Playing with fire
President Putin obviously bit off more than he can chew. Given his reckless gambling of Russia’s future, his under-estimation of Ukrainian resistance may simply make him only more dangerous to world stability and peace. His adventurist expedition into Ukraine has already created around half-a-million refugees and up-ended the global diplomatic and economic order; we must hope it does not end in a global military catastrophe. “We’re in a dangerous spot” says a Moscow-based defense analyst. As far back as 2018 Putin, fearing the slow decline of Russia as a world power, rhetorically asked: “Why do we need a world without Russia in it?”.
Far from the West ‘abandoning’ Ukraine, as one pro-Putin Russian journalist anticipated in advance of the invasion , the West has discovered a new and risky unanimity. Even Sweden broke its principle of not exporting arms to countries at war and decided to send 5,000 anti-tank weapons to Ukraine. Artis Pabriks, defense minister of Latvia, one of the Baltic states that some suggest would be next in Russia’s sights, has said “Europe must give Ukraine everything it asks for”. Everything?
A knife in a gunfight
Last Saturday, the US and Western allies agreed to put severe sanctions on Russia’s central bank ; the following day, in explicit retaliation, President Putin ordered Russia’s nuclear forces to be placed on ‘high alert’, although as the US magazine Time said: “The practical meaning of Putin’s order was not immediately clear”. It’s still not clear. While the US appears not to have responded in kind, Ukrainians (and others) worry that it’s bringing a knife to a gunfight.
Others are loading their guns, ratcheting up the tensions. Belarus, run by President Alexander Lukashenko, a close ally of Putin, claimed that a referendum conducted on Sunday “had seen enough public support for constitutional changes that would revoke the country’s neutrality and its nuclear-free status. The changes would allow Russia to station nuclear weapons on Belarusian soil”. This is playing with fire.
What impact does sanctioning Russia’s central bank have? In this fast-developing story it’s not yet entirely clear. It looks as though all its foreign exchange reserves ($630 billion at the last count ) are blocked, but Special Drawing Rights (or SDRs, the international reserve asset of the International Monetary Fund) and gold still seem to be available. Russia may own its foreign reserves but it doesn’t control them, as most of them are outside the country.
The rouble crashed more than 40% when the markets opened on Monday and the Russian central bank more than doubled interest rates, to 20%. It also banned foreigners from selling local securities, both efforts to shore up its currency and head off inflation.
As the rouble collapses, Russians will face much higher prices for imported goods. Russia imports “almost everything its citizens eat, wear, and use”. And the clouds are gathering over Russian banks — which and how many is still in doubt — who will be removed from the SWIFT international payments system, said the US, UK, Canada and EU on Saturday, to “ensure that these banks are disconnected from the international financial system and harm their ability to operate globally”. Cutting Russia out of the SWIFT system is a “financial nuclear option” according to the French finance minister, Bruno Le Maire , adding that “when you do have a financial nuclear weapon in your hands you do think carefully before using it”.
A double-edged sword
Sanctions may hurt Russia’s economy in the long-term, although according to Vladimir Solovyov, a Russian TV host (who has also been placed under sanctions), “we’ll endure it all. We’ll rebuild our own economy from scratch, an independent banking system, manufacturing and industry. We’ll rely on ourselves”. But it will hurt the West’s too. Higher prices for Russia’s fossil fuel, metals and grains exports will feed into higher costs-of-living for Western consumers — and completely disrupt plans by the US Federal Reserve and the Bank of England to raise interest rates to fight inflation. Indeed, the worry now becomes that a recession will hit, or even stagflation.
Russian exports of all commodities, including oil, gas, metals and grains, will be severely disrupted by these sanctions. Russia produces 10% of global oil and supplies 40% of Europe’s gas. It is the world’s largest grains and fertilisers exporter, its top palladium and nickel producer, the third-largest exporter of coal and steel, and fifth-largest wood exporter. This exclusion from world trade of substantial parts of the world supplier of one-sixth of all commodities is unprecedented. It has already pushed up the prices of these commodities, inadvertently punishing the West (which relies on them) and boosting Russia’s financial war-chest. For now — but how much longer? — the gas continues to flow. Russia may well decide that one form of retaliation might be to turn off the gas — but it’s in neither side’s interest to switch off the gas.
President Putin may not win on the battlefield of Kiev, but he may see a lot of damage inflicted on the West’s economy. As a senior figure of the financial services company Marex, which specialises in commodity trading, rhetorically asked the most recent edition of the UK’s Sunday Times, “who do sanctions really hurt, Russia or the consumer? One of the reasons sanctions unwound relatively quickly last time was the cost of raw materials for US carmakers spiked up”.
As Russia and the West overturn the apple cart of international trade one country has been relatively tight-lipped. More than 14% of Russia’s foreign exchange reserves are held in China, but would China want to provide that? China might then face sanctions of its own, cutting off access to Dollars and Euros. The Russian central bank has 2,299 tonnes of gold as part of its reserves, the fifth largest stockpile in the world, which is actually held inside Russia. Russia could try to sell some of this gold, but who would dare buy it? Russia’s central bank says it’s resuming gold buying from its domestic market, no doubt prompted by the sanctions. China has the money (the gold is valued at about $132 billion ) and the appetite, but would China pay the full current market price for the gold, or demand a discount from a ‘distressed’ seller? And China would probably be reluctant to buy the gold and leave it sitting inside Russia. Maybe China will invite Russia to join its Cross-Border Interbank Payment System (CIPS), which is a home-grown alternative to SWIFT. But the CIPS is tiny, with around 1,200 members compared to SWIFT’s 11,000. China would no doubt like to displace the Western-dominated SWIFT cross-border payments’ system, but as yet it cannot.
Apart from the loss of life and the displacement of hundreds of thousands of people, there is another reason why a speedy and peaceful end to this conflict is imperative. The West has responded forcefully and with one voice, but the greater danger today is that President Putin, who for the past few years has been surrounded by sycophants, might feel trapped, and lash out even more recklessly. It will be difficult to swallow, but for the sake of avoiding the risk of an even more serious conflict, it is necessary not to corner Putin, not to encourage any more playing with fire.
Gold whiplashed last week when Russia’s troops first marched across Ukraine’s borders. It has settled a little since then but feels — like us all no doubt — a little on edge. All that can be really said with any confidence is that the world is in a state of high anxiety. And while we at Glint make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power, we strongly believe that gold is the fairest and most reliable currency on the planet, although it isn’t 100% risk free. But is anything 100% risk free right now?