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Monday, March 17, 2014

Here's the Next Step

What will Russia do if the USA and others impose sanctions on it?  Russian president Putin has already said that sanctions will work both ways, but he has not been specific.  Now, his chief economic advisor has given some details about possible responses.

Sanctions imposed by the US against the Russian government institutions will force Russia to recognize the impossibility of loans repayment to the US banks, Presidential Aide Sergei Glazyev said.  "If sanctions are applied against state structures, we will be forced to recognize the impossibility of repayment of the loans that the US banks gave to the Russian structures. Indeed, sanctions are a double-edged weapon, and if the US chooses to freeze our assets, then our equities and liabilities in dollars will also be frozen. This means that our banks and businesses will not return the loans to American partners," he said.

On top of this, Glazyev said that Russia would switch currencies for trade purposes.  I doubt that move makes much sense, however, since the main reserve currencies in the world, namely the dollar and the euro would both be coming from lands that have imposed sanctions.  Will Russia start using the yen?  Japan may also impose sanctions.  Will Russia adopt the Chinese currency for its trade?  Again, that is doubtful.  We know that the ruble cannot be the currency of choice since it will be under assault from the sanctions.

So it seems that Russia's response will be to renounce the foreign debts and to nationalize the foreign ownership of its economy.  There are many billions more assets held by the West in Russia than by Russia in the West.  It is a real threat.

For the longer term, however, this threat is a self defeating course of action.  If Russia squashes all the investors with holdings in that country, it will lose a major source of capital for growth in the future.  There are not many businessmen or banks who will come back to invest again in Russia once they suffer big losses at the hands of the government.

For what it is worth, I should add that Glazyev's comments were disavowed by the Russian government.  This is most likely to give Putin the "plausible deniability" that he desires.  There is, however, no way that Glazyev said what he did without prior approval from his boss.



 


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