Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, our
Speaker 1: last episode was of course with a Saltan postar, and
Speaker 1: we talked quite a bit about the sanctions, the sort
Speaker 1: of the economic pressure that the US and Europe are
Speaker 1: putting on Russia over the war. However, it really seems
Speaker 1: like there's a lot more to dive into with respect
Speaker 1: to the mechanics and power of the sanctions themselves. Oh
Speaker 1: my gosh, I'm getting I'm getting flashbacks to doing international
Speaker 1: relations stuff at university. But yes, there's a lot to
Speaker 1: do and say when it comes to sanctions, And of course,
Speaker 1: the the overarching question has always been do they actually
Speaker 1: make much of a difference. And on the one hand,
Speaker 1: what we've seen in the past, um I guess week
Speaker 1: or so is that they can be very dramatic and clearly,
Speaker 1: you know, in the space of a few days, the
Speaker 1: US and its allies has basically created a financial crisis
Speaker 1: in Russia. But on the other hand, Russia is still
Speaker 1: invading Ukraine, and there's the question of what happens next
Speaker 1: now that you've ratcheted up this kind of financial pressure, right,
Speaker 1: And there's the fact that even with the sanctions, Russia
Speaker 1: is getting tons of cash every single day, largely from
Speaker 1: a Germany and other Central European players who are deeply
Speaker 1: reliant on Russian energy, in particular natural gas, but also
Speaker 1: call which of course raises the question of ken European
Speaker 1: countries can the U S impose effective sanctions that accomplish
Speaker 1: something against Russia when at the same time particular Europe
Speaker 1: is so dependent on Russian exports. Absolutely, I think having
Speaker 1: a big commodities exporter involved here obviously complicates everything, especially
Speaker 1: at a time when people are worried about inflation. But
Speaker 1: the other thing I will say, and I think I
Speaker 1: mentioned this on the episode with Sultan, but the other
Speaker 1: interesting thing here is people have been reacting preemptively to
Speaker 1: the threat of sanctions, so sort of voluntarily self sanctioning themselves.
Speaker 1: And in fact, on on the day after the invasion
Speaker 1: officially began, we saw a lot of people in the
Speaker 1: market just step away from Russian assets altogether simply because
Speaker 1: they didn't know what was and wasn't going to be impacted.
Speaker 1: And to some extent that's continued today. So yes, we
Speaker 1: still have Europe in particular Germany importing a lot of energy.
Speaker 1: But we've seen some other players, you know, some commodities
Speaker 1: traders in Singapore for instance, voluntarily step away from the market. Yeah. Absolutely.
Speaker 1: And then there's another element which is also sort of
Speaker 1: volunteer wish is just not necessarily fear sanctions, but companies
Speaker 1: just deciding, you know what, we're going to wash our
Speaker 1: hands of anything to do with Russia. And yeah, it's
Speaker 1: pretty striking, this sort of like domino or cascading effect
Speaker 1: of companies saying we just don't want to have any involvement,
Speaker 1: we want to completely walk away. You know, I don't
Speaker 1: think the Russian economy has boomed in recent years, so
Speaker 1: it's not as though, you know, perhaps this is not
Speaker 1: a huge source of revenue and profits for a lot
Speaker 1: of these companies. But it is really striking to see
Speaker 1: so many corporate interests abandoning the Russian economy right now,
Speaker 1: even apart from like formal sanctions related activity. Absolutely, so
Speaker 1: many different threads to pull here, that's key. And as
Speaker 1: long as uh, the US and the rest of the
Speaker 1: rest of NATO does not want to get involved directly
Speaker 1: militarily for obvious reasons, then of course sanctions and other
Speaker 1: related things become the primary means of putting pressure on Russia,
Speaker 1: So we have to dive into the sanctions, how they work,
Speaker 1: and what they accomplish. Further, we're going to be speaking
Speaker 1: with a sanctions researcher a lot of background in this area.
Speaker 1: We're gonna be speaking to Eduardo se Eduardo, thank you
Speaker 1: so much for joining us, Thank you so much for
Speaker 1: having So why don't we start off big picture? You know, what,
Speaker 1: in your view are the key elements. There have been
Speaker 1: tons of announcements really over the last week. What are
Speaker 1: the key most important things in your view that have
Speaker 1: been announced so far. I'd say there are a few
Speaker 1: of them. I think the big one to start is
Speaker 1: the action against the Russian Central Bank that was initially
Speaker 1: discussed as kind of a final escalatory move, and the
Speaker 1: fact that it came so early in the escalation is
Speaker 1: a sign of how serious governments on both sides of
Speaker 1: the Atlantic were about sanctioning Russia. But I think the
Speaker 1: other big ones, the other biggest one, i'd say, are
Speaker 1: the banking sanctions. Those are the ones that have the
Speaker 1: most defeat immediate effect, and they have been quite aggressive,
Speaker 1: and there's still room for escalation there, but the spur
Speaker 1: Bank can VTB where the two biggest targets there, and
Speaker 1: they were the kind of most extreme type of especially
Speaker 1: in the VTP side, the most extreme type of sanction
Speaker 1: that the United States can impose. I'd say there are
Speaker 1: other ones that are very notable, but their effect is
Speaker 1: in kind of the overnight panic that we're seeing, so
Speaker 1: they're not the kind of em causing ones. But I
Speaker 1: think there's other notable steps which are remarkable in terms
Speaker 1: of how the United States thinks about sanctions. So, for example,
Speaker 1: things like the United States is currently leading this global
Speaker 1: export control initiative basically meant to cripple the arrival of
Speaker 1: inputs for the Russian industry. Each country is doing them
Speaker 1: slightly differently, but it's kind of a remarkable thing because
Speaker 1: we tend to think of US sanctions as primarily focused
Speaker 1: on financial mechanisms, but here from the start they've targeted
Speaker 1: kind of physical inputs and supply chains as well. So
Speaker 1: this actually brings me to the question that I want
Speaker 1: to ask you, and I think it's kind of a
Speaker 1: basic question, but one of those basic questions that probably
Speaker 1: has an extremely long answer, But how does sanctions policy
Speaker 1: making actually happen. So you know, someone sits in a room,
Speaker 1: presumably there's a committee or something, and they look at
Speaker 1: the available suite of previous sanctions actions that they've done
Speaker 1: on regimes like Iran or Hong Kong or whatever, and
Speaker 1: try to decide about what would be most effective or
Speaker 1: most applicable to the Russian situation. How exactly does it work? Yeah,
Speaker 1: I think that's accurate description. In the United States sanctions
Speaker 1: the kind of two offices that the two agencies that
Speaker 1: handle sanctions are the Treasury Department and the State Department.
Speaker 1: The Treasury Department, i'd say, is the more in the
Speaker 1: weeds technical department. So you probably heard in these days about,
Speaker 1: oh fact, the Office of Foreign Asset Control that is
Speaker 1: within the Treasury Department, whereas the State Department handles a
Speaker 1: as sanctions, it's specifically handles So for example, the decision
Speaker 1: to sanction ords from the other day, it was actually
Speaker 1: taken by the State Department rather than Treasury Department. But
Speaker 1: that's kind of a quirk of u S sanctions long
Speaker 1: But I'd say it's a kind of trial and error
Speaker 1: and discovery process. So people are describing the sanctions these
Speaker 1: days as unprecedented. I wouldn't say they're unprecedented in the
Speaker 1: sense that they have never done before. What's unprecedented, it's
Speaker 1: kind of the speed and impact and kind of how
Speaker 1: cooes together they've been and how much they've shaken the
Speaker 1: Russian economy. There are precedents for what the United States
Speaker 1: has done. So for example, the bank, the Central Bank
Speaker 1: of Iran has previously been sanctioned, so this is the
Speaker 1: first time a central bank is sanctions. So there are
Speaker 1: in that sense, there are I would say there is
Speaker 1: kind of a sense of escalatory measures you can take.
