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False Claims About Russia Continue To Cloud The ‘West’s’ Vision
The pro-Ukrainian Spectator states correctly that the sanctions on Russia have failed. But its reasoning is dubious:
The West embarked on its sanctions war with an exaggerated sense of its own influence around the world. As we have discovered, non-western countries lack the will to impose sanctions on either Russia or on Russian oligarchs. The results of the miscalculation are there for all to see. In April last year, the IMF forecast that the Russian economy would contract by 8.5 per cent in 2022 and by a further 2.3 per cent this year. As it turned out, GDP fell by just 2.1 per cent last year, and this year the IMF is forecasting a small rise of 0.7 per cent. And that is all in spite of the war in Ukraine going much more badly than many imagined it would in February of last year. The Russian economy has not been destroyed; it has merely been reconfigured, reorientated to look eastwards and southwards rather than westwards.
Yes, the 'West' had an "exaggerated sense of its own influence around the world". But that is only a part of the problem. The 'West' still thinks it is superior to other countries even as at least some other countries have caught up with it and are, in parts, superior in the use of science and technology.
Moreover the 'West' thought that Russia was inferior to it. In 2015 the late Senator John McCain called it a "gas station masquerading as a country":
"Look, Russia is a gas station masquerading as a country," McCain said. "It's kleptocracy. It's corruption. It's a nation that's really only dependent upon oil and gas for their economy, and so economic sanctions are important."
In the early 1990s Russia surely was down. But it wasn't out. It had a heavy industry and everything it needed to feed it. It had well educated people and large scientific community. When McCain spoke, 25 years after Russia's downfall, the country was largely back in the upper league.
Its per head production of steel, cement, energy and food was and is higher than in most 'western' countries. Those are the basics numbers one needs to judge an industrial country and its capabilities, not some dubious number like the Gross Domestic Product which includes 'services' of dubious value. (For example the share of health expenditure in the quite high U.S. GDP is 16.8% with a worse outcome for the general population than in less spending European countries.)
As it has now become clear even to the Spectator that the sanctions on Russia have failed one would hope that the 'West' would come to a more realistic view of itself and of Russia economic capabilities. Unfortunately that is not yet the case.
Witness Florida's governor Ron DeSantis who in March 2023 basically repeated McCain's false claim:
… DeSantis said of Putin. "And so, he's basically a gas station with a bunch of nuclear weapons and one of the things we could be doing better is utilizing our own energy resources in the US."
The 'West' will continue to underestimate Russia's capability as long as such false claims are still believed. Only a realistic assessment and more respect for Russia's capabilities can correct the mistake of waging and losing a proxy war against it.
On the most basic level so people get it. 5 reasons why the sanctions didn’t work.
1. Russia does not need our money
Russia has its own currency – the rouble. That means when Vlad needs to buy a tank he orders the Russian Central Bank to debit the Russian Treasury account at the central bank and transfer that to the supplier of the tank. That’s all he needs to do – forever and for as much as he wants to do that.
That causes an overdraft at the central bank which is an asset of the central bank, and that balances the new reserve liability created for the commercial bank of the tank supplier. That reserve liability at the central bank is an asset of the commercial bank, who then credits a new bank deposit for the tank supplier. The balance sheets of the central bank, and the commercial bank expand.
The tank supplier will accept roubles for its tanks because it needs to pay its workers in roubles. The reason for that is because Vlad imposes taxes in roubles on both the tank supplier and the workers, which if not paid earns them a spell in a Russian Gulag. That’s all the ‘confidence’ Russia needs to impose on its people for them to accept roubles – a confident assertion, backed by force, that they will be jailed if they don’t pony up the relevant amount of roubles when they are demanded.
Those taxes are collected. Bank deposits are debited, and bank reserves transferred to the Treasury, which eliminates the overdraft asset and the balancing reserves at the central bank. The central bank balance sheet shrinks back down along with the commercial bank.
There is no need for interest payments. No need for ‘borrowing’. There is nobody who can say no. It all just happens and is perfectly self-sustaining throughout the entire area where Vlad can impose his taxes.
By this mechanism, Russia has command over all the physical resources available within its border and can transfer them to the service of the state as required.
