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Today, the latest on the war in Ukraine.
On previous episodes of this show.
We talked about various scenarios for the end of the conflict.
Those ranged from Russia’s Retreat to the beginning of a great power struggle and we discussed some of the wars potential Ripple effects in the US.
China and around the world.
I still think those episodes hold up very, very well.
But over the weekend, several things happened.
That demand our fresh attention in the last 72 hours.
The US and several major European countries announced a series of financial penalties and Sanctions against Russia.
These penalties are unprecedented.
It was a historic weekend.
We announced Our intention to cut off several Russian Banks from access to Swift.
Swift is an acronym.
It stands for the society for worldwide interbank Financial.
This is a messaging platform for banks to communicate about trades.
S, we announced sanctions for Russia’s Central Bank.
This was perhaps the most severe punishment announced.
We also put pressure on Russian oligarchs with promises to find and freeze their assets as well.
These policies have already kicked off a spiral of Chaos in Russia.
There have been Bank runs across the country long lines that have emptied, ATMs of all their cash.
The ruble Russia’s currency is collapsing.
The country itself might be close to defaulting on its debt and cut off from the world.
Russia is rapidly approaching a financial crisis in response.
Vladimir Putin has put Russia’s nuclear weapons.
Arsenal on high alert.
Now a brief aside.
I remember when Donald Trump was first elected, the comedian.
John Mulaney said, his presidency was like a horse loose in a hospital.
He said you think everything is gonna be okay, but no one knows for sure.
What’s going to happen next because, no one’s ever seen anything like this before.
You can find experts, who say.
Oh, I saw a bird loose in an airport once, but that’s not the same.
That’s not expertise.
This is a horse in a hospital and So on.
And so anyone, the current crisis is similar except with 100 times the threat of a mass death event.
This is like an angry bull loose in a nuclear power plant control room.
It is strange.
It’s unprecedented, but it’s also terrifying.
We are all in the danger zone, right now.
In almost every way you can.
Imagine Putin seems to have achieved the opposite of what he wanted.
He wanted a quick war in Ukraine and he got a fight.
He wanted to expose the West as divided and weak but he made the West United instead of reversing NATO expansion.
Now more countries like Finland are actually asking to join NATO and instead of demonstrating Russian strength.
His actions have torpedoed his economy.
So yes, you could say The West has Putin cornered right now has Putin in a headlock, but with enough nuclear weapons to end Humanity, as we know it.
Putin also has a gun aimed at us aimed at the head of the entire human race.
We need to find an off ramp here.
And as you’re about to hear the sanctions, we’ve imposed on Russia will in time, destroy its economy and potentially that of many others, the goal cannot be to inflict maximum pain or to take Delight in the suffering of Russians.
The goal is a peaceful Ukraine, a prosperous Russia, and if one can dream, the end of the Mad, reign of Vladimir Putin, I’m Derrick Thompson.
This is plain English.
There are three things we might want to accomplish with sanctions and only two of those make.
A lot of sense.
That’s Noah Smith.
He’s an economics writer and the author of the newsletter.
The first thing we might want to accomplish is to make life difficult for all of Putin’s allies and cronies with in.
To ruin them, put them under threat of Ruin so that they either pressure Putin to give up the attack or simply somehow remove him from Power.
The second thing.
We might accomplish is to actually hobble the Russian war machine because you know, it does take money to fight a war to pay for a war and it does take you know, physical resources import especially to pay for a war.
And so if we can cut that off we might be able to make it actually harder for Russia to Bear Down Ukraine to keep Adding material into that country and fight.
And the third thing, which I personally think is a bad idea.
And other people I’ve talked to think is a bad idea is to cause pain to the Russian economy to cause pain to the average Russian.
So that’s the grand strategy.
Squeeze, the Oleg arcs jam up the War Machine and hurt the economy.
For the rest of this episode.
We’re going to look at the specifics, starting with the US and European plan to kick certain Russian Banks off of Swift.
So, so, basically what Swift is is a messaging system.
It allows Banks to say very securely, it’s sort of like International Bloomberg, right?
Bloomberg has these terminals, you know, Bond Traders can say very securely and safely and secretly like, hey, I need this many bonds, you know, this maturity blah blah blah.
Oh and some Bond Trader somewhere, halfway around the world will say, okay.
I’ve got those bonds you want to trade and they haggle and so that’s what use Bloomberg for Swift is kind of like that for Banks Banks.