Speaker 1: If you think of sanctions, the most traditional kind of
Speaker 1: basic form of sanction is the individual, especially the so
Speaker 1: called STN sanctions, So it's against an individual, and so
Speaker 1: that basically means they don't have access to their assets.
Speaker 1: Their assets are frozen. So in the basic sense, your
Speaker 1: bank accounts are frozen and you probably can't come to
Speaker 1: the United States. And that's for example, what they did
Speaker 1: against the putin the other day. That's kind of the
Speaker 1: most basic building block. Usually that's what you see when
Speaker 1: you hear in the news sanctions are being posed in
Speaker 1: response to a crisis. That's more likely than not what
Speaker 1: people are talking about because they're pretty easy to impose
Speaker 1: and they don't have massive macroeconomic effects, and then from
Speaker 1: there you can kind of move up. You can put
Speaker 1: these so called blocking sanctions where you block the assets
Speaker 1: on corporations, and that can have a significant effect. So
Speaker 1: for example, that kind of depends on the target. So
Speaker 1: if you're sanctioning VTB, which is a major Russian bank,
Speaker 1: it will clearly have a massive effect. If you're sanctioning
Speaker 1: in the around case, it was often sanctioned small kind
Speaker 1: of satellite entities that we're doing something in the nuclear
Speaker 1: program that doesn't necessarily have a macroeconomicist location, and then
Speaker 1: from there you can kind of move bond and people.
Speaker 1: There is a lot of innovation in sanctions from program
Speaker 1: to programs. So for example, the Russian sanctions that had
Speaker 1: been imposed were an attempt to break out of the
Speaker 1: normal escalation ladder. So the sense there was these blocking
Speaker 1: sanctions were would be too too blunt and would have
Speaker 1: too much of a backlash. And the idea there, for example,
Speaker 1: as they impost sectoral sanctions, so rather than targeting an
Speaker 1: entire company, they just imposed limitations on what those companies
Speaker 1: could do. Americans couldn't buy certain forms of debt and
Speaker 1: equity from those companies, or couldn't provide certain services, and
Speaker 1: so that's just the way you can refine it. But
Speaker 1: I would say more generally, there is a sense of
Speaker 1: depending on the seriousness of the situation, you can kind
Speaker 1: of move up the ladder and i'd say Central Bank,
Speaker 1: and then the swift measure that has been in the
Speaker 1: news would be towards the upper end, at least in
Speaker 1: the financial sanctions side. So you know, obviously there perhaps
Speaker 1: it was some whole that sanctions or the threat of
Speaker 1: sanctions at least would have some sort of deterrent effect
Speaker 1: against this war. It hasn't happened. The war has happened.
Speaker 1: In general, it feels that those sanctions often get placed
Speaker 1: and stay for a long time and often don't seem
Speaker 1: to it's not obvious what the effect is, but what
Speaker 1: is the theory of what the sanctions are supposed to
Speaker 1: accomplish and how so The basic theory, especially now that
Speaker 1: kind of the deterrent theory is off the table, is
Speaker 1: that sanctions are a bargaining tool. You impose certain costs
Speaker 1: and say, if you acceed to our demand, we will
Speaker 1: stop imposing these costs. So it's the basic theory is
Speaker 1: pretty simple, but it gets very complicated very fast because
Speaker 1: the ask is not always clear, and I think the
Speaker 1: off ramp is not always clear, so people will kind
Speaker 1: of make up new new goals and new ass says
Speaker 1: they go. So it's very hard, especially in kind of
Speaker 1: a live conflict, to know what you're asking for. Some
Speaker 1: of the Russia case, now, one of the big challenges
Speaker 1: will be what would we consider enough for us to
Speaker 1: impose the sanctions, And as of now, I truly don't know.
Speaker 1: I feel like there isn't a unified transatlantic view on
Speaker 1: what what would be enough for lifting the sanctions. And
Speaker 1: the other thing which is sometimes ignored is that you
Speaker 1: have to hold up your own end of the bargain.
Speaker 1: So say say we said in order to lift sanctions
Speaker 1: or you would need Russia would need to return to
Speaker 1: the situation we had on Jan one, then the United
Speaker 1: States and Europe will need to actually deliver the relief
Speaker 1: from sanctions effectively and basically try to restore Russia's economy
Speaker 1: to one. And that that that is very challenging because
Speaker 1: sanctions the United States issues these regulations. But then it's
Speaker 1: the businesses that decide how to react with them. So,
Speaker 1: for example, BP has decided to exit Russia, the United
Speaker 1: States can't necessarily make BP return to Russia if Russia complies,
Speaker 1: So it's often can be very challenging. The private sector
Speaker 1: is hyper challenging to do the carrot side of the sanctions,
Speaker 1: whereas the stick is kind of is very quick. Companies
Speaker 1: are much more responsive to the threat of US punishment
Speaker 1: than they are too kind of requests by the United
Speaker 1: States to rekindle relations during the Irround deal. When the
Speaker 1: Around deal was passed, then Secretary of State carry would
Speaker 1: actually go around Europe and speak to banks and say,
Speaker 1: we've lifted the sanctions, please rekindle your business in Irun,
Speaker 1: and the bank's kind of bulked at it for all
Speaker 1: sorts of reasons, because it's very difficult to convince the
Speaker 1: other side that you're doing your best, and then they
Speaker 1: feel like they kind of got a raw deal because
Speaker 1: they complied that they didn't necessarily get all the bend
Speaker 1: as they were promised. So this is exactly what I
Speaker 1: wanted to ask you, because again, even before a lot
Speaker 1: of these sanctions were formally announced, we did see various
Speaker 1: companies financial institutions start to step away from the market,
Speaker 1: and you know, suddenly you have Russian companies, um you know,
Speaker 1: whether they're logistics networks or commodities exporters, things like that,
Speaker 1: unable to get credit from their banks even though technically
Speaker 1: nothing has happened yet. How much of that friction is
Speaker 1: I guess, beneficial to sanctions actually being implemented and enforced
Speaker 1: versus how much of it is unhelpful in the sense
Speaker 1: that it it sort of accidentally escalates the situation and may,
Speaker 1: as you just pointed out, be difficult to reverse if
Speaker 1: the deal is actually reached. I think it's a very
Speaker 1: much a double edged sword. It's it's definitely helpful because
Speaker 1: it's difficult to fully calibrate ones actions and in that
Speaker 1: sense you can kind of maximize the shock and all
Speaker 1: in that sense, and in that sense it's it's a
Speaker 1: positive I guess. I mean, it's it's nice to know
Speaker 1: that the United States doesn't necessary if everyone imposed the
Speaker 1: sanctions followed the exact letter of the law of sanctions,
Speaker 1: sanctions would be kind of an unwieldy measure because you
Speaker 1: would actually have to think through every single thing you're
Speaker 1: trying to block. So in that sense, it would be
Speaker 1: impossible to administer a program where you did that. There
Speaker 1: have been cases where companies are extremely forward leaning in
Speaker 1: terms of interpreting things exactly, and that can be counterproductive.
