Here Are The Sanctions. