WEBVTT - This Is What Sanctions Can Do to the Russian Economy 0:00:11.039 --> 0:00:15.480 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:15.560 --> 0:00:20.200 I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, our 0:00:20.320 --> 0:00:24.560 last episode was of course with a Saltan postar, and 0:00:25.000 --> 0:00:29.040 we talked quite a bit about the sanctions, the sort 0:00:29.040 --> 0:00:32.680 of the economic pressure that the US and Europe are 0:00:32.680 --> 0:00:36.680 putting on Russia over the war. However, it really seems 0:00:36.720 --> 0:00:39.760 like there's a lot more to dive into with respect 0:00:39.760 --> 0:00:43.360 to the mechanics and power of the sanctions themselves. Oh 0:00:43.400 --> 0:00:47.120 my gosh, I'm getting I'm getting flashbacks to doing international 0:00:47.159 --> 0:00:51.159 relations stuff at university. But yes, there's a lot to 0:00:51.280 --> 0:00:54.920 do and say when it comes to sanctions, And of course, 0:00:55.240 --> 0:00:59.240 the the overarching question has always been do they actually 0:00:59.360 --> 0:01:01.840 make much of a difference. And on the one hand, 0:01:01.880 --> 0:01:05.160 what we've seen in the past, um I guess week 0:01:05.400 --> 0:01:08.759 or so is that they can be very dramatic and clearly, 0:01:09.319 --> 0:01:11.400 you know, in the space of a few days, the 0:01:11.480 --> 0:01:14.680 US and its allies has basically created a financial crisis 0:01:14.840 --> 0:01:17.720 in Russia. But on the other hand, Russia is still 0:01:17.800 --> 0:01:21.440 invading Ukraine, and there's the question of what happens next 0:01:21.640 --> 0:01:25.560 now that you've ratcheted up this kind of financial pressure, right, 0:01:25.800 --> 0:01:29.000 And there's the fact that even with the sanctions, Russia 0:01:29.200 --> 0:01:34.119 is getting tons of cash every single day, largely from 0:01:34.120 --> 0:01:38.080 a Germany and other Central European players who are deeply 0:01:38.120 --> 0:01:42.040 reliant on Russian energy, in particular natural gas, but also 0:01:42.160 --> 0:01:45.959 call which of course raises the question of ken European 0:01:45.959 --> 0:01:49.960 countries can the U S impose effective sanctions that accomplish 0:01:50.040 --> 0:01:55.080 something against Russia when at the same time particular Europe 0:01:55.160 --> 0:01:59.920 is so dependent on Russian exports. Absolutely, I think having 0:02:00.040 --> 0:02:04.840 a big commodities exporter involved here obviously complicates everything, especially 0:02:04.880 --> 0:02:07.280 at a time when people are worried about inflation. But 0:02:07.360 --> 0:02:09.440 the other thing I will say, and I think I 0:02:09.480 --> 0:02:12.079 mentioned this on the episode with Sultan, but the other 0:02:12.160 --> 0:02:16.320 interesting thing here is people have been reacting preemptively to 0:02:16.919 --> 0:02:23.520 the threat of sanctions, so sort of voluntarily self sanctioning themselves. 0:02:23.520 --> 0:02:27.440 And in fact, on on the day after the invasion 0:02:27.840 --> 0:02:31.400 officially began, we saw a lot of people in the 0:02:31.440 --> 0:02:35.519 market just step away from Russian assets altogether simply because 0:02:35.560 --> 0:02:38.440 they didn't know what was and wasn't going to be impacted. 0:02:38.480 --> 0:02:41.160 And to some extent that's continued today. So yes, we 0:02:41.200 --> 0:02:45.800 still have Europe in particular Germany importing a lot of energy. 0:02:45.840 --> 0:02:48.640 But we've seen some other players, you know, some commodities 0:02:48.639 --> 0:02:54.520 traders in Singapore for instance, voluntarily step away from the market. Yeah. Absolutely. 