Speaker 1: On the other hand, I think it's a it's a
Speaker 1: big concern the overcompliance concerned, as you said, first of all,
Speaker 1: because things can very quickly spin out of control. I mean,
Speaker 1: in a sense, it feels if there was all this
Speaker 1: kind of excitement about how much was happening in Russia,
Speaker 1: but and Russia kind of I would say, in this
Speaker 1: situation made it warranted because it continued with it's uh,
Speaker 1: it's advance. But in a situation where Russia had paused
Speaker 1: and the bank runs had continued, you would have had
Speaker 1: a difficult, difficult situation. And I think it's very hard
Speaker 1: on the back end to incredibly deliver the relief. So
Speaker 1: I think it's very difficult. I think the current situation
Speaker 1: is kind of a unique one because at least not
Speaker 1: for now, everyone is hoping that this confrontation will be
Speaker 1: fairly short. People don't see this as necessarily an attrition
Speaker 1: along like multi year Iran type situation, So I think
Speaker 1: people are there is a concern over compliance can be
Speaker 1: a good way to very quickly dial up and then
Speaker 1: dial down. But if you're trying to be more calibrated
Speaker 1: and negotiate, I think you would be concerned. So I
Speaker 1: think it's a huge problem. And it's always easy to
Speaker 1: welcome over compliance at the front and then forget that
Speaker 1: you'll have to deal with on the back. So at
Speaker 1: this point, because we discussed, obviously the deterrent element didn't work,
Speaker 1: and so in theory, you know, you continue to apply
Speaker 1: stress and continue to offer out the chance of okay.
Speaker 1: Hopefully in theory this this gets reversed if Russia reverses
Speaker 1: its actions. What about just the uh, the persistent damage.
Speaker 1: I mean, yes, the Russia is going to continue to
Speaker 1: have at least for now cash coming in through the
Speaker 1: energy market. Could it be that the sanctions just imposed
Speaker 1: such weakness that it has to it has to backtrack
Speaker 1: in some way because the damage compounds to its economy,
Speaker 1: compounds to its banking system and so forth. Could it
Speaker 1: be that the penalty the sanctions weapon is so harsh
Speaker 1: that it essentially forces Russia is forced into some sort
Speaker 1: of reversal. It definitely could. I mean, I think that's
Speaker 1: the hope that it forces some sort of reversal, And
Speaker 1: as far as everything that's happened up to now, I'd say,
Speaker 1: if you're trying to impose pain to force a reversal,
Speaker 1: this you're getting what you wanted. And I mean, there's
Speaker 1: still more one can do, but it has been very
Speaker 1: successful the sanctions. I feels if it's kind of like
Speaker 1: people talk about kind of the economy in general. Bad
Speaker 1: things happened to economies all the time, but they don't
Speaker 1: just stop existing. They kind of address and moddel along.
Speaker 1: Like Russia defaulted, it kind of picked up the pieces
Speaker 1: it was bad, and they keep going. So sometimes I
Speaker 1: think during sanctions conversations, but in general there's the sense
Speaker 1: that there's like a final blow you're gonna deal, or
Speaker 1: some moments some point of no return. I read recently
Speaker 1: some really interesting comparisons of the Russia sanctions to the
Speaker 1: Iran and the Venezuela sanctions, and in that sense that
Speaker 1: those are concerning precedents because in those cases the country
Speaker 1: is kind of muddled along. So for example, Iran lost
Speaker 1: access to its reserves and it's still kind of had
Speaker 1: to consolidate. There was the economy shrank, but it kind
Speaker 1: of muddled along. It really energy became a smaller part
Speaker 1: of its economy, manufacturing mostly domestic focus became a bigger one,
Speaker 1: and it was able to kind of build some semblance
Speaker 1: of an economy that could work. In the Venezuela case,
Speaker 1: there were aggressive oil sanctions and really harmed the Venezula
Speaker 1: oil sector, but eventually the oil sector kind of came back.
Speaker 1: So in that sense, it's hard to imagine a situation
Speaker 1: where you kind of deal some final blow, in which
Speaker 1: case you have the country has no chance or no
Speaker 1: option but to negotiate. But at the same time you
Speaker 1: can inflict a lot of pain, and at least in
Speaker 1: the Iran case, the country has been willing to negotiate
Speaker 1: to get outside of sanctions. So in that sense you
Speaker 1: can define only use sanctions to get to do I
Speaker 1: would just say that the economic pain itself is not
Speaker 1: the only factor. That it ultimately comes down to politics.
Speaker 1: So what are the kind of internal constituencies that are
Speaker 1: willing to bargain and what can you Are you willing
Speaker 1: to accept what they have to offer, and can you
Speaker 1: give them what they want? So just on this note,
Speaker 1: you mentioned the idea of the US actually targeting specific
Speaker 1: sectors while trying to leave others, you know, relatively untouched,
Speaker 1: such as energy or commodities. How does that change I
Speaker 1: guess the efficacy of sanctions and what kind of impact
Speaker 1: would you expect that to have on the Russian economy.
Speaker 1: Would that be something like what we saw in Iran,
Speaker 1: where energy starts to become well, I guess in this
Speaker 1: case energy would become an even more important factor in
Speaker 1: the economy, or would you start to see Russia try
Speaker 1: to I don't know, offset some of the the impacts
Speaker 1: of the sanctions. First of all, the United It's true
Speaker 1: that the US and Europe stayed away from directly targeting energy,
Speaker 1: and they've kind of they've tried to be pretty explicit
Speaker 1: about it. So for example, in the United States case,
Speaker 1: they've added licenses which are basically exceptions the sanctions saying
Speaker 1: certain transactions are allowed. And for example, within the Russian
Speaker 1: Central Bank sanctions, within VTB and spur Bank they've allowed
Speaker 1: energy transactions. But I think in terms of kind of
Speaker 1: the over compliance and all that, I think it's very
Speaker 1: hard to say that the current sanctions aren't hitting energy.
Speaker 1: I think I was just seeing right before the show
Speaker 1: that Russian oil is trading at a discount. Financial institutions
Speaker 1: deals with commodities aren't as a forthcoming with letters of credit,
Speaker 1: and there was an announcement from shipping companies to that
Speaker 1: they're not they might be peeling away from energy. So
Speaker 1: in that sense, I think there will be an effect directly,
Speaker 1: I mean, compared to Iran, Russia's about thirty or so
Speaker 1: percent of it of its government budget comes from energy,
Speaker 1: whereas in the around case that was in the six
Speaker 1: piece of The interesting thing about thinking about the reliance
Speaker 1: on energy is that I mentioned kind of the big,
Speaker 1: big ticket sanctions, but some of the other ones that
Speaker 1: have been imposed are meant to target long term energy production. Uh.
Speaker 1: Some of these started actually, and the idea there was exactly,
Speaker 1: let's not target energy right now because we would be
Speaker 1: able to withstand it, but let's make it so Russia
Speaker 1: has more trouble getting the technology it needs, getting the
Speaker 1: funding it needs for its kind of frontier project. So
Speaker 1: in that sense, Russia might struggle with replacing its reserves,
Speaker 1: and in that sense energy might decline as a part
Speaker 1: of its economy just because it's not able to put
Speaker 1: put in the investment. In that context, the departure of
Speaker 1: it's part of companies like Shell and Equino or n
Speaker 1: VP might be potentially further law of kind of human
Speaker 1: capital or expertise that could harm the energy prospects of
Speaker 1: the Russian economy over the medium to long term. So
Speaker 1: I want to talk a little bit more about that
Speaker 1: because the introduction, you said, one of the things that
Speaker 1: you found striking. It's like, Okay, we all expect the
Speaker 1: financial sanctions, but this sort of export controls limiting Russia's
Speaker 1: access to factors of production, perhaps some intermediate stage goods
Speaker 1: that would really undermine Russian industry. What specifically has been
Speaker 1: announced in that respect, What are the areas of sort
Speaker 1: of our Russian economy, maybe be the energy or elsewhere
Speaker 1: they will really be affected by some of these new limitations.
