This letter to the editors of Financial Times was written on April 15th, 2018. It was never published by FT.com. As I think the ideas are still relevant, it is published here.
Sir, I agree with two points Tom Keange made in his op-ed, “This time, sanctions on Russia are having the desired effect” April 13th, 2018. First, the dollar reigns supreme in the global financial architecture. Second, indeed, unpredictability is a new and powerful feature of the most recent upgrade of US sanctions against Russia. Nonetheless, I feel it is premature to call the last leg of the sanctions striking.
It’s true that Russian stocks experienced a sharp correction, both on domestic and foreign exchanges. And Russian ruble dropped. But these two reactions haven’t produced anything close to havoc or a systemic meltdown. Instead, I would even argue that the sanctions are failing because those who devised them do not understand Kremlin’s strategy. Putin is playing a game layered by a mix of geopolitics and monetary economics. If anything, the US Treasury sanctions are more of a favor than a hindrance.
Over the 2000s Russia became highly integrated into the international financial system. Many leading Russian companies have evolved into listed names, albeit with sizable chunks of their balance sheets in dollars, shunning domestic currency, the ruble. While, Russia’s economic policies largely won praise from international experts and financial markets, the domestic economy remained shaky, and, worse, domestic support of Kremlin was nearly non-existent by early 2013. Since then, Kremlin has been driving its economy toward a new model, with more reliance on the domestic, ruble-based money-creation mechanism with an nonconvertible currency. By doing so, they have been abandoning the former model that relied on access to foreign “savings.” Kremlin took a deliberate step of scaling up its geopolitical posturing, putting at risk its access to western technology. The fact that foreign wealth of a few oligarchs got trimmed is a mere by-product of the shift. In return, Kremlin got massive consolidation of public support of its leadership, which wasn’t thought possible as recently as 2013.
It may sound bizarre at first glance, but the dollar’s status is a target of the Kremlin, too. Observe the Russia’s penetration of organizations that support the GOP, such as the National Rifle Association via the efforts of Alexander Torshin (@torshin_ru), a Kremlin man. Instead of looking for troll farms on Twitter or Facebook, look to the US political heartland, where the balanced budget amendment and other national debt hysteria like the debt ceiling is nurtured, which are both long-term dollar-undermining developments. The grand standoff between the US and Kremlin — including in monetary economics over very dollar status — is yet to unfold.