0:02:54.600 --> 0:02:57.120 And then there's another element which is also sort of 0:02:57.200 --> 0:03:01.799 volunteer wish is just not necessarily fear sanctions, but companies 0:03:01.840 --> 0:03:03.960 just deciding, you know what, we're going to wash our 0:03:04.000 --> 0:03:07.560 hands of anything to do with Russia. And yeah, it's 0:03:07.600 --> 0:03:12.160 pretty striking, this sort of like domino or cascading effect 0:03:12.200 --> 0:03:15.239 of companies saying we just don't want to have any involvement, 0:03:15.520 --> 0:03:17.959 we want to completely walk away. You know, I don't 0:03:18.000 --> 0:03:21.080 think the Russian economy has boomed in recent years, so 0:03:21.120 --> 0:03:23.639 it's not as though, you know, perhaps this is not 0:03:23.760 --> 0:03:25.960 a huge source of revenue and profits for a lot 0:03:25.960 --> 0:03:28.520 of these companies. But it is really striking to see 0:03:28.520 --> 0:03:32.720 so many corporate interests abandoning the Russian economy right now, 0:03:32.960 --> 0:03:38.480 even apart from like formal sanctions related activity. Absolutely, so 0:03:38.520 --> 0:03:41.400 many different threads to pull here, that's key. And as 0:03:41.440 --> 0:03:45.040 long as uh, the US and the rest of the 0:03:45.080 --> 0:03:47.440 rest of NATO does not want to get involved directly 0:03:47.600 --> 0:03:52.119 militarily for obvious reasons, then of course sanctions and other 0:03:52.880 --> 0:03:56.840 related things become the primary means of putting pressure on Russia, 0:03:57.200 --> 0:04:00.600 So we have to dive into the sanctions, how they work, 0:04:00.640 --> 0:04:03.760 and what they accomplish. Further, we're going to be speaking 0:04:03.840 --> 0:04:07.240 with a sanctions researcher a lot of background in this area. 0:04:07.280 --> 0:04:10.920 We're gonna be speaking to Eduardo se Eduardo, thank you 0:04:11.000 --> 0:04:13.040 so much for joining us, Thank you so much for 0:04:13.080 --> 0:04:18.839 having So why don't we start off big picture? You know, what, 0:04:19.080 --> 0:04:21.640 in your view are the key elements. There have been 0:04:21.720 --> 0:04:24.200 tons of announcements really over the last week. What are 0:04:24.240 --> 0:04:26.800 the key most important things in your view that have 0:04:26.800 --> 0:04:29.200 been announced so far. I'd say there are a few 0:04:29.240 --> 0:04:31.240 of them. I think the big one to start is 0:04:31.600 --> 0:04:35.400 the action against the Russian Central Bank that was initially 0:04:35.839 --> 0:04:39.520 discussed as kind of a final escalatory move, and the 0:04:39.520 --> 0:04:42.000 fact that it came so early in the escalation is 0:04:42.040 --> 0:04:44.800 a sign of how serious governments on both sides of 0:04:44.839 --> 0:04:47.880 the Atlantic were about sanctioning Russia. But I think the 0:04:47.920 --> 0:04:51.120 other big ones, the other biggest one, i'd say, are 0:04:51.640 --> 0:04:54.680 the banking sanctions. Those are the ones that have the 0:04:54.760 --> 0:04:59.320 most defeat immediate effect, and they have been quite aggressive, 0:04:59.360 --> 0:05:02.400 and there's still room for escalation there, but the spur 0:05:02.480 --> 0:05:05.680 Bank can VTB where the two biggest targets there, and 0:05:05.720 --> 0:05:09.040 they were the kind of most extreme type of especially 0:05:09.040 --> 0:05:11.440 in the VTP side, the most extreme type of sanction 0:05:11.720 --> 0:05:14.560 that the United States can impose. I'd say there are 0:05:14.800 --> 0:05:18.120 other ones that are very notable, but their effect is 0:05:18.160 --> 0:05:21.719 in kind of the overnight panic that we're seeing, so 0:05:21.760 --> 0:05:24.080 they're not the kind of em causing ones. But I 0:05:24.120 --> 0:05:27.800 think there's other notable steps which are remarkable in terms 0:05:27.839 --> 0:05:30.560 of how the United States thinks about sanctions. So, for example, 0:05:30.839 --> 0:05:34.599 things like the United States is currently leading this global 0:05:34.800 --> 0:05:39.240 export control initiative basically meant to cripple the arrival of 0:05:39.320 --> 0:05:41.960 inputs for the Russian industry. Each country is doing them 0:05:42.000 --> 0:05:44.520 slightly differently, but it's kind of a remarkable thing because 0:05:44.640 --> 0:05:48.359 we tend to think of US sanctions as primarily focused 0:05:48.640 --> 0:05:52.720 on financial mechanisms, but here from the start they've targeted 0:05:52.960 --> 0:05:56.440 kind of physical inputs and supply chains as well. So 0:05:56.680 --> 0:05:58.760 this actually brings me to the question that I want 0:05:58.839 --> 0:06:00.599 to ask you, and I think it's kind of a 0:06:00.600 --> 0:06:03.240 basic question, but one of those basic