Speaker 1: There's some differences between the US and the EU here.
Speaker 1: The United States said it's mostly focused on defense and aerospace,
Speaker 1: so it's specifically it mentioned so far that it planned
Speaker 1: to kind of limit inputs like semi conductors and lasers
Speaker 1: and other parts to the defense and aerospace. The European
Speaker 1: and seems more focused on a broader variety of of
Speaker 1: components targeting the energy sector as well. We've been coming
Speaker 1: at this very much from I guess the sort of
Speaker 1: external side, like from the perspective of the US and Europe.
Speaker 1: But what can Russia actually do here to offset sanctions impact?
Speaker 1: And of course there's been a lot of talk about
Speaker 1: what role China could play, um if any, in all
Speaker 1: of this, and the idea that maybe Russia can look
Speaker 1: to China for for some type of credit. So what
Speaker 1: sort of response might we expect here. The short term
Speaker 1: response is kind of what we saw the other day
Speaker 1: with the rays of raids and kind of the capital controls.
Speaker 1: Over time, I think it will be primarily about turning inward,
Speaker 1: kind of finding domestic sources of demand, and I mean
Speaker 1: the energy aside of it may change, but kind of
Speaker 1: encouraging capital to stay in. I think other sanctions we've
Speaker 1: seen in these days has been the targeting of the
Speaker 1: oligarchs and people close to Putin. The one potential scenario
Speaker 1: would be kind of a full repatriation to the extent
Speaker 1: that they're able to of their assets and kind of
Speaker 1: like new sources of capital within the Russian economy, all
Speaker 1: looking inward in terms of relationships with China. I think
Speaker 1: something that was interesting in the context of the comparison
Speaker 1: with Iran. That I saw was that Russia right now
Speaker 1: is much less exposed to China, and then say Iran
Speaker 1: was just because Russia, Russia historically has been very tied
Speaker 1: to the West compared to Iran. So and that's that
Speaker 1: there is like an opportunity to kind of reorient the
Speaker 1: entire economy east rather than West, and so that could
Speaker 1: be one way to kind of break the connection with Europe.
Speaker 1: But at the same time, I think, well two things.
Speaker 1: First of all, these things are take time, and right
Speaker 1: now we're still in the adjustment phase. It seems like
Speaker 1: Russia will have ways to stabilize as the rouble in
Speaker 1: the short term. It seems difficult to me from a
Speaker 1: sanctions perspective, what you don't want is the so called
Speaker 1: Cuba scenario where sanctions stay in place wherever you kind
Speaker 1: of you don't have right now. The United States has
Speaker 1: been admirable in the fact that it's been able to
Speaker 1: be extremely multilateral and so bring on the countries like
Speaker 1: Switzerland that are historically neutral, for example. The risk is
Speaker 1: the longer this goes on, the less multilateralism there is,
Speaker 1: and more kind of countries start to break away, start
Speaker 1: to re engage with Russia, and then you kind of
Speaker 1: have this situation where there's a complete blockade against Russia
Speaker 1: from one part of the world, but it's not enough
Speaker 1: to completely undo kind of unmake Russia's economy bringing to
Speaker 1: the bargaining table, and the economy kind of readjust like
Speaker 1: Europeans go to Cuba all the time, it kind of
Speaker 1: readjusts towards these So that's I think the thing everyone
Speaker 1: is really wants to avoid. So my sense of the
Speaker 1: goal right now is to try to impose so much
Speaker 1: pain that there is in the ability to remake oneself
Speaker 1: and kind of adjust, because otherwise the adjustment you could
Speaker 1: kind of end up in this worst of both worlds
Speaker 1: where you don't necessarily achieve your goal, you don't achieve
Speaker 1: your goals, you're cutting off a major part of the economy,
Speaker 1: and you're kind of re orienting a major part of
Speaker 1: the economy away from you. So for me, I struggle
Speaker 1: to imagine anyone wanting the current situation to be long term,
Speaker 1: and I think the hope is to reach a deal.
Speaker 1: So how as of right now, and we're you know,
Speaker 1: we're barely a week into this war and the announcement
Speaker 1: of sanctions. How surprised are you by the level of
Speaker 1: unity and the completeness of the I mean, as you
Speaker 1: mentioned even Switzerland neutral Switzerland is involved by this sort
Speaker 1: of the unanimity on the part of European powers in
Speaker 1: the US in the sanctions. And how does that compared
Speaker 1: to other ones in terms of unanimity versus say when
Speaker 1: a dealing with Iron and others. I think it's extremely impressive.
Speaker 1: I think it was unexpected. I mean both the Switzer
Speaker 1: and then Singapore's joining, which has kind of been kind
Speaker 1: of unique cases. But in general, if you think about
Speaker 1: the way sanctions work within the European Union is that
Speaker 1: you need unonumity of all twenty seven countries. It's not
Speaker 1: a majority decision. So even with getting the European on
Speaker 1: board for anything really requires getting twenty seven members on board.
Speaker 1: And you saw it over this weekend where it would
Speaker 1: be kind of one off reports Italy okay with Swift
Speaker 1: cut off. Hungary not opposed to Swift cut off. So
Speaker 1: in that sense, it's a really challenging diplomatic struggle. And
Speaker 1: I think it's been amazing to see how much that
Speaker 1: the United States was able to get everyone on board
Speaker 1: in terms of kind of looking at in precedent. First
Speaker 1: of all, I would say there are small differences between
Speaker 1: the sanctions. This isn't necessarily a bad thing, but I
Speaker 1: think everyone does minor adjustments or my carve outs, I
Speaker 1: think in some cases, and some of this is just
Speaker 1: the way kind of the way these work is that
Speaker 1: every country sits it in a room and kind of
Speaker 1: writes out there the same press release and then releases it.
Speaker 1: Everyone does it a bit at the same time, a
Speaker 1: bit differently. The United States, say, released its central Bank sanctions,
Speaker 1: they agreed to them over the weekend, but then the
Speaker 1: United States rules came out before the European world, So
Speaker 1: for temple of the the United States have a carve out
Speaker 1: that Europe doesn't have, and I think that's to be expected.
Speaker 1: But it's kind of a it's kind of a funny
Speaker 1: process in that sense that it kind of all comes
Speaker 1: together on the fly, and even more so now where
Speaker 1: it's not multi month or multi year escalation process, but
Speaker 1: it's a matter of hours everything changes. So in that sense,
Speaker 1: I think it's been pretty amazing. I think it's kind
Speaker 1: of a speed run of the Iran sanctions in that sense.
Speaker 1: So the classic dynamic during the Iran sanctions tended to
Speaker 1: be that someone wanted to escalate, some party within the
Speaker 1: United States wanted to escalate Iran sanctions, that they would
Speaker 1: push it, and usually it was something at that point unprecedented,
Speaker 1: and so then the administration, which tended to be more
Speaker 1: concerned about things like Dallar dominant or getting along with allies,
Speaker 1: would push back. But eventually there would be enough momentum
Speaker 1: for the kind of hawkish next step, so targeting the
Speaker 1: around Central Bank or trying to target Iranian oil exports,
Speaker 1: and so eventually the United States would kind of get
Speaker 1: on board with it, and then it would there be
Speaker 1: kind of friction with the EU that you would complain
Speaker 1: about overreach by the United States or lack of engagement
Speaker 1: with EU equities, etcetera. And then eventually the EU would
Speaker 1: kind of either fully join or kind of make itself
Speaker 1: comfortable with it, and so that's kind of how it
Speaker 1: would go. And then the kind of final step was
Speaker 1: the working with China. So China would not necessarily fully
Speaker 1: agree with the sanctions, that definitely wouldn't say it was complying,
Speaker 1: but China would maybe make some adjust mints and kind
Speaker 1: of conform or not too overtly go against US schools.
