will hit the peoples of Europe badly while America will be unaffected. (5)

Russia has said that “unfriendly countries”, that is those countries imposing sanctions, must pay for Russian gas in roubles. Poland and Bulgaria refused and had their gas cut off in April 2022. The EU Commission said on 22 April that European Union companies may be able to comply with Russia’s proposed system to pay for gas in roubles without falling foul of the bloc’s sanctions against Moscow. “A face-saving compromise may be found. One solution might be for European customers to pay for the gas in euros through Gazprombank, which would, in turn, pay exporter Gazprom in roubles. That solution would also shield Gazprombank, one of Russia’s top three lenders by assets, from the imposition of sanctions that would otherwise hobble the financial system. The alternative would be the mutually assured debilitation of Russia and the big European economies dependent on its gas.” (Lex, Financial Times, 28 April 2022)

A key issue for Russia is how to make the transition to China as its key gas customer. The new 2600-km pipeline originating in the Russian gas fields in Yamal, in northwest Siberia will reach full capacity in 2024. The interconnector through Mongolia will take 3 years to build so everything will be in place around 2025. And then there’s the Arctic LNG 2 project which is even larger than Yamal and is 80% ready.

The EU is proposing to stop importing Russian oil by the end of 2022. With oil prices rising the oil majors are reporting huge profits: Chevron’s have nearly quadrupled and Exxon Mobil earnings have doubled to $5.5 billion. BP has announced bumper profits (£4.9 bn. in first quarter) although it has written off its $25 billion stake in the Russian oil giant Rosneft.

India has bought 13 million barrels of Russian crude oil since late February compared with 16 million barrels it bought in the whole of last year. India is one of the many countries which has not adopted sanctions against Russia. India is part of QUAD (the alliance of the US, Australia, Japan and India) directed against China. The US views India as “shaky” on sanctions and is working hard to prise it away from its relationship with Russia built over decades.

THE DOLLAR STILL DOMINATES BUT...

Afghanistan’s $9 billion reserves were frozen by the US when the Taliban took control and Biden has now ordered that ½ of these be paid as compensation to victims of 9/11. Not surprisingly there were protests across Afghanistan in reaction to this move by the US as the people are starving.

Now some $300 billion of Russia’s foreign currency reserves have been frozen by the US, UK and EU. This is half of Russia’s foreign currency reserves. It is theft by another name: financial warfare. Chinese Ambassador to the United Nations, Zhang Jun, spoke at the UN Security Council and said, “Arbitrary freezes of foreign exchange reserves of other countries also constitute a violation of sovereignty, and is tantamount to weaponizing economic interdependence…Such practices undermine the foundation of world economic stability, and bring new uncertainties and risks to international relations.”

The International Monetary Fund (IMF) published a working paper on March 24 titled The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies. (6) The report documents “…a decline in the dollar share of international reserves since the turn of the century…” with central banks around the world increasingly diversifying their holdings. The study notes that this “…decline in the dollar’s share has not been accompanied by an increase in the shares of the pound sterling, yen and euro, other long-standing reserve currencies and units that, along with the dollar, have historically comprised the IMF’s Special Drawing Rights.” Instead, “…the shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries that have played a more limited role as reserve currencies.” The researchers describe this “…evolution of the international reserve system in the last 20 years…” as a “…gradual movement away from the dollar.”

In 2000, more than 98% of international foreign exchange reserves were held in the “big four” hegemonic currencies: the US dollar, euro, Japanese yen, and British pound. Less than 2% of reserves were held in what the IMF calls “nontraditional” currencies. But as of 2021, the share of nontraditional currencies had shot up to 10% and there is every indication that this figure will only keep growing. The IMF’s first deputy managing director, Gita Gopinath, made remarks reflecting this historic shift, in a report by the Financial Times, (FT) titled Russia sanctions threaten to erode dominance of US dollar, says IMF. (7) The FT wrote that the crushing Western sanctions imposed on Russia over its invasion of Ukraine “…including restrictions on its central bank, could encourage the emergence of small currency blocs based on trade between separate groups of countries.” Gopinath added, “We are already seeing that with some countries renegotiating the currency in which they get paid for trade…”

Western sanctions on Russia have forced Moscow’s trading partners to seek alternative payment mechanisms. China and Russia have moved toward boosting their bilateral trade in each other’s currencies. Bangladesh has said it is considering using yuan to evade sanctions and continue trading with Russia. India has created an alternative payment mechanism using rupees and roubles, to get around Washington’s sanctions.

This weaponization of the dollar has given rise to a feeling in large parts of the world that America cannot be trusted with their dollar reserves. This could be one of the unintended consequences of US sanctions. However, despite these trends the dollar’s dominance will stay for a while.

VISA AND MASTERCARD OUT OF RUSSIA 

After western sanctions were imposed on Russian banks in 2014 Moscow reshaped the country’s payments system. Russia built a domestic payment system from scratch as a bulwark against Visa and Mastercard pulling their services again. A National Card Payment System (NCPK) was created to process card transactions in Russia. NSPK launched in 2014 and by 2015 it had signed deals with Mastercard and Visa to handle all domestic payments in the country. In 2015 Russia introduced its own payment card, Mir (Russian for peace or world), which runs on the NSPK’s infrastructure. There are now more than 100 million Mir cards in circulation, about one-third of total market share.