questions that probably 0:06:03.320 --> 0:06:08.920 has an extremely long answer, But how does sanctions policy 0:06:09.000 --> 0:06:13.640 making actually happen. So you know, someone sits in a room, 0:06:13.640 --> 0:06:17.479 presumably there's a committee or something, and they look at 0:06:17.560 --> 0:06:23.039 the available suite of previous sanctions actions that they've done 0:06:23.040 --> 0:06:26.680 on regimes like Iran or Hong Kong or whatever, and 0:06:26.800 --> 0:06:30.560 try to decide about what would be most effective or 0:06:30.640 --> 0:06:35.320 most applicable to the Russian situation. How exactly does it work? Yeah, 0:06:35.600 --> 0:06:39.640 I think that's accurate description. In the United States sanctions 0:06:39.800 --> 0:06:42.839 the kind of two offices that the two agencies that 0:06:42.880 --> 0:06:46.320 handle sanctions are the Treasury Department and the State Department. 0:06:46.560 --> 0:06:48.919 The Treasury Department, i'd say, is the more in the 0:06:48.960 --> 0:06:52.599 weeds technical department. So you probably heard in these days about, 0:06:52.640 --> 0:06:55.520 oh fact, the Office of Foreign Asset Control that is 0:06:55.680 --> 0:07:00.040 within the Treasury Department, whereas the State Department handles a 0:07:00.040 --> 0:07:03.159 as sanctions, it's specifically handles So for example, the decision 0:07:03.160 --> 0:07:04.920 to sanction ords from the other day, it was actually 0:07:04.960 --> 0:07:07.880 taken by the State Department rather than Treasury Department. But 0:07:07.880 --> 0:07:10.560 that's kind of a quirk of u S sanctions long 0:07:11.000 --> 0:07:13.600 But I'd say it's a kind of trial and error 0:07:13.640 --> 0:07:17.680 and discovery process. So people are describing the sanctions these 0:07:17.760 --> 0:07:21.440 days as unprecedented. I wouldn't say they're unprecedented in the 0:07:21.480 --> 0:07:24.400 sense that they have never done before. What's unprecedented, it's 0:07:24.640 --> 0:07:27.360 kind of the speed and impact and kind of how 0:07:27.440 --> 0:07:30.440 cooes together they've been and how much they've shaken the 0:07:30.520 --> 0:07:34.720 Russian economy. There are precedents for what the United States 0:07:34.720 --> 0:07:37.040 has done. So for example, the bank, the Central Bank 0:07:37.080 --> 0:07:39.680 of Iran has previously been sanctioned, so this is the 0:07:39.720 --> 0:07:42.640 first time a central bank is sanctions. So there are 0:07:42.800 --> 0:07:45.800 in that sense, there are I would say there is 0:07:45.880 --> 0:07:49.040 kind of a sense of escalatory measures you can take. 0:07:49.080 --> 0:07:52.640 If you think of sanctions, the most traditional kind of 0:07:52.680 --> 0:07:57.160 basic form of sanction is the individual, especially the so 0:07:57.280 --> 0:08:00.200 called STN sanctions, So it's against an individual, and so 0:08:00.280 --> 0:08:03.120 that basically means they don't have access to their assets. 0:08:03.120 --> 0:08:05.920 Their assets are frozen. So in the basic sense, your 0:08:05.960 --> 0:08:08.560 bank accounts are frozen and you probably can't come to 0:08:08.600 --> 0:08:11.360 the United States. And that's for example, what they did 0:08:11.440 --> 0:08:14.119 against the putin the other day. That's kind of the 0:08:14.160 --> 0:08:17.600 most basic building block. Usually that's what you see when 0:08:17.600 --> 0:08:20.880 you hear in the news sanctions are being posed in 0:08:21.000 --> 0:08:24.640 response to a crisis. That's more likely than not what 0:08:24.720 --> 0:08:27.840 people are talking about because they're pretty easy to impose 0:08:28.000 --> 0:08:31.280 and they don't have massive macroeconomic effects, and then from 0:08:31.320 --> 0:08:33.320 there you can kind of move up. You can put 0:08:33.360 --> 0:08:36.479 these so called blocking sanctions where you block the assets 0:08:36.520 --> 0:08:40.040 on corporations, and that can have a significant effect. So 0:08:40.120 --> 0:08:42.560 for example, that kind of depends on the target. So 0:08:42.840 --> 0:08:45.600 if you're sanctioning VTB, which is a major Russian bank, 0:08:45.760 --> 0:08:48.719 it will clearly have a massive effect. If you're sanctioning 0:08:49.080 --> 0:08:51.800 in the around case, it was often sanctioned small kind 0:08:51.800 --> 0:08:55.040 of satellite entities that we're doing something in the nuclear 0:08:55.080 --> 0:08:58.880 program that doesn't necessarily have a macroeconomicist location, and then 0:08:58.880 --> 0:09:01.400 from there you can kind of move bond and people. 