Speaker 1: Now you're kind of seeing this extremely fast. So someone
Speaker 1: floats an idea with the Russia thing last week, So
Speaker 1: before the invasion fully started, you had all these ideas
Speaker 1: central Bank and the correspondent banking targeting olive arts, and
Speaker 1: they were kind of floating in the either and then
Speaker 1: the United States does something. Europe bulks, but then it
Speaker 1: moves faster than in the central Bank sanctions. Actually, initially
Speaker 1: it seemed like the United States was going to take
Speaker 1: a soft through approach, and in that case it was
Speaker 1: actually vonder Ley and speech that seemed to be a
Speaker 1: bit more forward leaning. So that sense, you're seeing everything
Speaker 1: move very quickly. And I think the current, like the
Speaker 1: final decision on Swift is kind of an example, this
Speaker 1: gradual campaign all building up to kind of a big decision.
Speaker 1: So I think it's been admirable. It's kind of interesting
Speaker 1: you see how much diplomacy matters, but you also see
Speaker 1: how much the technical questions matter because so much of
Speaker 1: it is kind of getting it's making the details compatible
Speaker 1: but also ensuring that domestic politics are feasible by carving
Speaker 1: out what you need to come. You used a phrase
Speaker 1: just then for the sake of dollar dominance. And this
Speaker 1: is something that has come up in our episode with
Speaker 1: Salton Poser, and I've also seen some comments from other
Speaker 1: commentators about it. But on the one hand, you have
Speaker 1: the US using its position in the global financial system
Speaker 1: to heap enormous amounts of pressure on Russia to try
Speaker 1: to get it to do something that it wants. On
Speaker 1: the other hand, it seems to have given rise, I guess,
Speaker 1: to a question of whether or not people are going
Speaker 1: to want to either do business with the US or
Speaker 1: maintain assets in dollars if they know that, you know,
Speaker 1: if they get into a situation of tensions with the US,
Speaker 1: that they could actually lose control or access to those
Speaker 1: various assets. So I guess my question is what does
Speaker 1: all of this mean for the long term position of
Speaker 1: the United States and the dollar in the financial system.
Speaker 1: This is kind of the million dollar question that has
Speaker 1: been kind of one of the ongoing questions in sanctions
Speaker 1: among sancts and practitioners. Two of the current people in
Speaker 1: government working on the sanctions actually wrote a report on
Speaker 1: will sanctions threatened the result of the dollar? So everyone
Speaker 1: in the government is very much thinking about this issue.
Speaker 1: I tend to be very skeptical about the sanctions threat
Speaker 1: to dollar dominance. I mean, first of all, I will say,
Speaker 1: like the way dollar dominance usually comes up in these
Speaker 1: conversations isn't because of some empirical threat to the dollar,
Speaker 1: but it's more of a way of kind of arguing
Speaker 1: against the sanctions without arguing against the sanctions. So you're
Speaker 1: not saying, I think this this measure is bad because
Speaker 1: it won't achieve its goal. You kind of have this
Speaker 1: banking shot argument where you say, actually, we shouldn't do
Speaker 1: this measure because of dollar dominance. So that's kind of that.
Speaker 1: I tend to kind of be skeptical of the argument
Speaker 1: just because that's it's not often like very informed. I
Speaker 1: think by it's most informed by kind of policy differences
Speaker 1: within the sanctions community. I mean, it's been something people
Speaker 1: have been worrying about for a long time. Like Jack
Speaker 1: lou when he was secretary, gave a speech saying, if
Speaker 1: we keep using this, it will be a threat. And
Speaker 1: it's I mean the United States keeps it does keep
Speaker 1: escalating and its use of it. I mean there have
Speaker 1: been kind of all these things. There was one point
Speaker 1: in the kind of tens they were all these massive
Speaker 1: fines against foreign banks, and people would complain. At one point,
Speaker 1: President Holland asked President Obama not define B and P
Speaker 1: Perry BA too much. So like, in a sense like
Speaker 1: it is like a big liability in a sense that
Speaker 1: like the United States has this control and it almost
Speaker 1: doesn't know what to do with it day to day. So,
Speaker 1: for example, in the afghan you recently saw the United
Speaker 1: States made that decision about the Afghanians assets held at
Speaker 1: the New York FED. In a sense like dollar dominance
Speaker 1: itself is kind of a huge imposition in the United
Speaker 1: States because it needs to make these decisions that it's
Speaker 1: not necessarily it might not want to make. So for example,
Speaker 1: the buying administration having to choose between sending money aid
Speaker 1: to Afghanistan and keeping in the United States because technically
Speaker 1: the money is in the United States, and so nine
Speaker 1: eleven victims families could sue and take the money from
Speaker 1: the New York FED. I guess we're generally I would
Speaker 1: say that dollar dominance has been people have been worrying
Speaker 1: about it for a long time. I'd say the last
Speaker 1: biggest worry was during the U s unilateral exit from
Speaker 1: the Iran Deal, and that to me at the time,
Speaker 1: there was all sorts of fears because the Iran Deal sanctions.
Speaker 1: The Iran sanctions really leverage it. Like the biggest thing
Speaker 1: they do is they force they don't allow Iran to
Speaker 1: export oil, and so you really have to lean on
Speaker 1: dollar dominance to pressure like third party countries not to
Speaker 1: import Iranian oil. And so there was a sense that
Speaker 1: that might be the breaking point, and it really wasn't
Speaker 1: in that case. Swift Swift is like the Belgian payment
Speaker 1: messaging service. They even complied with U S sanctions during
Speaker 1: this whole escalation. People keep saying it's up to the
Speaker 1: EU to decide on Swift, not to the United States.
Speaker 1: In that case that you very much did not want
Speaker 1: the Swift Swift to cut off during your banks but
Speaker 1: they did it anyway. So in the short term, the
Speaker 1: sanctions do not pose a threat to daughter dominants, I
Speaker 1: would say, mostly because well, sanctions are a huge deal
Speaker 1: and they can really remake economies as we're seeing right now.
Speaker 1: That's not what dollar dominance means day today. It seems
Speaker 1: it feels to me like the most important aspect of
Speaker 1: daughter dominance isn't the fact that the United States can
Speaker 1: kind of turn off the spigots of certain capital flows
Speaker 1: when it's sanctions countries, the biggest thing is that the
Speaker 1: FED can provide liquidity in a crisis. And in that sense,
Speaker 1: if you think of that, there's this historic kind of
Speaker 1: caused sanctions that geopolitical side of the dollar system, and
Speaker 1: like the normal day to day side is coronavirus crisis
Speaker 1: in the United States, doing swaplants or things like that.
Speaker 1: And so a country that might not be interested in
Speaker 1: or might want alternatives to sanctions also would need to
Speaker 1: create a parallel world where there is one entity that
Speaker 1: in a crisis can step up and keep the entire
Speaker 1: financial system afloat. And so from that angle, it just
Speaker 1: seems like the kind of benefits, or at least the
Speaker 1: kind of security provided by a world of daughter dominance
Speaker 1: and kind of the United States being able to singularly
Speaker 1: prop up the global financial system outweigh for most countries.
Speaker 1: The negatives. Yeah, I mean, I think like we've definitely
Speaker 1: seen in the wake of the financial crisis, and then
Speaker 1: more cutely, starting in March, the sort of benefits to
Speaker 1: being in the club or being under the relat that
Speaker 1: can get the benefit of fed liquidity is pretty powerful.
Speaker 1: I want to go back to Swift for a second.