2. Russia is a sovereign state unlike Eurozone countries or those countries that peg to the $.
Should the tank supplier decide not to take roubles, then the tank supplier will be commandeered by the state, and the leaders deposed – replaced by somebody who will take roubles.
Should somebody at the central bank decide not to honour Vlad’s payment order, they will be replaced by somebody who will.
Nobody can stop Vlad doing any of these things, because he has the authority of the state to get things done, and controls the enforcement mechanisms that allow him to get his own way. Legal decisions will go Vlad’s way. The central bank will be ordered by the courts to make payments, and the courts will sanction the commandeering of the tank supplier. Why? Because the legislature would have passed the legislation permitting those actions.
The only reason you can’t make an order to pay whoever you want for as much as you want is because the courts will side with the bank, not you. For the government the opposite is the case – if the legislature agrees. There is no other control mechanism, because banks can expand their balance sheet on demand.
What’s important to note is that this doesn’t just apply to Russia. It applies to all sovereign states the world over. Currencies are an expression of state power, a simple monopoly, and monopoly rules apply.
3. Russia doesn’t really care about the floating exchange rate. The dangers that were under the gold standard, fixed exchange rate regime no longer apply.
In the ‘seen to be doing something stakes’, nothing tops the utter nonsense spoken about central bank ‘international reserves’ and the SWIFT transaction system.
Let me explain what ‘international reserves’ do. If you’ve been abroad to lots of places you’ll end up with a drawer full of foreign small change. In my drawer I’ve some Korean Won, Japanese Yen, Polish Zloty, Bermuda cents and Gibraltar pennies alongside the usual US and Euro cents. That’s where they sit – unused except to entertain small children with funny looking coins – because they are useless in the United Kingdom. Yet technically they form part of my assets.
“International reserves” are really a drawer full of loose foreign change. They are of no real use in a country and can be completely ignored or written off to no operational effect. They end up on the balance sheet of a central bank because export entities within a nation want the currency of the nation to undertake local transactions – like paying their local workers. So they swap their foreign earnings for local currency.
Since that creates an FX risk for commercial operations, an excess of foreign currency in export surplus nations tends to bubble up until it ends up under the control of some state entity – often the central bank. There it sits – because not spending it tends to hold down the currency exchange rate which favours exports.
Since the only strategic reason to export is to obtain imports, why should Russia continue to export anything if it is getting nothing material in return?
If that means layoffs in Russian export industries, then there is now plenty of work supplying armaments and equipment to the war machine, as well as substitute industries to replace imports – which will gain greater momentum thanks to elimination of foreign competition. People in Russia are not going to be unemployed.
What about those in the West currently supplying exports to Russia? Where is the untapped source of demand in the world that will take those goods and services they can now no longer supply? There isn’t one, and to believe in it is to believe in a fallacy of composition. Instead those businesses will shrink, laying off people. We don’t have a national goal that will employ people instead.
As to replacing Russian Gas and Oil, are we sure we have enough spare pump capacity, and enough LNG ships to move that across the globe? What will happen to power prices in the meantime?
The whole idea of ‘creating inflation’ in Russia is far more likely to create inflation in the West. Russia has everything it needs within its borders, and eliminating foreign competition will simply accelerate the internal production of things it wants. All powered by its own banks, lending in its own currency, which they can do with impunity.
SWIFT is a fancy WhatsApp group for banks that allows banks to message each other when they want to move money from one account to another. What happens when you are booted out of a WhatsApp group? You create another one and talk via that. Or you use Signal, or Matrix or perhaps even have a phone call.
If nobody is selling anything to Russians, then why would Russians need to settle in anything other than roubles – which SWIFT cannot affect?
Trying to drive the rouble down just makes Russian exports even more of a bargain and incentivises ways of getting around the blockage. Since a decent team of developers could knock out a SWIFT replacement for the major transaction types in about a fortnight using RabbitMQ and an adequate supply of the finest Russian beer I doubt the Russians are going to be overly bothered by the inconvenience. After all, the external value of your currency is of little concern if you’re not sourcing required items outside your borders. Russia is not Turkey, nor is it Iran. It is an industrial power house with a vast land area full of natural resources and an energetic people that prefers to train engineers and scientists over advertising executives, and that happens to have the fourth largest armed force on the planet.