0:09:01.880 --> 0:09:05.600 There is a lot of innovation in sanctions from program 0:09:05.600 --> 0:09:08.880 to programs. So for example, the Russian sanctions that had 0:09:08.880 --> 0:09:13.320 been imposed were an attempt to break out of the 0:09:13.440 --> 0:09:17.880 normal escalation ladder. So the sense there was these blocking 0:09:17.920 --> 0:09:21.880 sanctions were would be too too blunt and would have 0:09:21.920 --> 0:09:25.560 too much of a backlash. And the idea there, for example, 0:09:25.559 --> 0:09:28.600 as they impost sectoral sanctions, so rather than targeting an 0:09:28.720 --> 0:09:32.079 entire company, they just imposed limitations on what those companies 0:09:32.120 --> 0:09:35.040 could do. Americans couldn't buy certain forms of debt and 0:09:35.040 --> 0:09:38.319 equity from those companies, or couldn't provide certain services, and 0:09:38.360 --> 0:09:40.440 so that's just the way you can refine it. But 0:09:40.480 --> 0:09:42.760 I would say more generally, there is a sense of 0:09:43.480 --> 0:09:46.520 depending on the seriousness of the situation, you can kind 0:09:46.520 --> 0:09:49.160 of move up the ladder and i'd say Central Bank, 0:09:49.240 --> 0:09:52.160 and then the swift measure that has been in the 0:09:52.240 --> 0:09:54.280 news would be towards the upper end, at least in 0:09:54.320 --> 0:09:59.200 the financial sanctions side. So you know, obviously there perhaps 0:09:59.240 --> 0:10:01.960 it was some whole that sanctions or the threat of 0:10:02.040 --> 0:10:06.040 sanctions at least would have some sort of deterrent effect 0:10:06.160 --> 0:10:09.320 against this war. It hasn't happened. The war has happened. 0:10:09.679 --> 0:10:14.079 In general, it feels that those sanctions often get placed 0:10:14.320 --> 0:10:17.320 and stay for a long time and often don't seem 0:10:17.360 --> 0:10:20.440 to it's not obvious what the effect is, but what 0:10:20.679 --> 0:10:24.360 is the theory of what the sanctions are supposed to 0:10:24.440 --> 0:10:29.800 accomplish and how so The basic theory, especially now that 0:10:30.000 --> 0:10:33.400 kind of the deterrent theory is off the table, is 0:10:33.440 --> 0:10:38.199 that sanctions are a bargaining tool. You impose certain costs 0:10:38.240 --> 0:10:41.199 and say, if you acceed to our demand, we will 0:10:41.200 --> 0:10:44.560 stop imposing these costs. So it's the basic theory is 0:10:45.280 --> 0:10:50.640 pretty simple, but it gets very complicated very fast because 0:10:51.080 --> 0:10:54.560 the ask is not always clear, and I think the 0:10:54.640 --> 0:10:57.280 off ramp is not always clear, so people will kind 0:10:57.280 --> 0:11:00.240 of make up new new goals and new ass says 0:11:00.280 --> 0:11:03.960 they go. So it's very hard, especially in kind of 0:11:04.000 --> 0:11:06.920 a live conflict, to know what you're asking for. Some 0:11:07.000 --> 0:11:09.520 of the Russia case, now, one of the big challenges 0:11:09.559 --> 0:11:13.080 will be what would we consider enough for us to 0:11:13.120 --> 0:11:17.360 impose the sanctions, And as of now, I truly don't know. 0:11:17.400 --> 0:11:20.800 I feel like there isn't a unified transatlantic view on 0:11:21.000 --> 0:11:24.040 what what would be enough for lifting the sanctions. And 0:11:24.320 --> 0:11:27.920 the other thing which is sometimes ignored is that you 0:11:27.960 --> 0:11:30.000 have to hold up your own end of the bargain. 0:11:30.120 --> 0:11:33.640 So say say we said in order to lift sanctions 0:11:34.080 --> 0:11:37.040 or you would need Russia would need to return to 0:11:37.080 --> 0:11:40.960 the situation we had on Jan one, then the United 0:11:41.000 --> 0:11:43.560 States and Europe will need to actually deliver the relief 0:11:43.600 --> 0:11:49.320 from sanctions effectively and basically try to restore Russia's economy 0:11:49.360 --> 0:11:53.559 to one. And that that that is very challenging because 0:11:53.920 --> 0:11:57.719 sanctions the United States issues these regulations. But then it's 0:11:57.760 --> 0:12:01.560 the businesses that decide how to react with them. So, 0:12:01.600 --> 0:12:06.840 for example, BP has decided to exit Russia, the United 0:12:06.840 --> 0:12:12.439 States can't necessarily make BP return to Russia if Russia complies, 0:12:12.679 --> 0:12:17.320 So it's often can be very challenging. The private sector 0:12:17.360 --> 0:12:20.760 is hyper challenging to do the carrot side of the sanctions, 0:12:20.760 --> 0:12:24.079 whereas the stick is kind of is very quick. Companies 0:12:24.080 --> 0:12:27.840 are much more responsive to the threat of US punishment 0:12:28.080 --> 0:12:31.240 than they are too kind of requests by the United 0:12:31.280 --> 0:12:34.520 States to rekindle relations during the Irround deal. When the 0:12:34.600 --> 0:12:37.480 Around deal was passed, then Secretary of State carry would 0:12:37.640 --> 0:12:41.400 actually go around Europe and speak to banks and say, 0:12:41.600 --> 0:12:46.000 we've lifted the sanctions, please rekindle your business in Irun, 0:12:46.520 --> 0:12:49.480 and the bank's kind of bulked at it for all 0:12:49.520 --> 0:12:52.720 sorts of reasons, because it's very difficult to convince the 0:12:52.720 --> 0:12:55.000 other side that you're doing your best, and then they 0:12:55.040 --> 0:12:57.120 feel like they kind of got a raw deal because 0:12:57.160 --> 0:12:59.920 they complied that they didn't necessarily get all the bend 0:13:00.040 --> 0:13:03.440 as they were promised. So this is exactly what I 0:13:03.440 --> 0:13:06.760 wanted to ask you, because again, even before a lot 0:13:06.800 --> 0:13:10.800 of these sanctions were formally announced, we did see various 0:13:10.920 --> 0:13:15.880 companies financial institutions start to step away from the market, 0:13:15.960 --> 0:13:19.880 and you know, suddenly you have Russian companies, um you know, 0:13:19.920 --> 0:13:24.079 whether they're logistics networks or commodities exporters, things like that, 0:13:24.520 --> 0:13:27.400 unable to get credit from their banks even though technically 0:13:27.400 --> 0:13:31.320 nothing has happened yet. How much of that friction is 0:13:31.840 --> 0:13:36.559 I guess, beneficial to sanctions actually being implemented and enforced 0:13:37.160 --> 0:13:39.679 versus how much of it is unhelpful in the sense 0:13:39.720 --> 0:13:44.840 that it it sort of accidentally escalates the situation and may, 0:13:44.960 --> 0:13:48.079 as you just pointed out, be difficult to reverse if 0:13:48.080 --> 0:13:52.520 the deal is actually reached. I think it's a very 0:13:52.600 --> 0:13:56.800 much a double edged sword. It's it's definitely helpful because 0:13:57.160 --> 0:14:01.600 it's difficult to fully calibrate ones actions and in that 0:14:01.640 --> 0:14:04.520 sense you can kind of maximize the shock and all 0:14:04.840 --> 0:14:07.560 in that sense, and in that sense it's it's a 0:14:07.600 --> 0:14:10.959 positive I guess. I mean, it's it's nice to know 0:14:11.040 --> 0:14:15.440 that the United States doesn't necessary if everyone imposed the 0:14:15.559 --> 0:14:18.640 sanctions followed the exact letter of the law of sanctions, 0:14:18.640 --> 0:14:21.680 sanctions would be kind of an unwieldy measure because you 0:14:21.680 --> 0:14:24.440 would actually have to think through every single thing you're 0:14:24.440 --> 0:14:27.080 trying to block. So in that sense, it would be 0:14:27.120 --> 0:14:30.280 impossible to administer a program where you did that. There 0:14:30.320 --> 0:14:33.840 have been cases where companies are extremely forward leaning in 0:14:33.920 --> 0:14:37.520 terms of interpreting things exactly, and that can be counterproductive. 0:14:37.760 --> 0:14:39.960 On the other hand, I think it's a it's a 0:14:39.960 --> 0:14:44.560 big concern the overcompliance concerned, as you said, first of all, 0:14:44.600 --> 0:14:48.000 because things can very quickly spin out of control. I mean, 0:14:48.280 --> 0:14:50.240 in a sense, it feels if there was all this 0:14:50.360 --> 0:14:54.000 kind of excitement about how much was happening in Russia, 0:14:54.040 --> 0:14:56.640 but and Russia kind of I would say, in this 0:14:56.720 --> 0:15:00.680 situation made it warranted because it continued with it's uh, 0:15:00.880 --> 0:15:04.040 it's advance. But in a situation where Russia had paused 0:15:04.280 --> 0:15:07.000 and the bank runs had continued, you would have had 0:15:07.000 --> 0:15:10.280 a difficult, difficult situation. And I think it's very hard 0:15:10.320 --> 0:15:13.520 on the back end to incredibly deliver the relief. So 0:15:13.680 --> 0:15:16.960 I think it's very difficult. I think the current situation 0:15:17.080 --> 0:15:19.840 is kind of a unique one because at least not 0:15:20.080 --> 0:15:23.320 for now, everyone is hoping that this confrontation will be 0:15:23.360 --> 0:15:27.120 fairly short. People don't see this as necessarily an attrition 0:15:27.640 --> 0:15:31.840 along like multi year Iran type situation, So I think 0:15:32.000 --> 0:15:34.760 people are there is a concern over compliance can be 0:15:34.800 --> 0:15:37.600 a good way to very quickly dial up and then 0:15:37.640 --> 0:15:40.560 dial down. But if you're trying to be more calibrated 0:15:40.560 --> 0:15:43.080 and negotiate, I think you would be concerned. So I 0:15:43.520 --> 0:15:46.680 think it's a huge problem. And it's always easy to 0:15:46.720 --> 0:15:50.800 welcome over compliance at the front and then forget that 0:15:50.880 --> 0:16:09.920 you'll have to deal with on the back. So at 0:16:10.000 --> 0:16:15.360 this point, because we discussed, obviously the deterrent element didn't work, 0:16:15.560 --> 0:16:18.400 and so in theory, you know, you continue to apply 0:16:18.520 --> 0:16:23.320 stress and continue to offer out the chance of okay. 0:16:23.680 --> 0:16:27.720 Hopefully in theory this this gets reversed if Russia reverses 0:16:27.800 --> 0:16:32.920 its actions. What about just the uh, the persistent damage. 0:16:33.000 --> 0:16:35.720 I mean, yes, the Russia is going to continue to 0:16:35.760 --> 0:16:38.920 have at least for now cash coming in through the 0:16:39.040 --> 0:16:42.520 energy market. Could it be that the sanctions just imposed 0:16:42.560 --> 0:16:46.040 such weakness that it has to it has to backtrack 0:16:46.160 --> 0:16:49.560 in some way because the damage compounds to its economy, 0:16:49.840 --> 0:16:52.240 compounds to its banking system and so forth. Could it 0:16:52.280 --> 0:16:55.440 be that the penalty the sanctions weapon is so harsh 0:16:55.520 --> 0:16:59.160 that it essentially forces Russia is forced into some sort 0:16:59.200 --> 0:17:01.800 of reversal. It definitely could. I mean, I think that's 0:17:01.840 --> 0:17:04.640 the hope that it forces some sort of reversal, And 0:17:04.880 --> 0:17:09.399 as far as everything that's happened up to now, I'd say, 0:17:09.440 --> 0:17:11.960 if you're trying to impose pain to force a reversal, 0:17:12.040 --> 0:17:16.120 this you're getting what you wanted. And I mean, there's 0:17:16.160 --> 0:17:19.040 still more one can do, but it has been very 0:17:19.080 --> 0:17:21.560 successful the sanctions. I feels if it's kind of like 0:17:21.640 --> 0:17:24.520 people talk about kind of the economy in general. Bad 0:17:24.600 --> 0:17:27.280 things happened to economies all the time, but they don't 0:17:27.320 --> 0:17:30.800 just stop existing. They kind of address and moddel along. 0:17:30.960 --> 0:17:35.280 Like Russia defaulted, it kind of picked up the pieces 0:17:35.560 --> 0:17:38.520 it was bad, and they keep going. So sometimes I 0:17:38.520 --> 0:17:42.200 think during sanctions conversations, but in general there's the sense 0:17:42.240 --> 0:17:45.120 that there's like a final blow you're gonna deal, or 0:17:45.280 --> 0:17:49.200 some moments some point of no return. I read recently 0:17:49.359 --> 0:17:53.720 some really interesting comparisons of the Russia sanctions to the 0:17:53.760 --> 0:17:57.919 Iran and the Venezuela sanctions, and in that sense that 0:17:58.720 --> 0:18:02.679 those are concerning precedents because in those cases the country 0:18:02.800 --> 0:18:06.320 is kind of muddled along. So for example, Iran lost 0:18:06.400 --> 0:18:10.640 access to its reserves and it's still kind of had 0:18:10.680 --> 0:18:14.959 to consolidate. There was the economy shrank, but it kind 0:18:15.000 --> 0:18:18.040 of muddled along. It really energy became a smaller part 0:18:18.080 --> 0:18:22.320 of its economy, manufacturing mostly domestic focus became a bigger one, 0:18:22.720 --> 0:18:26.680 and it was able to kind of build some semblance 0:18:26.680 --> 0:18:29.280 of an economy that could work. In the Venezuela case, 0:18:29.800 --> 0:18:34.320 there were aggressive oil sanctions and really harmed the Venezula 0:18:34.359 --> 0:18:37.520 oil sector, but eventually the oil sector kind of came back. 0:18:37.560 --> 0:18:40.560 So in that sense, it's hard to imagine a situation 0:18:41.000 --> 0:18:44.640 where you kind of deal some final blow, in which 0:18:44.640 --> 0:18:48.000 case you have the country has no chance or no 0:18:48.160 --> 0:18:50.960 option but to negotiate. But at the same time you 0:18:51.000 --> 0:18:53.679 can inflict a lot of pain, and at least in 0:18:53.720 --> 0:18:56.800 the Iran case, the country has been willing to negotiate 0:18:56.840 --> 0:18:59.560 to get outside of sanctions. So in that sense you 0:18:59.600 --> 0:19:02.240 can define only use sanctions to get to do I 0:19:02.240 --> 0:19:04.840 would just say that the economic pain itself is not 0:19:04.960 --> 0:19:08.680 the only factor. That it ultimately comes down to politics. 0:19:08.720 --> 0:19:12.480 So what are the kind of internal constituencies that are 0:19:12.520 --> 0:19:14.920 willing to bargain and what can you Are you willing 0:19:14.920 --> 0:19:17.080 to accept what they have to offer, and can you 0:19:17.800 --> 0:19:21.440 give them what they want? So just on this note, 0:19:21.760 --> 0:19:25.679 you mentioned the idea of the US actually targeting specific 0:19:25.760 --> 0:19:30.600 sectors while trying to leave others, you know, relatively untouched, 0:19:30.640 --> 0:19:35.600 such as energy or commodities. How does that change I 0:19:35.600 --> 0:19:39.640 guess the efficacy of sanctions and what kind of impact 0:19:39.680 --> 0:19:42.520 would you expect that to have on the Russian economy. 0:19:42.560 --> 0:19:45.119 Would that be something like what we saw in Iran, 0:19:45.240 --> 0:19:48.159 where energy starts to become well, I guess in this 0:19:48.240 --> 0:19:51.679 case energy would become an even more important factor in 0:19:51.720 --> 0:19:54.840 the economy, or would you start to see Russia try 0:19:54.880 --> 0:19:58.680 to I don't know, offset some of the the impacts 0:19:58.680 --> 0:20:02.400 of the sanctions. First of all, the United It's true 0:20:02.440 --> 0:20:06.879 that the US and Europe stayed away from directly targeting energy, 0:20:07.119 --> 0:20:09.080 and they've kind of they've tried to be pretty explicit 0:20:09.119 --> 0:20:11.320 about it. So for example, in the United States case, 0:20:12.000 --> 0:20:16.640 they've added licenses which are basically exceptions the sanctions saying 0:20:16.720 --> 0:20:20.320 certain transactions are allowed. And for example, within the Russian 0:20:20.359 --> 0:20:24.320 Central Bank sanctions, within VTB and spur Bank they've allowed 0:20:24.640 --> 0:20:28.800 energy transactions. But I think in terms of kind of 0:20:28.800 --> 0:20:32.040 the over compliance and all that, I think it's very 0:20:32.119 --> 0:20:35.000 hard to say that the current sanctions aren't hitting energy. 0:20:35.040 --> 0:20:36.640 I think I was just seeing right before the show 0:20:36.680 --> 0:20:40.160 that Russian oil is trading at a discount. Financial institutions 0:20:40.200 --> 0:20:44.480 deals with commodities aren't as a forthcoming with letters of credit, 0:20:44.720 --> 0:20:49.240 and there was an announcement from shipping companies to that 0:20:49.320 --> 0:20:51.760 they're not they might be peeling away from energy. So 0:20:51.800 --> 0:20:55.639 in that sense, I think there will be an effect directly, 0:20:55.680 --> 0:20:59.440 I mean, compared to Iran, Russia's about thirty or so 0:20:59.600 --> 0:21:03.680 percent of it of its government budget comes from energy, 0:21:03.680 --> 0:21:06.200 whereas in the around case that was in the six 0:21:06.240 --> 0:21:09.840 piece of The interesting thing about thinking about the reliance 0:21:09.880 --> 0:21:12.159 on energy is that I mentioned kind of the big, 0:21:12.240 --> 0:21:15.240 big ticket sanctions, but some of the other ones that 0:21:15.240 --> 0:21:22.120 have been imposed are meant to target long term energy production. Uh. 0:21:22.800 --> 0:21:27.480 Some of these started actually, and the idea there was exactly, 0:21:27.640 --> 0:21:30.280 let's not target energy right now because we would be 0:21:30.320 --> 0:21:32.879 able to withstand it, but let's make it so Russia 0:21:32.920 --> 0:21:35.600 has more trouble getting the technology it needs, getting the 0:21:35.640 --> 0:21:38.280 funding it needs for its kind of frontier project. So 0:21:38.280 --> 0:21:42.639 in that sense, Russia might struggle with replacing its reserves, 0:21:42.760 --> 0:21:45.920 and in that sense energy might decline as a part 0:21:45.960 --> 0:21:48.160 of its economy just because it's not able to put 0:21:48.320 --> 0:21:51.879 put in the investment. In that context, the departure of 0:21:52.400 --> 0:21:56.720 it's part of companies like Shell and Equino or n 0:21:56.800 --> 0:22:01.320 VP might be potentially further law of kind of human 0:22:01.359 --> 0:22:04.760 capital or expertise that could harm the energy prospects of 0:22:04.760 --> 0:22:07.520 the Russian economy over the medium to long term. So 0:22:07.560 --> 0:22:09.040 I want to talk a little bit more about that 0:22:09.080 --> 0:22:12.040 because the introduction, you said, one of the things that 0:22:12.080 --> 0:22:15.159 you found striking. It's like, Okay, we all expect the 0:22:15.200 --> 0:22:20.320 financial sanctions, but this sort of export controls limiting Russia's 0:22:20.359 --> 0:22:24.880 access to factors of production, perhaps some intermediate stage goods 0:22:24.920 --> 0:22:28.879 that would really undermine Russian industry. What specifically has been 0:22:28.920 --> 0:22:32.080 announced in that respect, What are the areas of sort 0:22:32.080 --> 0:22:34.920 of our Russian economy, maybe be the energy or elsewhere 0:22:35.160 --> 0:22:38.560 they will really be affected by some of these new limitations. 0:22:39.240 --> 0:22:43.320 There's some differences between the US and the EU here. 0:22:43.560 --> 0:22:48.000 The United States said it's mostly focused on defense and aerospace, 0:22:48.720 --> 0:22:51.720 so it's specifically it mentioned so far that it planned 0:22:51.760 --> 0:22:55.560 to kind of limit inputs like semi conductors and lasers 0:22:55.560 --> 0:22:59.800 and other parts to the defense and aerospace. The European 0:23:00.040 --> 0:23:04.679 and seems more focused on a broader variety of of 0:23:04.720 --> 0:23:08.960 components targeting the energy sector as well. We've been coming 0:23:08.960 --> 0:23:12.000 at this very much from I guess the sort of 0:23:12.800 --> 0:23:16.040 external side, like from the perspective of the US and Europe. 0:23:16.040 --> 0:23:22.200 But what can Russia actually do here to offset sanctions impact? 0:23:22.280 --> 0:23:24.480 And of course there's been a lot of talk about 0:23:24.840 --> 0:23:28.280 what role China could play, um if any, in all 0:23:28.320 --> 0:23:30.320 of this, and the idea that maybe Russia can look 0:23:30.359 --> 0:23:33.960 to China for for some type of credit. So what 0:23:34.040 --> 0:23:37.560 sort of response might we expect here. The short term 0:23:37.560 --> 0:23:40.120 response is kind of what we saw the other day 0:23:40.160 --> 0:23:44.640 with the rays of raids and kind of the capital controls. 0:23:44.720 --> 0:23:49.120 Over time, I think it will be primarily about turning inward, 0:23:49.600 --> 0:23:54.040 kind of finding domestic sources of demand, and I mean 0:23:54.200 --> 0:23:57.240 the energy aside of it may change, but kind of 0:23:57.400 --> 0:24:01.080 encouraging capital to stay in. I think other sanctions we've 0:24:01.080 --> 0:24:03.520 seen in these days has been the targeting of the 0:24:03.560 --> 0:24:06.760 oligarchs and people close to Putin. The one potential scenario 0:24:06.840 --> 0:24:09.879 would be kind of a full repatriation to the extent 0:24:09.920 --> 0:24:12.080