We need to borrow this much money overnight blah blah, to maintain our operations.
We need to stash our assets with you when we’re on a swap rubles for dollars, all the things that Banks do, like all the plumbing of the financial world.
So when you cut them off from this, there’s no good way to send messages.
Of course, Banks, you know, you could just use For something like that, but it’s not designed to handle the volume.
It’s it, you know, it’s difficult to verify identities.
You can get some guy, you know, saying the Russian mafia sing like, you know, new phone, who dis?
I am, you know, spare Banks.
And I’m like, and then, you know, it’s, it’s hard to verify identities.
So, I’ll just say that Russian banks will find it.
Very, very difficult to do business with any banks in the west at this point.
We’ve used this weapon before several years ago.
Go Iran was kicked off of Swift to punish that country for its pursuit of nuclear weapons.
The effect was devastating after a Rowdy and Banks were disconnected from Swift.
The country lost almost half of its oil, export revenues and 30% of foreign trade.
We shouldn’t necessarily expect the same effect in Russia for now.
It seems Europe is continuing to pay Russia for its energy exports, but the effect on Russia could still be disastrous nobody with alternatives.
He’s going to want to do business with a bank that’s been kicked off the global messaging system.
That is the communications backbone of Finance.
Russia’s Financial system has essentially been ostracized from the global Community.
Anybody who can get their money out is going to try to get their money out.
You know, you’re going to see Bank runs, you’re going to see people trying to pull their money out of banks that are no longer able to use Swift because not being able to use Swift really sucks for bag.
So now Being able to use Swift really sucks for banks in sort of the same way that not being able to use SMS or text with someone would really suck.
If you were trying to sell a chair and Facebook Marketplace, the complex’s changes require private Communications move booted.
A lot of Russian Banks off of this essential Communication Service.
So nobody wants their money in a bank that’s been kicked off Swift.
That’s why you might begin to see Bank runs.
Could we see?
A second thing that you see is a crash in the ruble, which is the Russian currency of Crash of Of the ruble.
And the reason this happens is the following.
If you can’t.
One of the main things you have to do for international trade to swap currencies.
If Russia wants to buy something from Germany.
They need Euros to buy it because German companies need Euro.
That, that’s what they transaction.
You need Euros to buy it.
And so just like, if you’re going to pay for a pizza, an American Pizza Restaurant, you need dollars to buy that pizza because the pizza restaurant people have very little use for rubles.
And so you, And the Euros to buy whatever you’re importing from Germany, like, you know, Munitions in components to like make rockets to throw it ukrainians, or oil, drilling Machinery, to keep up drilling for oil.
Things like that replacement parts, all kinds of stuff like that.
You need to buy from overseas.
And to do that, you need overseas currency and to get overseas currency.
How does Russia do that?
How does any country, do that?
You swap your currency for the foreign currency.
It’s a currency swap, you do that.
And so, so Russia goes Russian.
Goes to a German bank and says, you know, hey, we got some rubles, give us some euros in exchange for these rubles during Bank says, okay, here’s a here’s our rate and you exchange them just like you would at the the, you know, aircraft.
I’m sorry airport counter, you know, when you’re when you’re going to exchange your currency when you travel, it’s the same thing, but with banks, so if Russian Banks an individual’s investors or cut off from normal currency exchanges, what will they do?
Well, imagine what you would do if you were desperate.
Four Euros and let’s say, France and the currency exchange counter was closed.
You’d start to get pretty desperate.
You might go to Black markets, underground channels.
You’d be like here, please take as many dollars as you can.
Just give me some euros, please.
I’m desperate to get this money off.
My hands, take these giant chunks of cash.
Just give me Euros.
Well with so many companies and people rushing to exchange their rubles for foreign currencies.
They’ll be dumping rubles on the market.
What happens then?
When you dump something on the market, in mass quantities, its price goes down.
So the value of the ruble will crash.
And in fact today, it already crashed by 40%.
What is the ruble crashing?
It means harder for Russian companies to afford Imports.
It means it’s also harder for Russian people to afford Imports Russians import foop, you know, they’re gonna, they’re gonna find themselves cut off from for and foods.
And so it’s it’s going to hurt Rich.
Also going to hurt average Russians.
Eat a lot and that’s the kind of thing that I am a bit scared of hurting the average Russian very deeply, but it is.
This is going to crash the Russian economy.
It already is crashing the Russian economy.
This all sounds rather, dramatic extremely dramatic, but remarkably, the Swift.
