This Is What Sanctions Can Do to the Russian Economy

to the mechanics and power of the sanctions themselves. Oh my gosh, I'm getting I'm getting flashbacks to doing international relations stuff at university. But yes, there's a lot to do and say when it comes to sanctions, And of course, the the overarching question has always been do they actually

make much of a difference. And on the one hand, what we've seen in the past, um I guess week or so is that they can be very dramatic and clearly, you know, in the space of a few days, the US and its allies has basically created a financial crisis

in Russia. But on the other hand, Russia is still invading Ukraine, and there's the question of what happens next now that you've ratcheted up this kind of financial pressure, right, And there's the fact that even with the sanctions, Russia is getting tons of cash every single day, largely from a Germany and other Central European players who are deeply reliant on Russian energy, in particular natural gas, but also call which of course raises the question of ken European

countries can the U S impose effective sanctions that accomplish something against Russia when at the same time particular Europe is so dependent on Russian exports. Absolutely, I think having a big commodities exporter involved here obviously complicates everything, especially

at a time when people are worried about inflation. But the other thing I will say, and I think I mentioned this on the episode with Sultan, but the other interesting thing here is people have been reacting preemptively to the threat of sanctions, so sort of voluntarily self sanctioning themselves.

And in fact, on on the day after the invasion officially began, we saw a lot of people in the market just step away from Russian assets altogether simply because they didn't know what was and wasn't going to be impacted. And to some extent that's continued today. So yes, we still have Europe in particular Germany importing a lot of energy. But we've seen some other players, you know, some commodities traders in Singapore for instance, voluntarily step away from the market. Yeah. Absolutely.

And then there's another element which is also sort of volunteer wish is just not necessarily fear sanctions, but companies just deciding, you know what, we're going to wash our hands of anything to do with Russia. And yeah, it's pretty striking, this sort of like domino or cascading effect of companies saying we just don't want to have any involvement,

we want to completely walk away. You know, I don't think the Russian economy has boomed in recent years, so it's not as though, you know, perhaps this is not a huge source of revenue and profits for a lot of these companies. But it is really striking to see so many corporate interests abandoning the Russian economy right now, even apart from like formal sanctions related activity. Absolutely, so

many different threads to pull here, that's key. And as long as uh, the US and the rest of the rest of NATO does not want to get involved directly militarily for obvious reasons, then of course sanctions and other related things become the primary means of putting pressure on Russia, So we have to dive into the sanctions, how they work, and what they accomplish. Further, we're going to be speaking with a sanctions researcher a lot of background in this area.

We're gonna be speaking to Eduardo se Eduardo, thank you so much for joining us, Thank you so much for having So why don't we start off big picture? You know, what, in your view are the key elements. There have been tons of announcements really over the last week. What are the key most important things in your view that have been announced so far. I'd say there are a few

of them. I think the big one to start is the action against the Russian Central Bank that was initially discussed as kind of a final escalatory move, and the fact that it came so early in the escalation is a sign of how serious governments on both sides of the Atlantic were about sanctioning Russia. But I think the other big ones, the other biggest one, i'd say, are

the banking sanctions. Those are the ones that have the most defeat immediate effect, and they have been quite aggressive, and there's still room for escalation there, but the spur Bank can VTB where the two biggest targets there, and they were the kind of most extreme type of especially in the VTP side, the most extreme type of sanction that the United States can impose. I'd say there are other ones that are very notable, but their effect is in kind of the overnight panic that we're seeing, so

they're not the kind of em causing ones. But I think there's other notable steps which are remarkable in terms of how the United States thinks about sanctions. So, for example, things like the United States is currently leading this global export control initiative basically meant to cripple the arrival of

inputs for the Russian industry. Each country is doing them slightly differently, but it's kind of a remarkable thing because we tend to think of US sanctions as primarily focused on financial mechanisms, but here from the start they've targeted

kind of physical inputs and supply chains as well. So this actually brings me to the question that I want to ask you, and I think it's kind of a basic question, but one of those basic questions that probably has an extremely long answer, But how does sanctions policy

making actually happen. So you know, someone sits in a room, presumably there's a committee or something, and they look at the available suite of previous sanctions actions that they've done on regimes like Iran or Hong Kong or whatever, and try to decide about what would be most effective or most applicable to the Russian situation. How exactly does it work? Yeah,

I think that's accurate description. In the United States sanctions the kind of two offices that the two agencies that handle sanctions are the Treasury Department and the State Department. The Treasury Department, i'd say, is the more in the

weeds technical department. So you probably heard in these days about, oh fact, the Office of Foreign Asset Control that is within the Treasury Department, whereas the State Department handles a as sanctions, it's specifically handles So for example, the decision to sanction ords from the other day, it was actually taken by the State Department rather than Treasury Department. But that's kind of a quirk of u S sanctions long But I'd say it's a kind of trial and error

and discovery process. So people are describing the sanctions these days as unprecedented. I wouldn't say they're unprecedented in the sense that they have never done before. What's unprecedented, it's kind of the speed and impact and kind of how cooes together they've been and how much they've shaken the Russian economy. There are precedents for what the United States has done. So for example, the bank, the Central Bank of Iran has previously been sanctioned, so this is the

