Are economic santions the wrong solution?

by Germanico P Vaca

 War has always brought out the worst of humanity. Lies and disinformation become a central part of the rhetoric. Ever since Putin ordered the invasion of the Russian army into Ukraine the world has been bombarded with all kinds of lies from both sides. The biggest problem seems to me in the disregard for the dangers that Ukraine poses to the world due to Putin's actions. If the Chernobyl nuclear plant is left uncared for and the Zaporizhzhia nuclear plant suffers damages the nuclear fallout will affect all of Europe. The Western powers announced that Russia was going to be punished for its invasion of Ukraine with severe sanctions against the country's central bank and targeted expulsions of key banks from SWIFT, a move which has effectively locked Russia out of the western financial system and left its vast oil export industry of over 12 million BPD, 12% of global gas exports and 30% of grains exports completely out of trading with anyone.

 

Initially, that may seem like the proper response. Tragically the world could see results that are quite opposite to what the measures are intended to solve. The first and most important is the question that every single central bank must be asking itself. If the Russian central bank overseas assets can be frozen, and the money of all Russian oligarchs can be seized because they had it in dollars. It begs the question: why countries would keep and have foreign currency reserves at all in dollars if the United States has given themselves global powers to take it no questions were asked and no answers were given. It is total hegemony and it is a total abuse of power. The end result will be to jeopardized the dollar's reserve status. China, India, Brazil, and all the other countries will feel that they can no longer use the US dollar as a reserve. Gold, silver, and any other assets will be considered. After all who wants to keep their money if is there for the USA taking it.

 

Yet, the absurd thinking of most politicians in the USA, in the G7 and European Union governments seems to be that the measure blocking certain Russian banks' access to the SWIFT international payment system and also about half the Russian central bank's $630 billion worth of foreign currency and gold reserves. While it is true that those measures will undermine Moscow's ability to defend the ruble - which has lost up to a quarter of its value since Friday alone - and recapitalize sanctioned banks as they face nascent bank runs. In fact, as some admitted, it was the explicit intention of the west to spark bank runs and to crash the Russian financial system from within. The other side of the coin is that after this no one will trust the financial system, because the United States has conceded powers over the lives of everyone on the planet to take and destroy the financial well-being of any nation if it sees fit for political gain.

 

 If indeed that move can be a huge blow for the economy of Russia. At the same time, it has opened a pandora box where every other nation now knows that economic warfare will face any potential conflict with U.S. or EU governments. China, India, and every nation will be finding alternatives and the end result is the US dollar collapse.

 At the same, this becomes a much bigger issue than people realize. It's a potentially huge problem for the petrodollar to survive if the 12 million barrels per day of Russian oil, 5 million BPD of Chinese oil, 5 million BPD of Iranian oil, and so forth are no longer traded using the US dollar. The US dollar losses 12 cents for every dollar not needed or used. The losses for the United States are more massive than people are accounting for. The only end result is total economic collapse for the United States and that is what Putin is betting on. China is happing to play its part as bystanders, allowing the USA and Russia to destroy themselves. World markets are going to suffer. If central bank foreign currency reserves totaled a record $12.83 trillion late last year - a rise of $11 trillion over the past 20 years. This money is held mostly in U.S. and European government bills and bonds - with the U.S. dollar still accounting for almost 60% of that and the euro about 20%. The massive devaluation of the US dollar will indicate a loss of trust in the dollar and that will mean the end of the US dollar system because the only thing the dollar is backed with is trust. This will break the trust in the US dollar and that means the end.

 

To those that may believe that Putin was not aware, then they have not been paying attention to what Putin has said many times. Putin was aware of the potential risk involved in holding dollars as reserves, and since the annexation of Crimea in 2014, Russia's central bank had steadily divested its reserves of most U.S. dollar assets. But the dollar, euro, and sterling still account for more than 50% of its holdings, located in France, Germany, Japan, Britain, the United States, Canada, and Australia.

 

 But ther5e are several treaties between Moscow and Beijing that have increasingly allied them on the geopolitical stage and China refusing to either condemn the Ukraine invasion or join Western sanctions, China's yuan - currently accounting for just 2.7% of world reserves - may be one clear option for anxious reserve managers in Moscow or elsewhere.

 

Of course, the majority of people think that China will never dump the US dollar since it has been the biggest reserve stockpiler since 20 years ago amid tight control of its exchange rate. More than $3 trillion to offset foreign inflows to keep a lid on the yuan. But, China wants to grab Taiwan and the way they may be looking at this financial mess is that they will recoup all the losses if they emerge as the new reserve system.

 

But the hegemony of the USA is about to change with these western sanctions against Russia because no one else in the world can be comfortable with such total power of the USA, this will end up being the beginning of the end of the dollar as the world's reserve currency.

 But the USA has gone even further. They have promised the world to go after the Russian oligarchs. But then every person will money will feel nervous to hold their assets in US dollars if they now know the USA will take their money whenever they feel like it by simply claiming that they have been aiding and abetting the dictator that hods power in their country. It is quite literally as if Biden was to decide to take the fortune of Elon Musk or Bill Gates if they were to support Trump. That in itself could have a profound impact on world markets and on the model for emerging markets and developing economies.

 

There cannot be any doubt that Western sanctions could ultimately lead to a major reform of the global system. Because while the entire world may be against the Russian invasion of Ukraine, everyone wants to keep their money and not concede to anyone the power to take it all whenever someone feels like it.

 

European countries, China and a lot of countries may see less need to accumulate FX reserves. Emerging markets will try to reform and open up their domestic markets by allowing citizens to hold their money in Gold, silver and even cryptos to liberalize and move away from the U.S-centric system.

 

In other words, the actions of the USA and Europeans have shown the rest of the world. 1,44 billion Chinese, 1,3 billion Indians, and populations of other nations that there is no safety whatsoever to hold dollars for safety, because the USA may just take it away under one pretext or another.

 

In the next coming months, we may see central banks of different nations diversify away from the dollar, or try to re-anchor their currencies to assets that are less susceptible to influence from the U.S. or European governments. Latin nations may create and hold new gold and silver coins. Several nations may allow cryptocurrencies to become more widely available than before. Most central banks will move away from the US dollar and if the war with Russia is prolonged the results will be catastrophic for the USA because it will precipitate further the US dollar demise. A new monetary order may emerge to trade over 50% of oil, gas, and grains. Commodities will follow and the US dollar has lost the trust it had. Anyone who may argue to the contrary has not realized that no one trusted the USA before this happen. Now the bells are ringing with war, but once the dust settles most countries will feel that to protect themselves, they need to be far less interconnected through international bank accounts and reserves.

 

A lot of people have been claiming Putin is insane. He has been piling up massive amounts of gold for over a decade. He has been driving companies to make decisions where they voluntarily have given up mining, exploration, and economic rights to Russian assets. Billions of dollars lost by companies. Do not be surprised if Putin announces soon that the Russian ruble will be totally backed by gold, silver, and Russian commodities. One thing is sure. China is playing the same game and the USA may have walked into their hands.

 So, Ecuador has one solution. Start production of gold and silver coins yesterday.