Cut off isn’t even the most dramatic economic weapon.
We’ve Unleashed in the past 48 hours.
The sanctions against individual Russian Banks, cutting them away from Swift.
Are a huge deal.
But in a way is sanctions against Russian central bank and to freezing observe foreign reserves is even bigger.
That’s Nicholas Veron.
He’s a French Economist and a senior fellow at the Peterson Institute of international economics and bruegel a Brussels Think Tank.
I asked him to explain to me how big a deal.
It was that the West has frozen the foreign reserves of Russia’s Central.
Central Bank his answer.
It’s a BF D.
This is massive and it’s massive because there was a perception that this is something that just cannot be done because it, you know, this is not the way the world financial system operates.
The Russian Central Bank is a fully paid-up member of the international Central Banking Community to member of the bank for international settlements.
I’m not going into all kinds of funeral infrastructures that are really important but not well, known to the public.
Some point is this is not Iran.
It’s not Venezuela.
It’s not a peripheral country.
It’s a country.
That was maybe not at the very core of the International Financial system, but into inner group and having it cut off from the system in such, an Abrupt way is incredible.
And something I didn’t expect to see the Central Bank of Russia is like their Federal Reserve just as the FED in the u.s.
Is responsible for stabilizing our currency and keeping an eye on inflation.
The Central Bank of Russia has its own strategies for protecting the ruble.
Now when the ruble plunges as it might during normal sanctions, the Central Bank wants to step in and buy up rubles that will prop up its value.
Well, how do you buy rubles?
You can’t buy rubles with other rubles, that doesn’t make any sense.
You have to buy rubles with other assets like Euros or American dollars.
So the Central Bank needs a stash of these foreign assets that it can use in case of Emergency, this stash is called its foreign exchange reserves.
We saw this just 8 years ago in 2014.
Putin invaded Ukraine.
We sanctioned Russia, the ruble got a little wonky as people, lost faith in some Russian Banks, but the Russian Central Bank, stepped in it, converted a bunch of its reserves into rubles and it stopped the damage.
Essentially it paid for water with these foreign reserves and poured water on the currency fire, but here’s the catch.
Each the Central Bank of Russia holds these reserves perhaps 300 billion dollars in US and European Banks.
And the policy announced this weekend said those assets are frozen.
So for the moment, it’s as if that money doesn’t exist, Russia thought it had 300 billion dollars worth of water to fight the fire of foreign sanctions.
And the US and Europe essentially said, oh, no, actually you don’t have 300 billion dollars.
You have zero point zero, zero dollars worth in those accounts.
Your money is gone.
Your currency is on fire and the water store isn’t taking your credit card.
I think the biggest ripple effect kind of first round effect is inflation and possibly hyperinflation in Russia.
And this is precisely because there is this loss of confidence in the currency.
So the Central Bank of Russia can print money.
Use a printing presses print rubles and satisfy the demand for rubles.
That’s not in question.
But that demand for cash is going to is already accelerating because people want not to hold rubles.
They want to buy stuff says they don’t.
Trust the ruble as a good way of storing their wealth and this creates inflation or Dynamics.
One definition of inflation is too much money.
Too few goods, and this is exactly what you will have.
If people don’t want to keep their rubles in a bank account or even as cash under the mattress, imagine you live in Russia, you know, your economy is getting cut off much the world, you know, your Ruble is collapsing.
So what do you do?
What you go to the ATM to take out a bunch of rubles, to spend them on Essentials ASAP because your currency is losing money every day.
Well, so do your friends.
So do your friends friends?
So do your friends are friends of friends.
Everybody’s going to the ATM?
Everyone’s trying to spend their rubles immediately on Essentials.
And if everyone’s trying to get rid of rubles at the same time, it’s only rationale for people selling bread or toilet paper to say, well, I’m going to raise prices because I want rubles in my hand to, and this sort of panic combined with the total collapse and confidence in the currency.
This is what we tend to see in the early Innings of an awful inflationary spiral, but that’s not the only thing that Nicholas foreign is looking at.
Another thing which is massively important for the world.
Not only for Russia is their attitude of China and China.
Clearly has been taken, you know, a stays visors.
It didn’t see it coming either, C Xi Jinping, presumably trusted footings and Putin wouldn’t do something as Reckless as invading Ukraine, and that’s what he communicated when he made this big joint declaration.
At the beginning of the Winter Olympics Xi Jinping and putting together.