first time a central bank is sanctions. So there are in that sense, there are I would say there is kind of a sense of escalatory measures you can take. If you think of sanctions, the most traditional kind of basic form of sanction is the individual, especially the so called STN sanctions, So it's against an individual, and so that basically means they don't have access to their assets. Their assets are frozen. So in the basic sense, your bank accounts are frozen and you probably can't come to

the United States. And that's for example, what they did against the putin the other day. That's kind of the most basic building block. Usually that's what you see when you hear in the news sanctions are being posed in response to a crisis. That's more likely than not what people are talking about because they're pretty easy to impose and they don't have massive macroeconomic effects, and then from

there you can kind of move up. You can put these so called blocking sanctions where you block the assets on corporations, and that can have a significant effect. So for example, that kind of depends on the target. So if you're sanctioning VTB, which is a major Russian bank,

it will clearly have a massive effect. If you're sanctioning in the around case, it was often sanctioned small kind of satellite entities that we're doing something in the nuclear program that doesn't necessarily have a macroeconomicist location, and then from there you can kind of move bond and people. There is a lot of innovation in sanctions from program to programs. So for example, the Russian sanctions that had been imposed were an attempt to break out of the

normal escalation ladder. So the sense there was these blocking sanctions were would be too too blunt and would have too much of a backlash. And the idea there, for example, as they impost sectoral sanctions, so rather than targeting an entire company, they just imposed limitations on what those companies could do. Americans couldn't buy certain forms of debt and equity from those companies, or couldn't provide certain services, and

so that's just the way you can refine it. But I would say more generally, there is a sense of depending on the seriousness of the situation, you can kind of move up the ladder and i'd say Central Bank, and then the swift measure that has been in the news would be towards the upper end, at least in the financial sanctions side. So you know, obviously there perhaps it was some whole that sanctions or the threat of sanctions at least would have some sort of deterrent effect

against this war. It hasn't happened. The war has happened. In general, it feels that those sanctions often get placed and stay for a long time and often don't seem to it's not obvious what the effect is, but what is the theory of what the sanctions are supposed to accomplish and how so The basic theory, especially now that kind of the deterrent theory is off the table, is that sanctions are a bargaining tool. You impose certain costs and say, if you acceed to our demand, we will

stop imposing these costs. So it's the basic theory is pretty simple, but it gets very complicated very fast because the ask is not always clear, and I think the off ramp is not always clear, so people will kind of make up new new goals and new ass says they go. So it's very hard, especially in kind of

a live conflict, to know what you're asking for. Some of the Russia case, now, one of the big challenges will be what would we consider enough for us to impose the sanctions, And as of now, I truly don't know. I feel like there isn't a unified transatlantic view on what what would be enough for lifting the sanctions. And the other thing which is sometimes ignored is that you have to hold up your own end of the bargain.

So say say we said in order to lift sanctions or you would need Russia would need to return to the situation we had on Jan one, then the United States and Europe will need to actually deliver the relief from sanctions effectively and basically try to restore Russia's economy to one. And that that that is very challenging because sanctions the United States issues these regulations. But then it's

the businesses that decide how to react with them. So, for example, BP has decided to exit Russia, the United States can't necessarily make BP return to Russia if Russia complies, So it's often can be very challenging. The private sector is hyper challenging to do the carrot side of the sanctions, whereas the stick is kind of is very quick. Companies are much more responsive to the threat of US punishment than they are too kind of requests by the United

States to rekindle relations during the Irround deal. When the Around deal was passed, then Secretary of State carry would actually go around Europe and speak to banks and say, we've lifted the sanctions, please rekindle your business in Irun, and the bank's kind of bulked at it for all sorts of reasons, because it's very difficult to convince the other side that you're doing your best, and then they feel like they kind of got a raw deal because

they complied that they didn't necessarily get all the bend as they were promised. So this is exactly what I wanted to ask you, because again, even before a lot of these sanctions were formally announced, we did see various companies financial institutions start to step away from the market, and you know, suddenly you have Russian companies, um you know, whether they're logistics networks or commodities exporters, things like that, unable to get credit from their banks even though technically

nothing has happened yet. How much of that friction is I guess, beneficial to sanctions actually being implemented and enforced versus how much of it is unhelpful in the sense that it it sort of accidentally escalates the situation and may, as you just pointed out, be difficult to reverse if the deal is actually reached. I think it's a very

much a double edged sword. It's it's definitely helpful because it's difficult to fully calibrate ones actions and in that sense you can kind of maximize the shock and all in that sense, and in that sense it's it's a

positive I guess. I mean, it's it's nice to know that the United States doesn't necessary if everyone imposed the sanctions followed the exact letter of the law of sanctions, sanctions would be kind of an unwieldy measure because you would actually have to think through every single thing you're trying to block. So in that sense, it would be

impossible to administer a program where you did that. There have been cases where companies are extremely forward leaning in terms of interpreting things exactly, and that can be counterproductive. On the other hand, I think it's a it's a big concern the overcompliance concerned, as you said, first of all,

because things can very quickly spin out of control. I mean, in a sense, it feels if there was all this kind of excitement about how much was happening in Russia, but and Russia kind of I would say, in this situation made it warranted because it continued with it's uh, it's advance. But in a situation where Russia had paused and the bank runs had continued, you would have had a difficult, difficult situation. And I think it's very hard on the back end to incredibly deliver the relief. So