Speaker 1: I feel like, you know, on Twitter, Swift gets talked
Speaker 1: about in harsh tones like this should be this should
Speaker 1: be like this is the thing that they can't touch,
Speaker 1: and then of course they sort of did it, not entirely,
Speaker 1: but it has been employed. How powerful is that? What
Speaker 1: are the sort of misconceptions? What do people get wrong
Speaker 1: about what it means to lose access to Swift? Yeah,
Speaker 1: I definitely agree about the hushtones. I feel like on
Speaker 1: Thursday or Friday, after a present by the game conference
Speaker 1: called he was asked something like, are you really unwilling
Speaker 1: to do the two most destructive things for the Russian
Speaker 1: economy sanctioned potent and disconnects Swift and kind of both
Speaker 1: of them were kind of beside the point, as has
Speaker 1: been proven by the fact that all the damage hasn't
Speaker 1: been caused by those two Swift the base is this
Speaker 1: payment messaging service has eleven thousand banks. It's based in Belgium,
Speaker 1: so technically it's not responsive to US US requests, although
Speaker 1: in practice it tends to very much be responsive. In
Speaker 1: part of it is responsive because it's board member banks
Speaker 1: are they have extreme exposure to US jurisdictions. Its board
Speaker 1: member banks would tend to kind of align themselves with
Speaker 1: US goals. I mean, ultimately, the thing is Swift is
Speaker 1: a messaging service. I mean, it's very well networked, it's
Speaker 1: uh is secure, so in that end, it's standardized. So
Speaker 1: in that sense it has the perks really good messaging service.
Speaker 1: But if someone shut down WhatsApp, you could use something
Speaker 1: else if you really wanted to communicate with people, And
Speaker 1: it's kind of the same with Swift. There's nothing that
Speaker 1: Swift does that itself couldn't be replicated. But I think
Speaker 1: the reason Swift is such an appealing kind of example
Speaker 1: is that it's kind of the embodiment. So much of
Speaker 1: sanctions depend on kind of the concept of like inter
Speaker 1: the end, and so like there's these few choke points
Speaker 1: or places in the global economy that if you can,
Speaker 1: if you can exert your pressure on them, you'll be
Speaker 1: able to control all sorts of other things. So and
Speaker 1: in that sense, Swift release is like a good symbol
Speaker 1: of that, because it's like this, what if there were
Speaker 1: one messaging service and every bank depends on them, and
Speaker 1: with one stroke you could cut off these banks, and
Speaker 1: they would lose their connection to the global economy. In practice,
Speaker 1: that's not now what would happen. But I think in
Speaker 1: that sense it's very symbolic, I think so. I think
Speaker 1: that's why it became such a symbol, and there was
Speaker 1: there was this talk about Europe can only be a
Speaker 1: global player if it's willing to cut off Russia from swift.
Speaker 1: I think more generally, though, it's the kind of infrastructures
Speaker 1: that's makes swift possible. You swift that are more important,
Speaker 1: So swift you're sending the messages. But what matters is
Speaker 1: kind of because if there's been a bunch of analogies
Speaker 1: people of use, the one I think of is like
Speaker 1: what matters the train tracks between towns. You don't necessarily
Speaker 1: need like a telegraph system communicating that the train arrives,
Speaker 1: but without the communications and stuff, trains will probably have
Speaker 1: to go a bit slower because you don't know who
Speaker 1: else is on the track. So ultimately, what the United
Speaker 1: States did with the spur Bank when it basic denied
Speaker 1: the correspondent bank accounts, it just uprooted the chain tracks.
Speaker 1: So no messaging service can make up for that. Just
Speaker 1: when it comes to the oligarch. So we do have
Speaker 1: sanctions in place now, you know, possibly belatedly when it
Speaker 1: comes to the UK, and you pointed out earlier that
Speaker 1: to some extent extensions on individuals are you know, almost
Speaker 1: the the original like clean vanilla sanctions. So you say,
Speaker 1: these people can't go to the US, they can't access
Speaker 1: their US bank accounts and things like that. But what
Speaker 1: exactly is it supposed to accomplish here, because there does
Speaker 1: seem to be a thought process that, well, we're going
Speaker 1: to sanction the oligarchs and then they're going to call
Speaker 1: it Putin and complain about everything that's happening. But like,
Speaker 1: how realistic is that? Like what is the thought process
Speaker 1: behind this? I think that is the thought process in
Speaker 1: a sense, like the basic one, which is these are
Speaker 1: Russia is not kind of a fully traditional responsive electoral democracy,
Speaker 1: and so what matters is convincing the elites who might
Speaker 1: have access to Putin and that might change things that
Speaker 1: I feel that that is the basic theory of the case.
Speaker 1: I don't think necessarily it would work that way just
Speaker 1: because these are oligarchs depend more on Putin that Putin
Speaker 1: depends on them. These are some of the ones that
Speaker 1: have recently been hit and the you are people who
Speaker 1: were putin KGB mates in Germany, so they're not they're
Speaker 1: not successful businessmen who placed put in an office. So
Speaker 1: so in that sense, it might just drive them closer
Speaker 1: to the government. In one sense, I read an interesting
Speaker 1: comparison of the to the Venezuela sanctions, and in the
Speaker 1: Venezuela sanctions going after Venezuelan corruption, especially given they have
Speaker 1: all these kind of state owned businesses that pavesa There's
Speaker 1: one of the things the United States did was really
Speaker 1: target uh, these high profile corrupt individuals and for example
Speaker 1: or say, take over their assets in the United States,
Speaker 1: and that tended to push them closer to Maduro. So
Speaker 1: in that sense, it could cut the other way. I mean,
Speaker 1: at the same time, I think there is sanctions. We
Speaker 1: think of them. Before the invasion, there was the whole
Speaker 1: thinking of sanctions as deterrents, and then now we're talking
Speaker 1: about sanctions as bargaining. But there's another theory, which is
Speaker 1: sanctions as kind of a signaling message, and so you
Speaker 1: do sanctions to say we disapprove of this in some cases,
Speaker 1: so for example, the United States will sanction people who
Speaker 1: have no assets to the United States never planned to
Speaker 1: come to the United States, but the United States so
Speaker 1: does it as a way of saying this won't fly
Speaker 1: for us. And I mean, I think there is some
Speaker 1: value in kind of signaling disapproval, so I will say that.
Speaker 1: One thing I would note though, is that these oligarchs
Speaker 1: do control often very large businesses, and different sanctions do
Speaker 1: things differently, but sometimes it depending on how you do it.