Saying, you know, so we’re sucks.
Well now that doesn’t look very smart because Russia is doing something extremely Reckless and you know, China will don’t want want to jump off a bridge together with Russia.
There are much more conservative and risk-averse and that.
So so that’s a huge important space to watch at this point.
China is not going to tell us what to think about atolls.
That’s not their style.
But look at what you do and whether it’s search for Treasure or not into next few.
As weeks months and I think this is massively consequential.
There’s a third leg to the u.s.
Strategy to Cripple the Putin regime and that is to bolster an international Manhunt for Oleg Arc.
Cash turning up the heat on cronies around Putin.
The White House has announced a quote, multilateral transatlantic task, force to identify hunt down and freeze the assets of Russian.
Noah Smith says, you have to see this through Data, G in the context of all the other sanctions, all these sanctions are adding up.
And it’s going to mean that Russian rich people are essentially trapped within Russia.
In this collapsing, economy unable to exercise their riches and appealing to Putin will have will give them no leverage.
They’ll have nothing.
There will be nothing they can do about it, by just appealing to Daddy Putin because he’s already sending his whole war machine do Ukrainian.
There’s just nothing else he can do.
The point is not Punish but to persuade, if we make life miserable for a bunch of Russian oligarchs, but Russia still destroys Kiev, and still conquers Ukraine.
We will have failed.
We will have destroyed the Russian economy.
And also lost Ukraine.
As Noah, says goal.
Number one, should be to jam up.
Russia’s, War financing system.
So that Russia can’t execute this war.
But how would that work?
So suppose you’re rushing defense manufacturer, you make rockets.
What do you need to make rockets?
You need materials to make the Rockets.
You need Machinery to put the materials together to make the Rockets.
You need workers who need to be paid in Rubles so they can buy bread.
Those are the things you need.
You need financial Capital, physical capital, labor, and material inputs.
So this A great overview.
Tell me how these sanctions are designed to make it harder for Russia to get all of these things.
So Financial Capital, obviously, if banks are imploding.
It’s hard to get a loan physical capital.
Russia does not make a lot of machine tools that uses to make rockets.
It gets those from it buys those from Germany your machines break down, you know, you’re running them hot.
You’re saying make more Rockets make more Rockets.
Oh, we lost a little yard drill bit where out where do we get in a drill bit?
It so it’s this fancy kind of drill bit.
That only Germany makes.
Well, let’s just call the Germans and get them to send us Hoops.
Nope, can’t do that anymore.
And so those are the ways in which the Russian defense apparatus will be affected.
Put it all together, the Swift policy, the Central Bank asset freeze, the sanctions that Avengers Force for hunting down oligarch assets.
The West’s policies amount to a kind of collective Suffocation of the Russian economy as Russia.
Tries to besiege Kiev surrounding the capital of Ukraine, cutting it off from essential resources.
You can kind of see how the International Community especially The West, the US and Europe are racing to besiege, Russia surrounding it.
Shutting it off from access to foreign resources companies can trade in the west.
We are trying to deprive the Russian economy of just enough oxygen that it forces Putin to the negotiating table, but there are huge risks.
After all we are suffocating and entire economy and the goal should not be be to destroy Russia.
It should be the save Ukraine from Putin and perhaps even to save Russia from Putin to to spare the Russian people.
We have to find a way to offer Putin and off-ramp and out some incentive to come to the table.
So I asked, Noah, where do you see an off-ramp to these policies?
I have no idea and neither do experts.
I talked to because the reason is because essentially, you know, the only people who expected him to in, Aid were people who were paying very close attention to the Intel.
That said he would invade everyone else said this is nuts and it is nuts.
Why would he ever do this?
And it’s true?
Why would he ever do this?
He is being nuts.
It’s hard to find anyone else who’s enthusiastic for this war?
Besides the one person of Vladimir Putin.
This is the tragic irony of the war in Ukraine.
Putin invaded with delusions of grandeur and he’s reduced his economy to Rubble.
Mr. Putin has built his legitimacy.
He took the reins of Russian power in 2000, just a few years after that traumatizing, it is owed and he’s legitimacy has always been look.
I’m the guy who will bring you stability wealth, power international respect.
Not like what you had under Yeltsin, which was it.
And so the fact that we have a financial Panic.
Now, in Russia, is particularly significant given that background.
The irony goes One Step deeper Putin, sought to manipulate what he saw as a weakness in the west division within Europe, and a week, neighbor and Ukraine.