I think it's very difficult. I think the current situation is kind of a unique one because at least not for now, everyone is hoping that this confrontation will be fairly short. People don't see this as necessarily an attrition along like multi year Iran type situation, So I think people are there is a concern over compliance can be a good way to very quickly dial up and then dial down. But if you're trying to be more calibrated and negotiate, I think you would be concerned. So I

think it's a huge problem. And it's always easy to welcome over compliance at the front and then forget that you'll have to deal with on the back. So at this point, because we discussed, obviously the deterrent element didn't work, and so in theory, you know, you continue to apply stress and continue to offer out the chance of okay. Hopefully in theory this this gets reversed if Russia reverses its actions. What about just the uh, the persistent damage.

I mean, yes, the Russia is going to continue to have at least for now cash coming in through the energy market. Could it be that the sanctions just imposed such weakness that it has to it has to backtrack in some way because the damage compounds to its economy, compounds to its banking system and so forth. Could it be that the penalty the sanctions weapon is so harsh that it essentially forces Russia is forced into some sort

of reversal. It definitely could. I mean, I think that's the hope that it forces some sort of reversal, And as far as everything that's happened up to now, I'd say, if you're trying to impose pain to force a reversal, this you're getting what you wanted. And I mean, there's still more one can do, but it has been very successful the sanctions. I feels if it's kind of like people talk about kind of the economy in general. Bad things happened to economies all the time, but they don't

just stop existing. They kind of address and moddel along. Like Russia defaulted, it kind of picked up the pieces it was bad, and they keep going. So sometimes I think during sanctions conversations, but in general there's the sense that there's like a final blow you're gonna deal, or

some moments some point of no return. I read recently some really interesting comparisons of the Russia sanctions to the Iran and the Venezuela sanctions, and in that sense that those are concerning precedents because in those cases the country is kind of muddled along. So for example, Iran lost access to its reserves and it's still kind of had to consolidate. There was the economy shrank, but it kind

of muddled along. It really energy became a smaller part of its economy, manufacturing mostly domestic focus became a bigger one, and it was able to kind of build some semblance of an economy that could work. In the Venezuela case, there were aggressive oil sanctions and really harmed the Venezula oil sector, but eventually the oil sector kind of came back.

So in that sense, it's hard to imagine a situation where you kind of deal some final blow, in which case you have the country has no chance or no option but to negotiate. But at the same time you can inflict a lot of pain, and at least in the Iran case, the country has been willing to negotiate to get outside of sanctions. So in that sense you can define only use sanctions to get to do I would just say that the economic pain itself is not

the only factor. That it ultimately comes down to politics. So what are the kind of internal constituencies that are willing to bargain and what can you Are you willing to accept what they have to offer, and can you give them what they want? So just on this note, you mentioned the idea of the US actually targeting specific sectors while trying to leave others, you know, relatively untouched,

such as energy or commodities. How does that change I guess the efficacy of sanctions and what kind of impact would you expect that to have on the Russian economy. Would that be something like what we saw in Iran, where energy starts to become well, I guess in this case energy would become an even more important factor in the economy, or would you start to see Russia try to I don't know, offset some of the the impacts

of the sanctions. First of all, the United It's true that the US and Europe stayed away from directly targeting energy, and they've kind of they've tried to be pretty explicit about it. So for example, in the United States case, they've added licenses which are basically exceptions the sanctions saying certain transactions are allowed. And for example, within the Russian Central Bank sanctions, within VTB and spur Bank they've allowed

energy transactions. But I think in terms of kind of the over compliance and all that, I think it's very hard to say that the current sanctions aren't hitting energy. I think I was just seeing right before the show that Russian oil is trading at a discount. Financial institutions deals with commodities aren't as a forthcoming with letters of credit, and there was an announcement from shipping companies to that

they're not they might be peeling away from energy. So in that sense, I think there will be an effect directly, I mean, compared to Iran, Russia's about thirty or so percent of it of its government budget comes from energy, whereas in the around case that was in the six piece of The interesting thing about thinking about the reliance on energy is that I mentioned kind of the big, big ticket sanctions, but some of the other ones that

have been imposed are meant to target long term energy production. Uh. Some of these started actually, and the idea there was exactly, let's not target energy right now because we would be able to withstand it, but let's make it so Russia has more trouble getting the technology it needs, getting the

funding it needs for its kind of frontier project. So in that sense, Russia might struggle with replacing its reserves, and in that sense energy might decline as a part of its economy just because it's not able to put put in the investment. In that context, the departure of it's part of companies like Shell and Equino or n VP might be potentially further law of kind of human capital or expertise that could harm the energy prospects of

the Russian economy over the medium to long term. So I want to talk a little bit more about that because the introduction, you said, one of the things that you found striking. It's like, Okay, we all expect the financial sanctions, but this sort of export controls limiting Russia's access to factors of production, perhaps some intermediate stage goods