Speaker 1: Sometimes sanctioning the head of an individual can lead to
Speaker 1: the sanctioning of a firm he owns or controls, and
Speaker 1: in that sense it can have very large ripples. Just recently,
Speaker 1: uh that you just released its own sanctions. It's on
Speaker 1: oligar sanctions and those could lead to dislocations because it
Speaker 1: has I mean, we'll see how it plays out, but
Speaker 1: it seems to have a capacious definition of control, which
Speaker 1: could mean major Russian companies get sanctioned as well companies
Speaker 1: that haven't been sanctioned so far, So I could be
Speaker 1: a thing. And sometimes they can have kind of crazy
Speaker 1: knock on effects. And twenty Team the United States sanctioned
Speaker 1: ole deir Pasca Big Medals Magnate. He could he controls
Speaker 1: one of the top producers aluminum in the world, and
Speaker 1: then that that was sanctioned, and then the London Medals
Speaker 1: Exchange freaked out because that was a big player there,
Speaker 1: and so they haulted trading and overnight the price of
Speaker 1: aluminum went up. So even the individual ones can have
Speaker 1: crazy knock on effects, but kind of the day to
Speaker 1: day sanctioning, like the sun they sanctioned the son of
Speaker 1: the Rose and f CEO that I would say is
Speaker 1: primarily a way of seeing a hope that he might
Speaker 1: intercede with Putin, but also more simply a signal that
Speaker 1: this won't fly. And especially in the UK, but also
Speaker 1: in the United States, there's the sense that the United
Speaker 1: States has been turning a blind eye to Russian dirty
Speaker 1: money that flows in, and so this is also a
Speaker 1: way to kind of eliminate charges of hypocrisy, I would say,
Speaker 1: which is kind of a signaling thing, but there's value
Speaker 1: to it. So this next question is actually going to
Speaker 1: be a subject of an entire It has, you know,
Speaker 1: I'm sure multiple episodes, and certainly one imminently. But you know,
Speaker 1: we talked about, Okay, the one area that's not going
Speaker 1: to really be touched, at least directly, although maybe implicitly
Speaker 1: is the energy sector, and of course we all know
Speaker 1: that Europe, particularly Germany, highly dependent on Russian natural gas
Speaker 1: and to some extent, call how did you know? What's
Speaker 1: the short version of how in your view, Europe got
Speaker 1: into this situation where it became so dependent. You know,
Speaker 1: even after with the annexation of Crimea, which is sort
Speaker 1: of well sort of telegraphed, what thought of Aprutin was
Speaker 1: willing to do? How did it let itself get so
Speaker 1: vulnerable on this front? Search that, at least with energy,
Speaker 1: it has very little leverage. First of all, energy imports
Speaker 1: in Europe have been kind of a long term source
Speaker 1: of friction. Even in the eighties there was tension between
Speaker 1: the Reagan administration and Europe because of a European pipeline
Speaker 1: to Russia. So this has been very long I think,
Speaker 1: if I'm not mistaken, Anthony B. Lincoln wrote a book
Speaker 1: about this in n So this is kind of a
Speaker 1: long term sorts of friction, and there's differences between gas
Speaker 1: and oil. But the political economy of Europe and energy
Speaker 1: is very challenging in terms of unwillingness to invest, has
Speaker 1: made it very hard for Europe to diversify. I think
Speaker 1: that kind of was one of the big things. Then
Speaker 1: you kind of have the freak events like Fukushima and
Speaker 1: harming getting rid of German nuclear in the German energy mix.
Speaker 1: But I think the biggest thing I would say is,
Speaker 1: and I think this kind of is goes to the
Speaker 1: shortcoming of sanctions more generally, is that sanctions can only
Speaker 1: shut off certain economic activity. They can do the opposite
Speaker 1: and like foster it. So the United States they impose
Speaker 1: these sanctions and there was a sense of geopolitical risk
Speaker 1: attached to Russian gas, but it wasn't enough to creates
Speaker 1: a an alternative to Norse stream, you know. So I
Speaker 1: think that's kind of a big problem. You need more
Speaker 1: active measures. Sanctions are relatively cheap in terms of imposing them.
Speaker 1: They can have their costs, but they're not whereas building
Speaker 1: interconnections in Europe, so gas from Spain can get to Germany,
Speaker 1: which seems to be one of the concerns in terms
Speaker 1: of like the geography of the gas interconnection in Europe.
Speaker 1: That wasn't enough. So in that sense, I just don't
Speaker 1: think there was enough forethought, and I think unwillingness to
Speaker 1: invest in kind of think long term was able to diversify.
Speaker 1: I mean, we'll see what happens now. I think there's
Speaker 1: a bunch of enthusiasm about potentially the changing political economy
Speaker 1: of Germany, or at least the greater willingness to invest
Speaker 1: in spend. I mean, there's been talking about nuclear and
Speaker 1: L and G, but those are long term thing. I
Speaker 1: think in the short term without kind of an impetus
Speaker 1: to invest and instead kind of I guess chronic consolidation,
Speaker 1: and that's how you end up without other options. And
Speaker 1: I don't know if people in fifteen, if they've been
Speaker 1: told been in the most effective measure against Russia, would
Speaker 1: have been off the table because we hadn't build the infrastructure.
Speaker 1: It's hard for me to imagine that they would actually
Speaker 1: have followed through and build the infrastructure, just because there's
Speaker 1: all sorts of other domestic problems that have halted it.
Speaker 1: So I'm very aware of the time, and it feels
Speaker 1: like we could probably we could easily go on for
Speaker 1: another hour. So I'm just gonna I'm gonna try to
Speaker 1: squeeze in two very important questions in one, which is
Speaker 1: one of the big criticisms of sanctions is obviously the
Speaker 1: impact on the general population, who may not themselves have
Speaker 1: decided or supported the invasion of Ukraine, So so what's
Speaker 1: the impact there. And then secondly, you mentioned escalation earlier
Speaker 1: in the conversation. How much more could the US and
Speaker 1: Europe do on this front When it comes to sanctions
Speaker 1: on the humanitarian front, I think it's a it's a
Speaker 1: it's a huge problem. In the late nineties there was
Speaker 1: a complete revulsion at sanctions uh and there was a
Speaker 1: sense that it didn't work. They didn't work and the
Speaker 1: main damage was inflicted on the population. Since then, there
Speaker 1: kind of was this evolution in thinking of the creation
Speaker 1: of smart sanctions and the idea there was like more targeting,
Speaker 1: so for example, going off after the other guards and
Speaker 1: other measures that type of measure and other ways to
Speaker 1: kind of limit the humanitarian impact. Right now, I think
Speaker 1: this conversation has continued. I think, for example, there was
Speaker 1: frustration with say the way Iran sanctions limited the access
Speaker 1: to healthcare in Iran during coronavirus, and so I think
Speaker 1: there is a lot of willingness to think more about
Speaker 1: the humanitarian impact. The Treasury Department uh in at the
Speaker 1: end of last year actually issue this kind of comprehensive
Speaker 1: sanctions reviews. So when by the administration came in, they said,
Speaker 1: we're going to rethink how we do sanctions, and one
Speaker 1: of the things that they did was much more focused
Speaker 1: on limiting mean humanitarian impact, and I think you've seen
Speaker 1: it in some way with a measure so far, they
Speaker 1: could have carve outs, say related to COVID. At the
Speaker 1: same time, ultimately, when you're causing these massive slides in
Speaker 1: the country's currency, or targeting its biggest banks or even
Speaker 1: as central bank and resulting in massive capital controls and
Speaker 1: interest rates going off, there's no way to contain the
Speaker 1: humanitarian impact. My hope is that these sanctions are short
Speaker 1: enough that the humanitarian impact doesn't kind of ripple through
Speaker 1: or set in it on. Doubted, they leave long term
Speaker 1: scars on the Russian economy, which I think is very troubling.
Speaker 1: I mean, even something like you can't undo these things overnight.
Speaker 1: If there's there was some administration officials I've talked about
Speaker 1: how one of the goals of the sanctions is to
Speaker 1: is causing inflation, and so these things really do have
Speaker 1: long term effects, and there's I guess it's kind of
Speaker 1: like hystorys hystoricist or something where like it's it's very
Speaker 1: hard to undo. So for example, if you cut off
Speaker 1: the bank's corresponding bank accounts, the banks will cut them off,
Speaker 1: but then re establishing them is like a one by
Speaker 1: one resigning the deal. And so these things will have
Speaker 1: long term effects and so people will feel them. Your
Speaker 1: question un escalating, So I hope there will. There'd be
Speaker 1: ways one could mitigate them, but unfortunately, especially I think
Speaker 1: those have with the speed of escalation, so far, those
Speaker 1: haven't been as top of mind. But we'll see it.