Russians may want the stuff the West can supply, but they don’t need it. Where does West’s demand for Gas and Wheat sit on that divide?
There is a persistent notion in the West that Russia is nothing more than a commodity producer and entirely dependent upon imports. I suspect that notion is about to be disabused.
4. US dollars are useful but not necessary.
One of the greatest repeated lies in international trade is the idea that the US dollar is king and is necessary. It’s a complete fabrication.
Just because some item is usually priced in US dollars does not mean that the contract to supply that item has to be denominated in US dollars. Even if it is, there is no requirement that it is settled end to end in US dollars.
US dollars are used in international trade because they are convenient. In reality in every international trade the seller gets the currency they want and the buyer pays with the currency they have. The international finance system makes a tidy living matching those two desires to create demand. (What’s interesting in the analysis of currency area boundaries and financial exchange is not the border of a country, but the point at which an exchange entity has a foot in at least two currency areas. It’s by selecting the actual operational boundary that a Modern Monetary Theory analysis of international trade throws up new insights into the process).
To use an Internet analogy, the US dollar is the network layer, not the application layer. It is a financial IP packet that everybody has converged upon to allow the thing it encapsulates – the actual end to end transaction of real goods and services priced in other currencies – to occur.
If we started charging tolls for IP packets, somebody would come up with a parallel structure or use a different network layer encapsulation. It is the same with money. Once dollars stop being cheap and convenient other methods of exchange will take over. It’s the end to end exchange that matters, not how it gets there.
The Wool and Corn Exchanges of the world believed they would last forever. Now, if they survive at all, they are flats, and shops and restaurants. Trade bypassed them when they stopped being convenient and useful.
5. The saving grace
Sanctions are based upon a belief about Russia and a belief about money: that Russia is utterly dependent upon imports to survive, that roubles need ‘confidence’ and ‘interest payments’ to be accepted, that freezing ‘international reserves’ will cause bank runs, that inflation will run rampant.
In reality, Russia is self-sufficient in what it needs, roubles are accepted because there are tax payments to pay, interest is utterly irrelevant and can be zero to eliminate inadvertent demand injection, and freezing ‘international reserves’ will just result in dollar and euro denominated deposits in Russian banks being frozen in the same way, if not entirely confiscated under emergency tax legislation. After all, keeping your assets in foreign denominations isn’t the act of a patriot and is likely somebody who would oppose Putin’s regime. Taxing away their money seems like a good way to reduce their power – after all that’s what the “tax the rich” people keep saying in the West
In 1940 JM Keynes published a pamphlet called “How to pay for the war” where he explains how equipment for a war is produced and distributed and what the population must do to enable it. In it is the following: “In a totalitarian state the problem of the distribution of sacrifice does not exist. That is one of its initial advantages for war”.
Putin’s Russia can easily counter sanctions. It can put taxes up – payable in roubles to ensure demand matches supply. It can freeze savings in foreign currencies at its banks. It can lower interest rates to eliminate the Interest/Price spiral. It can demand that its exports are settled in roubles or simply stop exporting – since there is no longer anything on the other side worth importing. It can redeploy workers from the export industry to the production of substitute products and services. It can physically ration goods and services amongst the population.
Putin is a conservative statist. All we can hope is that the ‘sound finance’ nonsense is solidly in his mind in the same way as the other dubious notions he has laid out at length over the last few weeks, and that he will make the same mistakes with money as Erdogan and other totalitarian leaders. If he has read “How to pay for the war” and truly understood it, and particularly if he has gained insights into the power he has with the rouble that flows from understanding Modern Monetary Theory, then it will be the West blinking wondering what happened, not Russia.
Like all alchemy, financial alchemy works like the hypnotism of the stage magician – an illusion that only captures those with weak gullible minds. Pushing Russia back is going to require a rather more physical approach, which is something our effete elite appear can’t comprehend.
https://new-wayland.com/blog/theunreasonable-ineffectiveness-of-sanctions-on-russia/“>https://new-wayland.com/blog/”>https://new-wayland.com/blog/theunreasonable-ineffectiveness-of-sanctions-on-russia/
Posted by: Derek Henry | May 13 2023 7:57 utc | 103
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