that would really undermine Russian industry. What specifically has been announced in that respect, What are the areas of sort of our Russian economy, maybe be the energy or elsewhere they will really be affected by some of these new limitations. There's some differences between the US and the EU here. The United States said it's mostly focused on defense and aerospace, so it's specifically it mentioned so far that it planned to kind of limit inputs like semi conductors and lasers

and other parts to the defense and aerospace. The European and seems more focused on a broader variety of of components targeting the energy sector as well. We've been coming at this very much from I guess the sort of external side, like from the perspective of the US and Europe. But what can Russia actually do here to offset sanctions impact? And of course there's been a lot of talk about what role China could play, um if any, in all of this, and the idea that maybe Russia can look

to China for for some type of credit. So what sort of response might we expect here. The short term response is kind of what we saw the other day with the rays of raids and kind of the capital controls. Over time, I think it will be primarily about turning inward, kind of finding domestic sources of demand, and I mean the energy aside of it may change, but kind of encouraging capital to stay in. I think other sanctions we've seen in these days has been the targeting of the

oligarchs and people close to Putin. The one potential scenario would be kind of a full repatriation to the extent that they're able to of their assets and kind of like new sources of capital within the Russian economy, all looking inward in terms of relationships with China. I think something that was interesting in the context of the comparison

with Iran. That I saw was that Russia right now is much less exposed to China, and then say Iran was just because Russia, Russia historically has been very tied to the West compared to Iran. So and that's that there is like an opportunity to kind of reorient the entire economy east rather than West, and so that could be one way to kind of break the connection with Europe. But at the same time, I think, well two things. First of all, these things are take time, and right

now we're still in the adjustment phase. It seems like Russia will have ways to stabilize as the rouble in the short term. It seems difficult to me from a sanctions perspective, what you don't want is the so called Cuba scenario where sanctions stay in place wherever you kind of you don't have right now. The United States has been admirable in the fact that it's been able to be extremely multilateral and so bring on the countries like

Switzerland that are historically neutral, for example. The risk is the longer this goes on, the less multilateralism there is, and more kind of countries start to break away, start to re engage with Russia, and then you kind of have this situation where there's a complete blockade against Russia from one part of the world, but it's not enough to completely undo kind of unmake Russia's economy bringing to the bargaining table, and the economy kind of readjust like

Europeans go to Cuba all the time, it kind of readjusts towards these So that's I think the thing everyone

is really wants to avoid. So my sense of the goal right now is to try to impose so much pain that there is in the ability to remake oneself and kind of adjust, because otherwise the adjustment you could kind of end up in this worst of both worlds where you don't necessarily achieve your goal, you don't achieve your goals, you're cutting off a major part of the economy, and you're kind of re orienting a major part of

the economy away from you. So for me, I struggle to imagine anyone wanting the current situation to be long term, and I think the hope is to reach a deal. So how as of right now, and we're you know, we're barely a week into this war and the announcement of sanctions. How surprised are you by the level of unity and the completeness of the I mean, as you mentioned even Switzerland neutral Switzerland is involved by this sort of the unanimity on the part of European powers in

the US in the sanctions. And how does that compared to other ones in terms of unanimity versus say when a dealing with Iron and others. I think it's extremely impressive. I think it was unexpected. I mean both the Switzer and then Singapore's joining, which has kind of been kind of unique cases. But in general, if you think about the way sanctions work within the European Union is that you need unonumity of all twenty seven countries. It's not

a majority decision. So even with getting the European on board for anything really requires getting twenty seven members on board. And you saw it over this weekend where it would be kind of one off reports Italy okay with Swift cut off. Hungary not opposed to Swift cut off. So in that sense, it's a really challenging diplomatic struggle. And I think it's been amazing to see how much that the United States was able to get everyone on board

in terms of kind of looking at in precedent. First of all, I would say there are small differences between the sanctions. This isn't necessarily a bad thing, but I think everyone does minor adjustments or my carve outs, I think in some cases, and some of this is just the way kind of the way these work is that every country sits it in a room and kind of writes out there the same press release and then releases it. Everyone does it a bit at the same time, a

bit differently. The United States, say, released its central Bank sanctions, they agreed to them over the weekend, but then the United States rules came out before the European world, So for temple of the the United States have a carve out that Europe doesn't have, and I think that's to be expected. But it's kind of a it's kind of a funny process in that sense that it kind of all comes together on the fly, and even more so now where it's not multi month or multi year escalation process, but

it's a matter of hours everything changes. So in that sense, I think it's been pretty amazing. I think it's kind of a speed run of the Iran sanctions in that sense.

So the classic dynamic during the Iran sanctions tended to be that someone wanted to escalate, some party within the United States wanted to escalate Iran sanctions, that they would push it, and usually it was something at that point unprecedented, and so then the administration, which tended to be more concerned about things like Dallar dominant or getting along with allies,

would push back. But eventually there would be enough momentum for the kind of hawkish next step, so targeting the around Central Bank or trying to target Iranian oil exports, and so eventually the United States would kind of get on board with it, and then it would there be kind of friction with the EU that you would complain about overreach by the United States or lack of engagement

with EU equities, etcetera. And then eventually the EU would kind of either fully join or kind of make itself comfortable with it, and so that's kind of how it would go. And then the kind of final step was the working with China. So China would not necessarily fully agree with the sanctions, that definitely wouldn't say it was complying, but China would maybe make some adjust mints and kind of conform or not too overtly go against US schools.

Now you're kind of seeing this extremely fast. So someone floats an idea with the Russia thing last week, So before the invasion fully started, you had all these ideas central Bank and the correspondent banking targeting olive arts, and they were kind of floating in the either and then the United States does something. Europe bulks, but then it

moves faster than in the central Bank sanctions. Actually, initially it seemed like the United States was going to take a soft through approach, and in that case it was actually vonder Ley and speech that seemed to be a bit more forward leaning. So that sense, you're seeing everything move very quickly. And I think the current, like the final decision on Swift is kind of an example, this gradual campaign all building up to kind of a big decision.

So I think it's been admirable. It's kind of interesting you see how much diplomacy matters, but you also see how much the technical questions matter because so much of it is kind of getting it's making the details compatible but also ensuring that domestic politics are feasible by carving out what you need to come. You used a phrase just then for the sake of dollar dominance. And this is something that has come up in our episode with Salton Poser, and I've also seen some comments from other

commentators about it. But on the one hand, you have the US using its position in the global financial system to heap enormous amounts of pressure on Russia to try

to get it to do something that it wants. On the other hand, it seems to have given rise, I guess, to a question of whether or not people are going to want to either do business with the US or maintain assets in dollars if they know that, you know, if they get into a situation of tensions with the US, that they could actually lose control or access to those

various assets. So I guess my question is what does all of this mean for the long term position of the United States and the dollar in the financial system. This is kind of the million dollar question that has been kind of one of the ongoing questions in sanctions among sancts and practitioners. Two of the current people in government working on the sanctions actually wrote a report on

will sanctions threatened the result of the dollar? So everyone in the government is very much thinking about this issue. I tend to be very skeptical about the sanctions threat to dollar dominance. I mean, first of all, I will say, like the way dollar dominance usually comes up in these conversations isn't because of some empirical threat to the dollar, but it's more of a way of kind of arguing

against the sanctions without arguing against the sanctions. So you're not saying, I think this this measure is bad because it won't achieve its goal. You kind of have this banking shot argument where you say, actually, we shouldn't do this measure because of dollar dominance. So that's kind of that. I tend to kind of be skeptical of the argument just because that's it's not often like very informed. I think by it's most informed by kind of policy differences

within the sanctions community. I mean, it's been something people have been worrying about for a long time. Like Jack lou when he was secretary, gave a speech saying, if we keep using this, it will be a threat. And it's I mean the United States keeps it does keep escalating and its use of it. I mean there have been kind of all these things. There was one point in the kind of tens they were all these massive

fines against foreign banks, and people would complain. At one point, President Holland asked President Obama not define B and P Perry BA too much. So like, in a sense like it is like a big liability in a sense that like the United States has this control and it almost doesn't know what to do with it day to day. So, for example, in the afghan you recently saw the United States made that decision about the Afghanians assets held at

the New York FED. In a sense like dollar dominance itself is kind of a huge imposition in the United States because it needs to make these decisions that it's not necessarily it might not want to make. So for example, the buying administration having to choose between sending money aid to Afghanistan and keeping in the United States because technically the money is in the United States, and so nine eleven victims families could sue and take the money from

the New York FED. I guess we're generally I would say that dollar dominance has been people have been worrying about it for a long time. I'd say the last biggest worry was during the U s unilateral exit from the Iran Deal, and that to me at the time, there was all sorts of fears because the Iran Deal sanctions.

The Iran sanctions really leverage it. Like the biggest thing they do is they force they don't allow Iran to export oil, and so you really have to lean on dollar dominance to pressure like third party countries not to import Iranian oil. And so there was a sense that that might be the breaking point, and it really wasn't in that case. Swift Swift is like the Belgian payment messaging service. They even complied with U S sanctions during

this whole escalation. People keep saying it's up to the EU to decide on Swift, not to the United States. In that case that you very much did not want the Swift Swift to cut off during your banks but they did it anyway. So in the short term, the sanctions do not pose a threat to daughter dominants, I would say, mostly because well, sanctions are a huge deal and they can really remake economies as we're seeing right now.

That's not what dollar dominance means day today. It seems it feels to me like the most important aspect of daughter dominance isn't the fact that the United States can kind of turn off the spigots of certain capital flows when it's sanctions countries, the biggest thing is that the

FED can provide liquidity in a crisis. And in that sense, if you think of that, there's this historic kind of caused sanctions that geopolitical side of the dollar system, and like the normal day to day side is coronavirus crisis in the United States, doing swaplants or things like that. And so a country that might not be interested in or might want alternatives to sanctions also would need to create a parallel world where there is one entity that in a crisis can step up and keep the entire

financial system afloat. And so from that angle, it just seems like the kind of benefits, or at least the kind of security provided by a world of daughter dominance and kind of the United States being able to singularly prop up the global financial system outweigh for most countries.

The negatives. Yeah, I mean, I think like we've definitely seen in the wake of the financial crisis, and then more cutely, starting in March, the sort of benefits to being in the club or being under the relat that can get the benefit of fed liquidity is pretty powerful. I want to go back to Swift for a second.

I feel like, you know, on Twitter, Swift gets talked about in harsh tones like this should be this should be like this is the thing that they can't touch, and then of course they sort of did it, not entirely, but it has been employed. How powerful is that? What are the sort of misconceptions? What do people get wrong about what it means to lose access to Swift? Yeah,

I definitely agree about the hushtones. I feel like on Thursday or Friday, after a present by the game conference called he was asked something like, are you really unwilling to do the two most destructive things for the Russian economy sanctioned potent and disconnects Swift and kind of both of them were kind of beside the point, as has been proven by the fact that all the damage hasn't been caused by those two Swift the base is this

payment messaging service has eleven thousand banks. It's based in Belgium, so technically it's not responsive to US US requests, although in practice it tends to very much be responsive. In part of it is responsive because it's board member banks are they have extreme exposure to US jurisdictions. Its board member banks would tend to kind of align themselves with US goals. I mean, ultimately, the thing is Swift is a messaging service. I mean, it's very well networked, it's

uh is secure, so in that end, it's standardized. So in that sense it has the perks really good messaging service. But if someone shut down WhatsApp, you could use something else if you really wanted to communicate with people, And it's kind of the same with Swift. There's nothing that Swift does that itself couldn't be replicated. But I think the reason Swift is such an appealing kind of example

is that it's kind of the embodiment. So much of sanctions depend on kind of the concept of like inter the end, and so like there's these few choke points or places in the global economy that if you can, if you can exert your pressure on them, you'll be

able to control all sorts of other things. So and in that sense, Swift release is like a good symbol of that, because it's like this, what if there were one messaging service and every bank depends on them, and with one stroke you could cut off these banks, and they would lose their connection to the global economy. In practice, that's not now what would happen. But I think in

that sense it's very symbolic, I think so. I think that's why it became such a symbol, and there was there was this talk about Europe can only be a global player if it's willing to cut off Russia from swift. I think more generally, though, it's the kind of infrastructures that's makes swift possible. You swift that are more important, So swift you're sending the messages. But what matters is kind of because if there's been a bunch of analogies people of use, the one I think of is like

what matters the train tracks between towns. You don't necessarily need like a telegraph system communicating that the train arrives, but without the communications and stuff, trains will probably have to go a bit slower because you don't know who else is on the track. So ultimately, what the United States did with the spur Bank when it basic denied the correspondent bank accounts, it just uprooted the chain tracks. So no messaging service can make up for that. Just

when it comes to the oligarch. So we do have sanctions in place now, you know, possibly belatedly when it comes to the UK, and you pointed out earlier that to some extent extensions on individuals are you know, almost the the original like clean vanilla sanctions. So you say, these people can't go to the US, they can't access

their US bank accounts and things like that. But what exactly is it supposed to accomplish here, because there does seem to be a thought process that, well, we're going to sanction the oligarchs and then they're going to call it Putin and complain about everything that's happening. But like, how realistic is that? Like what is the thought process

behind this? I think that is the thought process in a sense, like the basic one, which is these are Russia is not kind of a fully traditional responsive electoral democracy, and so what matters is convincing the elites who might have access to Putin and that might change things that I feel that that is the basic theory of the case. I don't think necessarily it would work that way just because these are oligarchs depend more on Putin that Putin

depends on them. These are some of the ones that have recently been hit and the you are people who were putin KGB mates in Germany, so they're not they're not successful businessmen who placed put in an office. So so in that sense, it might just drive them closer

to the government. In one sense, I read an interesting comparison of the to the Venezuela sanctions, and in the Venezuela sanctions going after Venezuelan corruption, especially given they have all these kind of state owned businesses that pavesa There's one of the things the United States did was really target uh, these high profile corrupt individuals and for example or say, take over their assets in the United States, and that tended to push them closer to Maduro. So

in that sense, it could cut the other way. I mean, at the same time, I think there is sanctions. We think of them. Before the invasion, there was the whole thinking of sanctions as deterrents, and then now we're talking

about sanctions as bargaining. But there's another theory, which is sanctions as kind of a signaling message, and so you do sanctions to say we disapprove of this in some cases, so for example, the United States will sanction people who have no assets to the United States never planned to come to the United States, but the United States so does it as a way of saying this won't fly for us. And I mean, I think there is some value in kind of signaling disapproval, so I will say that.

One thing I would note though, is that these oligarchs do control often very large businesses, and different sanctions do things differently, but sometimes it depending on how you do it. Sometimes sanctioning the head of an individual can lead to the sanctioning of a firm he owns or controls, and in that sense it can have very large ripples. Just recently,

uh that you just released its own sanctions. It's on oligar sanctions and those could lead to dislocations because it has I mean, we'll see how it plays out, but it seems to have a capacious definition of control, which could mean major Russian companies get sanctioned as well companies that haven't been sanctioned so far, So I could be a thing. And sometimes they can have kind of crazy knock on effects. And twenty Team the United States sanctioned

ole deir Pasca Big Medals Magnate. He could he controls one of the top producers aluminum in the world, and then that that was sanctioned, and then the London Medals Exchange freaked out because that was a big player there, and so they haulted trading and overnight the price of

aluminum went up. So even the individual ones can have crazy knock on effects, but kind of the day to day sanctioning, like the sun they sanctioned the son of the Rose and f CEO that I would say is primarily a way of seeing a hope that he might intercede with Putin, but also more simply a signal that

this won't fly. And especially in the UK, but also in the United States, there's the sense that the United States has been turning a blind eye to Russian dirty money that flows in, and so this is also a way to kind of eliminate charges of hypocrisy, I would say, which is kind of a signaling thing, but there's value to it. So this next question is actually going to be a subject of an entire It has, you know,

I'm sure multiple episodes, and certainly one imminently. But you know, we talked about, Okay, the one area that's not going to really be touched, at least directly, although maybe implicitly is the energy sector, and of course we all know that Europe, particularly Germany, highly dependent on Russian natural gas and to some extent, call how did you know? What's the short version of how in your view, Europe got

into this situation where it became so dependent. You know, even after with the annexation of Crimea, which is sort of well sort of telegraphed, what thought of Aprutin was willing to do? How did it let itself get so vulnerable on this front? Search that, at least with energy, it has very little leverage. First of all, energy imports in Europe have been kind of a long term source

of friction. Even in the eighties there was tension between the Reagan administration and Europe because of a European pipeline to Russia. So this has been very long I think, if I'm not mistaken, Anthony B. Lincoln wrote a book about this in n So this is kind of a long term sorts of friction, and there's differences between gas and oil. But the political economy of Europe and energy is very challenging in terms of unwillingness to invest, has made it very hard for Europe to diversify. I think

that kind of was one of the big things. Then you kind of have the freak events like Fukushima and harming getting rid of German nuclear in the German energy mix. But I think the biggest thing I would say is, and I think this kind of is goes to the shortcoming of sanctions more generally, is that sanctions can only shut off certain economic activity. They can do the opposite

and like foster it. So the United States they impose these sanctions and there was a sense of geopolitical risk attached to Russian gas, but it wasn't enough to creates a an alternative to Norse stream, you know. So I think that's kind of a big problem. You need more active measures. Sanctions are relatively cheap in terms of imposing them.

They can have their costs, but they're not whereas building interconnections in Europe, so gas from Spain can get to Germany, which seems to be one of the concerns in terms of like the geography of the gas interconnection in Europe. That wasn't enough. So in that sense, I just don't think there was enough forethought, and I think unwillingness to invest in kind of think long term was able to diversify.

I mean, we'll see what happens now. I think there's a bunch of enthusiasm about potentially the changing political economy of Germany, or at least the greater willingness to invest in spend. I mean, there's been talking about nuclear and L and G, but those are long term thing. I think in the short term without kind of an impetus to invest and instead kind of I guess chronic consolidation,

and that's how you end up without other options. And I don't know if people in fifteen, if they've been told been in the most effective measure against Russia, would have been off the table because we hadn't build the infrastructure. It's hard for me to imagine that they would actually have followed through and build the infrastructure, just because there's all sorts of other domestic problems that have halted it.

So I'm very aware of the time, and it feels like we could probably we could easily go on for another hour. So I'm just gonna I'm gonna try to squeeze in two very important questions in one, which is one of the big criticisms of sanctions is obviously the impact on the general population, who may not themselves have decided or supported the invasion of Ukraine, So so what's the impact there. And then secondly, you mentioned escalation earlier

in the conversation. How much more could the US and Europe do on this front When it comes to sanctions on the humanitarian front, I think it's a it's a it's a huge problem. In the late nineties there was a complete revulsion at sanctions uh and there was a sense that it didn't work. They didn't work and the

main damage was inflicted on the population. Since then, there kind of was this evolution in thinking of the creation of smart sanctions and the idea there was like more targeting, so for example, going off after the other guards and other measures that type of measure and other ways to kind of limit the humanitarian impact. Right now, I think

this conversation has continued. I think, for example, there was frustration with say the way Iran sanctions limited the access to healthcare in Iran during coronavirus, and so I think there is a lot of willingness to think more about the humanitarian impact. The Treasury Department uh in at the end of last year actually issue this kind of comprehensive

sanctions reviews. So when by the administration came in, they said, we're going to rethink how we do sanctions, and one of the things that they did was much more focused on limiting mean humanitarian impact, and I think you've seen it in some way with a measure so far, they

could have carve outs, say related to COVID. At the same time, ultimately, when you're causing these massive slides in the country's currency, or targeting its biggest banks or even as central bank and resulting in massive capital controls and interest rates going off, there's no way to contain the humanitarian impact. My hope is that these sanctions are short enough that the humanitarian impact doesn't kind of ripple through

or set in it on. Doubted, they leave long term scars on the Russian economy, which I think is very troubling. I mean, even something like you can't undo these things overnight. If there's there was some administration officials I've talked about how one of the goals of the sanctions is to is causing inflation, and so these things really do have long term effects, and there's I guess it's kind of like hystorys hystoricist or something where like it's it's very

hard to undo. So for example, if you cut off the bank's corresponding bank accounts, the banks will cut them off, but then re establishing them is like a one by one resigning the deal. And so these things will have long term effects and so people will feel them. Your question un escalating, So I hope there will. There'd be ways one could mitigate them, but unfortunately, especially I think those have with the speed of escalation, so far, those haven't been as top of mind. But we'll see it.

There's a lot that could be done. So far, the United States has targeted banks, but it hasn't the banks it has targeted, it hasn't necessary targeted with the fullest extent. So for a kind of burbank, the biggest bank, it's only that correspondent bank account hasn't done the full blocking sanctions,

and other banks just hasn't targeted. So for example, gas from bank hasn't been targeted with any measures so far, So in that sense, you can target those more banks, and there's potentially space for on the Central Bank, they actually haven't done the full blocking sanctions, so potentially they could do a full blocking sanction, but on the market, so that could be a way to kind of tighten

the screws. And there's the energy sanctions as we talked about, so those like you could just say you can't buy Russian oil and practice, you probably couldn't do that and practice. What they did there their on deal is they kind of said they required every country to gradually decrease its

purchases in Iran, you know, in Iranian oil. So you would probably have to do something like that because otherwise it would be kind of I don't think any economy or kind of the global oil market could necessarily react that easily to a complete cut off. There's also other sectors you could target or other companies right now, because finance is so pervasive, you kind of like you can

hit that you're hitting out the targets. So for example, I so the swift cut off and some of these finance kind of are making it harder for Russian airlines to pay for the leases of their aircraft. But so that's harming the Russian Russian airlines. But I'm not necessarily

advocating a target in Russian airlines. But you could also just target Russian airlines directly, you know, like there's like ways, right now because of the effect of the financial sanctions, there's a sense that the entire Russian economies in turmoil. But you could also just target direct sectors, and there's other sectors that kind of have this ripple effect through

the economy. For example, insurance is one of them. So as for example, targeting Russian insurance companies could make it harder for companies that need insurance to carry on their business. For example, like in the around case, the United States

made it harder for oil tankers to get insured. But you need insurance to kind of dock in places in case something happens, and so then the Iranian government had to insure its own boats, and so you kind of there are ways you can kind of escalate by targeting more and more subsectors of the economy. So I'd say those are some of the main areas that you could talk well, Uh, Eduardo is Tracy noted. I feel like that went by the blink of an eye and we

could talk for hours. But that was fantastic. I learned a lot. I really really appreciate you coming out on a lot. Thank you so much for having that was fantastic. Thanks good, Thanks that was really good. Yeah, thank you. That was extremely informative, and you know, we just said it. I feel like we could have talked like two more

hours very easily on this topic. Absolutely. I mean there are a number of things to pick out there, but I mean one, I thought it was really interesting what Edwardos said about the idea that even if you throw all this stuff at an economy, you can't you can't just turn it off. And of course, I mean there's the original sanctions question when it comes to dictators, which is, if they're not answering to a population which is actually feeling the economic pain, do they even care? And will

sanctions have any policy impact? Um, that's there as well. And then the other thing was this idea that it's difficult to turn these things off once you get them going. I thought that was really interesting. I think that is a really important dimension to all of this because you know, obviously what we've seen over the last week. Like in theory, the hope is that okay, this imposes significant pain in it UH, that at some point Putin decides to turn around,

Goes removes forces from Ukraine. That's the hope that there's some sort of peace and end of UH fighting, even if you're start to turn these off. However, we've seen

such a dramatic move over the last several days. If companies just saying, you know we talked about in the beginning, washing their hands, not wanting to do business, it seems very hard to imagine what restoring the status, you know, getting back to ten days ago, not just of the legal regime, but of the various corporate activity that was taking place in Russia. It seems essentially unfathomable almost at

this point to go back. So then the question is like, well, how much of a carrot is there still to offer if it's going to be such a long haul just to get back to you know what the middle of February look like. Absolutely, And I mean we haven't even touched on E s G considerations, but it does feel like, Okay, you can't necessarily turn sanctions on and off with the switch of a button because people have compliance departments, and you know they tend the people who work in compliance

tend to be cautious people. Uh. And then secondly, what does this actually mean for E s G? Because even if you remove sanctions, there could be plenty of investors and companies out there who still don't want to invest in Russia because of previous behavior, and we're already seeing some inklings of that in the market. Yeah, companies have plants departments, they also have PR departments, and I think

that's going to be now for real. That's going to be another big factor of like, well, do we want to go back in after this for PR reasons alone, or is it better to just not have anything to do with the country. Number of companies maybe having tasked

themselves that question. I also thought it was interesting like even on like um, this sort of like the technical aspects of financial sanctions, the loss of correspondent banking for spur Bank, as you know that it's like easy to turn them off, but then you need to write new deals to bring them back on. And so to the extent that the sanctions the removal of sanctions is hopefully carrot to end the war in a short period of time, there's gonna be something that you know, can realistically be

regained for them to have that effect. Yeah, exactly. Um well, I mean either way, I feel like we're going to have a lot more episodes on this topic. Um yeah, it definitely feels like, Okay, shall we leave it there. Let's leave it there, all right. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Why Isn't All? You can follow me on Twitter

at The Stalwart. Follow our guests on Twitter at Ward Sara Vale He's at E s V. Follow our producer Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast Francesco Levi at Francesca Today, and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening, O