Speaker 1: There's a lot that could be done. So far, the
Speaker 1: United States has targeted banks, but it hasn't the banks
Speaker 1: it has targeted, it hasn't necessary targeted with the fullest extent.
Speaker 1: So for a kind of burbank, the biggest bank, it's
Speaker 1: only that correspondent bank account hasn't done the full blocking sanctions,
Speaker 1: and other banks just hasn't targeted. So for example, gas
Speaker 1: from bank hasn't been targeted with any measures so far,
Speaker 1: So in that sense, you can target those more banks,
Speaker 1: and there's potentially space for on the Central Bank, they
Speaker 1: actually haven't done the full blocking sanctions, so potentially they
Speaker 1: could do a full blocking sanction, but on the market,
Speaker 1: so that could be a way to kind of tighten
Speaker 1: the screws. And there's the energy sanctions as we talked about,
Speaker 1: so those like you could just say you can't buy
Speaker 1: Russian oil and practice, you probably couldn't do that and practice.
Speaker 1: What they did there their on deal is they kind
Speaker 1: of said they required every country to gradually decrease its
Speaker 1: purchases in Iran, you know, in Iranian oil. So you
Speaker 1: would probably have to do something like that because otherwise
Speaker 1: it would be kind of I don't think any economy
Speaker 1: or kind of the global oil market could necessarily react
Speaker 1: that easily to a complete cut off. There's also other
Speaker 1: sectors you could target or other companies right now, because
Speaker 1: finance is so pervasive, you kind of like you can
Speaker 1: hit that you're hitting out the targets. So for example,
Speaker 1: I so the swift cut off and some of these
Speaker 1: finance kind of are making it harder for Russian airlines
Speaker 1: to pay for the leases of their aircraft. But so
Speaker 1: that's harming the Russian Russian airlines. But I'm not necessarily
Speaker 1: advocating a target in Russian airlines. But you could also
Speaker 1: just target Russian airlines directly, you know, like there's like ways,
Speaker 1: right now because of the effect of the financial sanctions,
Speaker 1: there's a sense that the entire Russian economies in turmoil.
Speaker 1: But you could also just target direct sectors, and there's
Speaker 1: other sectors that kind of have this ripple effect through
Speaker 1: the economy. For example, insurance is one of them. So
Speaker 1: as for example, targeting Russian insurance companies could make it
Speaker 1: harder for companies that need insurance to carry on their business.
Speaker 1: For example, like in the around case, the United States
Speaker 1: made it harder for oil tankers to get insured. But
Speaker 1: you need insurance to kind of dock in places in
Speaker 1: case something happens, and so then the Iranian government had
Speaker 1: to insure its own boats, and so you kind of
Speaker 1: there are ways you can kind of escalate by targeting
Speaker 1: more and more subsectors of the economy. So I'd say
Speaker 1: those are some of the main areas that you could
Speaker 1: talk well, Uh, Eduardo is Tracy noted. I feel like
Speaker 1: that went by the blink of an eye and we
Speaker 1: could talk for hours. But that was fantastic. I learned
Speaker 1: a lot. I really really appreciate you coming out on
Speaker 1: a lot. Thank you so much for having that was fantastic.
Speaker 1: Thanks good, Thanks that was really good. Yeah, thank you.
Speaker 1: That was extremely informative, and you know, we just said it.
Speaker 1: I feel like we could have talked like two more
Speaker 1: hours very easily on this topic. Absolutely. I mean there
Speaker 1: are a number of things to pick out there, but
Speaker 1: I mean one, I thought it was really interesting what
Speaker 1: Edwardos said about the idea that even if you throw
Speaker 1: all this stuff at an economy, you can't you can't
Speaker 1: just turn it off. And of course, I mean there's
Speaker 1: the original sanctions question when it comes to dictators, which is,
Speaker 1: if they're not answering to a population which is actually
Speaker 1: feeling the economic pain, do they even care? And will
Speaker 1: sanctions have any policy impact? Um, that's there as well.
Speaker 1: And then the other thing was this idea that it's
Speaker 1: difficult to turn these things off once you get them going.
Speaker 1: I thought that was really interesting. I think that is
Speaker 1: a really important dimension to all of this because you know,
Speaker 1: obviously what we've seen over the last week. Like in theory,
Speaker 1: the hope is that okay, this imposes significant pain in
Speaker 1: it UH, that at some point Putin decides to turn around,
Speaker 1: Goes removes forces from Ukraine. That's the hope that there's
Speaker 1: some sort of peace and end of UH fighting, even
Speaker 1: if you're start to turn these off. However, we've seen
Speaker 1: such a dramatic move over the last several days. If
Speaker 1: companies just saying, you know we talked about in the beginning,
Speaker 1: washing their hands, not wanting to do business, it seems
Speaker 1: very hard to imagine what restoring the status, you know,
Speaker 1: getting back to ten days ago, not just of the
Speaker 1: legal regime, but of the various corporate activity that was
Speaker 1: taking place in Russia. It seems essentially unfathomable almost at
Speaker 1: this point to go back. So then the question is like, well,
Speaker 1: how much of a carrot is there still to offer
Speaker 1: if it's going to be such a long haul just
Speaker 1: to get back to you know what the middle of
Speaker 1: February look like. Absolutely, And I mean we haven't even
Speaker 1: touched on E s G considerations, but it does feel like, Okay,
Speaker 1: you can't necessarily turn sanctions on and off with the
Speaker 1: switch of a button because people have compliance departments, and
Speaker 1: you know they tend the people who work in compliance
Speaker 1: tend to be cautious people. Uh. And then secondly, what
Speaker 1: does this actually mean for E s G? Because even
Speaker 1: if you remove sanctions, there could be plenty of investors
Speaker 1: and companies out there who still don't want to invest
Speaker 1: in Russia because of previous behavior, and we're already seeing
Speaker 1: some inklings of that in the market. Yeah, companies have
Speaker 1: plants departments, they also have PR departments, and I think
Speaker 1: that's going to be now for real. That's going to
Speaker 1: be another big factor of like, well, do we want
Speaker 1: to go back in after this for PR reasons alone,
Speaker 1: or is it better to just not have anything to
Speaker 1: do with the country. Number of companies maybe having tasked
Speaker 1: themselves that question. I also thought it was interesting like
Speaker 1: even on like um, this sort of like the technical
Speaker 1: aspects of financial sanctions, the loss of correspondent banking for
Speaker 1: spur Bank, as you know that it's like easy to
Speaker 1: turn them off, but then you need to write new
Speaker 1: deals to bring them back on. And so to the
Speaker 1: extent that the sanctions the removal of sanctions is hopefully
Speaker 1: carrot to end the war in a short period of time,
Speaker 1: there's gonna be something that you know, can realistically be
Speaker 1: regained for them to have that effect. Yeah, exactly. Um well,
Speaker 1: I mean either way, I feel like we're going to
Speaker 1: have a lot more episodes on this topic. Um yeah,
Speaker 1: it definitely feels like, Okay, shall we leave it there.
Speaker 1: Let's leave it there, all right. This has been another
Speaker 1: episode of the All Thoughts podcast. I'm Tracy Alloway. You
Speaker 1: can follow me on Twitter at Tracy Alloway and I'm
Speaker 1: Joe Why Isn't All? You can follow me on Twitter
Speaker 1: at The Stalwart. Follow our guests on Twitter at Ward
Speaker 1: Sara Vale He's at E s V. Follow our producer
Speaker 1: Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg
Speaker 1: head of podcast Francesco Levi at Francesca Today, and check
Speaker 1: out all of our podcasts at Bloomberg under the handle
Speaker 1: at podcasts. Thanks for listening, O