But his invasion has achieved the opposite of all of that.
The war has proved The Valor and courage.
If Ukraine, it’s made a hero of its president, solinsky.
Courage in Germany inspired the courage of all of Europe.
The West is found at spine.
This backbone has been to a large extent.
Stiffened or even created by the incredible resistance of the Ukrainian government and the Ukrainian people.
There are credible reports that mr.
Szalinski address leaders also.
European Union a couple of days ago after the invasion had started and two leaders became emotional.
Some of them started to cry.
The Lansky said matter-of-factly, you know, maybe this is, this is The first the last time you see me alive, but please do this for Ukraine.
You know, this is what’s happening.
Is it you cannot disconnect things from one another and I very much see the causal link between the ability of Ukraine’s to show resistance a sense of national purpose, commitment to democracy against the Russian aggression and the ability of the International Community to come together around.
Those sanctions is unprecedented.
Then to the action, which really has consequences for Russia.
We still don’t know what kind of Pandora’s Box we’ve opened with these policies.
Russia and Ukraine are critical cogs in the global trading system car part.
Sweet sunflower oil Metals.
I expect the world is going to get a chaotic lesson in economic interdependence e and Eastern Europe and Russian trade and Supply chains the next 72 hours like Nicholas for on says, This chaos is the nature of war war has changed.
The world was our events that have massive consequences.
I can give you 100 scenarios in which to war and to developments around the war in Ukraine, including Financial meltdown in Russia, trigger instability in all kinds of places which in turn transforms a world.
This is what we are to do and this is a big one.
Here’s one such scenario.
Tajikistan is a small Central, Asian country, just north of Afghanistan.
It relies on remittances, from Russia, from more than twenty percent of its GDP.
That means, if workers in Russia, stopped sending money to their families and Tajikistan, the economy would suddenly contract by 20% that is a depression and economic crises as we know can spark political crises Tajikistan shares a border with China and its westernmost province of Shin Jang, so tajikistan’s.
Remittance crisis that flows Downstream from Russia’s economics crisis, could become China’s crisis.
The point is not to predict anything to specifically.
It’s to say what happens in Russia will not stay in Russia.
This war means everything to millions of people around the world.
It means life and death for smaller countries that are very linked to Russia like Tajikistan.
It’s not the only one It means life and death for big companies that have business in Russia.
It means life and death or life changing event for individuals and countless individuals, which have relationships in Russia.
And in two countries that will be affected by Russia starting with crane, of course, but it’s not the only one.
We have to get used to the fact that the kind of uncertainty that is inherent in Wars, is affecting all of us because this is maybe your whining.
Crane, but the war with global implications in a way, that probably more recent Wars that we have observed in Syria.
You men, Yemen etiopia other places have not had.
So so so we have to get used to that kind of uncertainty and massive developments have been happening very quickly.
The West has succeeded in standing up to Russia, but that’s not enough.
We have to end this war without destroying Russia.
And without destroying the world.
Noah Smith doesn’t know exactly how we’ll do it, but he’s got an idea.
I have a thought, which is we should promised a Swift and abrupt economic reversal of all the not just a reversal of all the sanctions and lifting of all the sanctions.
But pumping money and investment into the Russian economy.
If Putin is deposed.
If it’s no longer Putin, we should Implement a Marshall Plan for Russia.
To help Russia become more than just a gas station.
We should refloat, the Russian economy on a wave of American cash and and stuff.
This sort of promise we can do of not just a not just lifting the pain, but actually giving a huge reward went to Russia.
Once Putin is gone as we should have done in the 90s.
When the Soviet Union fell, instead of this shock therapy crap, where we just let these oligarchs buy up all these asses on the cheap.
And run a kleptocracy.
We should have been pouring investment into Russia to support real productive Enterprise and the retooling of Soviet factories to be more efficient integrate them with the west and blah blah blah instead.
We turned Russia into a giant gangster owned gas station by insisting, on free-market, privatization BS because that was our sort of our ideology in the later days of the Cold War.
If we’re lucky, the policies we’ve discussed today will help to end this war bring Putin to the table and even accelerate a regime change.
If we’re very, very lucky.
We should not want to go back to the 1970s or 1980s with cold war 2.0.
But it’s Noah says we also shouldn’t hope to go back to the 1990s where Russia emerged as an oligarchical, gas station, seeking a strong man.
The delicate job for the West today is to chart a path toward the future.
If it doesn’t lead us back into the past.