Visa and Mastercard suspended their services at the start of March 2022. American Express, PayPal, Japanese card network JCB and Western Union have also suspended services. Russia is now reaping the rewards for creating an alternative payments system that has helped mitigate the effect of these new severe sanctions. Ordinary Russians have not felt much change as domestic transactions operate as normal including for cards bearing the Visa and the Mastercard logos now running through the Russian system.

UnionPay, the Chinese payment card, has a small share of the Russian market but it is now expected to play a much larger role. There are some 9 billion UnionPay cards in circulation, which is half of the global total of bank cards and about 2 billion more than Mastercard and Visa combined.

There are a growing number of countries, including Brazil and India, embracing alternative payment networks which could also reduce the power of western sanctions.   

FOOD CRISIS

The sanctioning of Russian wheat (largest exporter of wheat with 21% of world exports) and fertilisers (23%) will have a devastating effect on the Developing World already subject to a food crisis. It will be the poorest who will suffer the most. With the increase in wheat prices, Egypt, which is the world’s largest importer of wheat, has seen its food prices soar since the war in Ukraine. Brazil and India are the world’s largest importers of fertiliser and if these countries were to follow the path of western sanctions it would have a profound effect on their agriculture as Russia and Ukraine are the main producers. 

METALS, NUCLEAR AND HIGH-TECH INDUSTRIES

Many European companies rely on a steady supply of Russian metal exports such as nickel, palladium, copper and chromium. Palladium is vital for carmakers, as it is a critical component in the production of automotive catalytic converters, which clean exhaust fumes in petrol and hybrid vehicles. Russia accounts for 37% of world production of Palladium. The price has increased 13% since the war in Ukraine and is affecting car production costs in the west. Nickel is used in stainless steelmaking but is also an important component for lithium-ion batteries which are needed to power electric cars. Russia is Germany's biggest provider of nickel, accounting for 39% of the country's supply. It also provides around 25% of German imports of palladium, and between 15% and 20% of the heavy metals chromium and cadmium, which have a range of industrial uses.

Russia, the market leader, supplies around 20% of the world’s class 1 nickel (99.8% pure). High grade nickel has been in increasingly short supply for a few years now. More advanced electric car batteries store more energy and need more class 1 nickel. The boom in electric vehicle production around the world has seen demand for nickel surge. (8)

The war in Ukraine saw a 250% rise in one day (8 March) leading to the closure of the London Metals Exchange for six days. It has worried Tesla CEO Elon Musk who said that nickel shortages are the top risk in the production of lithium-ion batteries. He has now bought Twitter.

Although Russia bears the brunt of Western high-tech sanctions, the European Union will also face problems in sectors where it relies on Russian and Ukrainian commodities and technologies. Some nuclear power stations in Europe are exposed, including existing plants that use Russian technology and planned plants with Russian involvement, as supply of both parts and fuel will be affected. Russia provides 30% of enriched uranium, plutonium, nuclear reactors and reactor parts to the EU. There are 18 Russian nuclear reactors in the EU and others were being planned.

Russia and China are technologically behind the US in terms of high-tech although some commodities used in high-tech supply chains are sourced mainly from Russia. The production and development of semi-conductors is monopolised by US firms and they lead the field in the development of Artificial Intelligence (AI). Research and Development is predominantly tied to military/space development. Drones, satellites and various robotic systems are critical in modern warfare. The development of unmanned, aerial and naval autonomous systems and AI capabilities are the latest weapons of war. The US has some five times the number of unmanned aerial vehicles (UAVs) compared to Russia.

US DETERMINED TO RULE THE WORLD 

The US rejected any effort to prevent war in Ukraine, did everything to provoke it and will extract whatever advantages they can from its continuation. The Ukrainian people are mere pawns in the US proxy war with Russia. Russia, threatened by the incremental expansion of NATO right up to its border, the eight years of attacks on the Donbas, the ever-closer stationing of US nuclear weapons and the non-implementation of the Minsk Agreements, finally compelled it to react.

Russia is largely self-sufficient in terms of food and energy and in that regard can withstand these unprecedented western sanctions as have other countries (Cuba, North Korea, Venezuela) but it faces a US/NATO enemy determined to continue to rule the world.   

(1) The White House, Briefing Room, 6 April 2022.

(2) Ukraine Democracy Defense Lend-Lease Act of 2022

(https://www.congress.gov/bill/117th-congress/senate-bill/3522)

(3) US Department of State, US Security Cooperation with Ukraine, Fact Sheet, 24 April 2022 (https://www.state.gov/u-s-security-cooperation-with-ukraine/)

(4) Agence-France Press (AFP), 21 April 2022.

(5) Escobar, Pepe, Sit back and watch Europe commit suicide: If the US goal is to crush Russia's economy with sanctions and isolation, why is Europe in an economic free fall instead?, The Cradle, 7 April 2022.

(6) IMF Working Paper by Barry Eichengreen (Professor of Economics at University of California) along with IMF economists Chima Simpson-Bell and Serkan Arslanalp.

(https://www.imf.org/en/Search#q=the%20stealth%20erosion%20of%20dollar%20dominance&sort=relevancy)

(7) Financial Times, 31 March 2022.

(8) Wall St. Journal, 14 March 2022.

Zapolyarnoye oil and gas field, Russia photo by Chursaev13

There are a growing number of countries, including Brazil and India, embracing alternative payment networks which could also reduce the power of Western sanction.