None of the BRIC countries Brazil, Russia, India, China and South Africa put sanctions on Russia even though most of the world shuns the country. Let's recap where we are.
Global Isolation Impossible
The US and EU have tried mightily to isolate Russia, even to the point of a de facto but unrecognized default on US dollars.
Yet, total isolation is impossible, says Eurointelligence founder Wolfgang Münchau in a A BRIC, Impenetrable to Sanctions.
Remember the Brics? This acronym stood for Brazil, Russia, India, China and South Africa. They are not strategic allies of Russia. But they, and many other countries, will continue to trade with Russia.
The west, meanwhile, has taken the biggest gamble in the history of economic warfare. We have frozen the assets of the Russian central bank.
But we did not think this through. For a central bank to freeze the accounts of another central bank is a really big deal. Economically, what this means is that the entire transatlantic west has defaulted on our most important asset: our fiat money.
With this one sanction, we have done all of the following: undermined trust in the US dollar as the world’s main reserve currency; forestalled any challenge the euro might ever make; reduced the creditworthiness of our central banks; encouraged China and Russia to bypass the western financial infrastructure; and turned bitcoin into a respectable alternative transaction currency. At least the blockchain is not going to default on you.
Now consider what the Chinese will make of our sanctions. The Chinese government knows that its large exposure to US assets is equally at risk. What the US did to President Putin over Ukraine can be done to President Xi over the Uyghurs. The process of de-dollarization will take time. But China is never in a hurry.
As a direct result of these decisions, we have turned the dollar and the euro, and everything that is denominated in those currencies, into de facto risky assets. The probability of default of a dollar or euro denominated asset can no longer be credibly put at zero. With a single decision, we have created a tail risk.
Was it Worth It?
To answer that question, consider another set of questions
- Is Putin still in power? Yes
- Is the EU still dependent on Russian energy? Yes
- Did sanctions help drive Russia into China's arms? Yes
- Is Russia truly globally isolated? No
- Did the Fed illegally violate its constitutional Mandate? Yes
- Did the US force Russia into default even as Russia tries to pay creditors? Yes
- Can Russia survive with the sanctions? Yes, easily
- Is China the big winner in this? Yes
Münchau concludes "We are resorting to the only problem-solving method we know: kicking the can down the road. Until we hit a brick wall."
Where We Are
- The US did not default on interest payments, rather it stole the dollar reserves of another country.
- The EU froze Putin's and some Russian oligarch euro-denominated assets, a far less stringent, yet still severe measure.
- Points number one and two undermine faith in fiat currency reserves.
- A Russia Bond Default Coming Up and What It Means
- Russia Can Easily Survive, Perhaps Even Thrive, Isolated From the West
- US Sanction Policy Drives China Into Russia's Loving Arms
Unprecedented Actions May Have Just Started a Global Currency Crisis
Collectively, the Unprecedented Actions May Have Just Started a Global Currency Crisis
Perhaps we are not there yet, but the stage is set. And what have we achieved but more inflation?
This material is based upon information that Sitka Pacific Capital Management considers reliable and endeavors to keep current, Sitka Pacific Capital Management does not assure that this material is accurate, current or complete, and it should not be relied upon as such.
Recommended Content
Editors’ Picks
EUR/USD eases below 1.1000 ahead of German inflation data

EUR/USD is trading below 1.1000, losing its upside traction in the European session on Wednesday. The pair is holding steady, as the US Dollar finds its feet despite a sell-off in the US Treasury bond yields. Traders stay cautious ahead of the German inflation and US GDP data.
GBP/USD retreats below 1.2700 as US Dollar decline stalls

GBP/USD is falling back below 1.2700, extending its retreat from multi-month highs in European trading on Monday. The pair fails to find any inspiration from BoE Governor Bailey's hawkish comments, as the US Dollar looks to stabilize ahead of top-tier economic data and Fedspeak.
Gold price retreats from multi-month peak as USD stages a modest recovery ahead of US GDP

Gold price (XAU/USD) struggles to capitalize on its intraday gains to the $2,052 area and retreats from a near seven-month top touched earlier this Wednesday.
Bitcoin price could touch $41,000 in December, analyst predicts bullish breakout

Bitcoin worth $1 billion has been withdrawn from exchanges in the last two weeks. The SEC asked for public feedback on Franklin Templeton’s Spot Bitcoin ETF, fueling anticipation of approval.
Germany CPI Preview: Inflation set to ease further, not necessarily negative for the Euro Premium

The Federal Statistical Office of Germany (Destatis) will release inflation data on Wednesday at 13:00 GMT. The annual German Consumer Price Index (CPI) is expected to rise 3.5% in November, down from the 3.8% increase reported in October.