The Russian economy could “collapse” under the weight of Western sanctions, JPMorgan said, in a new note.
As any regular reader will readily attest, I’ve warned for weeks that the US and its allies would move to cripple Russia by engineering a debt crisis, hyperinflation and a deep recession in the event Vladimir Putin moved ahead with an all-out invasion of Ukraine.
That is indeed what happened, and over the past several days, it’s become obvious that an energy embargo may not be necessary due to SWIFT bans and sanctions on the central bank. Increasingly, Moscow faces a “buyers’ strike” for its energy. Existing measures have made it exceptionally difficult (not to mention risky) to finance trade in Russian commodities. A partial, de facto embargo is already in place.
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Some kind of default appears all but inevitable. Indeed, it may well be that Putin has no intention of servicing some of Russia’s obligations. Note that his decree prohibiting hard currency transfers abroad included debt service payments. All three major ratings agencies cut Russia to junk.
JPMorgan’s assessment was stark. “Russia’s export earnings will be disrupted, and capital outflows will likely be immediate despite its large current account surplus,” the bank said. “Imports and GDP will collapse.”
The problem is twofold. This is repetitive, but because JPMorgan’s note emphasized the same points, I’ll reiterate:
- First, Russia’s central bank can’t defend the ruble. All they can do is hike rates. At least half their reserves are frozen. The worse things get for the currency, the higher the odds of runaway inflation.
- Second, Russia is increasingly constrained in its capacity to obtain hard currency from exports due to the above-mentioned buyers’ strike.
As JPMorgan put it, “sanctions undermine the two pillars promoting stability — the ‘fortress’ foreign currency reserves of the central bank and Russia’s current account surplus.”
In short: It’s over. And it happened (much) more rapidly than even I anticipated, remarkable considering how convinced I was of the West’s capacity to dynamite Putin’s economy.
If you ask JPMorgan, Russia’s economy will contract 7% in 2022. On a seasonally adjusted annual basis, output may shrink more than 10% in the current quarter, and 35% in Q2.
On Thursday, Alexander Butmanov, founder of a Moscow-based hedge fund, was asked on Russian television whether “stock market strategies [are] now outdated.” “Do you hope to remain in the profession?”, an anchor wondered.
Butmanov pulled out a glass bottle and drank to what he declared “the death of the [Russian] stock market.”
“Dear stock market, you were close to us, you were interesting, rest in peace dear comrade,” Butmanov said.
At a loss, the stunned host hadn’t much to offer. “I’m not going to comment on this stunt, because I don’t want to believe it,” she said.
Believe it, madam. Because, again, it’s over.
With regards to the nuclear threat, it’s hard to understand how destroying Russia’s economy is less provocative (to Putin) then defending Ukraine militarily. Here’s hoping that he is removed before he really lashes out. Meanwhile, the west sacrifices Ukraine and it’s citizens after having convinced them to give up their nukes with promises of protection.
In comparison, the damage caused to the dollar’s reserve currency status by constantly weaponizing it in this way seems almost incidental.
Doesn’t Russia’s failed attempt to inoculate itself from dollar weaponization, executed here not just by the USA but a surprisingly united Europe and East Asia, actually bolster the dollar’s reserve currency status?
The concern is whether other countries will be willing to keep the system status quo when the US can freeze 300 billion of a country’s reserves (after due consultation with our friends, of course). China, Russia and anyone else not in club west might seek to insulate themselves from such punishment by working even harder for an alternative.
If this keeps going there will be pressure to do a no fly zone over Ukraine. We are not there yet, but it is brewing. Also I believe Putin’s position will become increasingly tenuous- a group of Kremlin folks may decide to make a change. Absent that a covert operation to kill or capture Putin may be initiaited by one or more governments outside Russia.
I’m hoping the lend-lease act of 2022 gets passed. It’s a bipartisan bill written a couple of weeks ago in the House. It makes sense to renew this useful tool to support Ukraine (indirectly, sort of) without actually committing our troops. Here is a link:
https://joewilson.house.gov/media-center/press-releases/rep-wilson-introduces-bipartisan-ukraine-democracy-defense-lend-lease
Write on, Ria! One more point in regard to Putin’s tenuous position. Lindsey Graham drawing attention to himself by saying Putin s/b “taken out” is about Lindsey Graham. But Putin is already crazy. And there’s a chorus of voices around the world drawing the same obvious conclusions and making allusions to the possibility of Putin’s removal. If that persists and the voices are loud enough, Putin might just go completely bananas. He’s already afraid to stick his head out the window. I wonder to what extent he’s flipping out, sleeping with a gun under his pillow, worrying about his food being poisoned, or hiding from his own bodyguards.
When reduced down to the only elements that appear based on objective criteria this is a “zero sum game ” between US , Russia and maybe China. One is defending the Dollar based System the other two are defending their ability to fend off and compete on more favorable terms . The rest as well as other players are more or less theater each using the well practiced/known tools of the trade that all preceding Empires have also used. Sometimes Geopolitics is fun/ exiting but this is not one of those times due to the stakes which are way over the top on my chart..
Putin dreams of being Czar but is becoming Stalin.
China hides from Covid practicing for wartime and restoration of Empire.
All the effort required to live in the past is almost always inefficient. Every history book ever written on the planet could be burned and it would be no great loss, probably be better for it.
Inefficiency and volatility due to wars are the only history worth knowing. Peace need not historical context.
Will it take the whole world becoming impoverished for these idiots to know what they’re up to.
If the fields of Ukraine do not get planted this spring people very far away are going to starve.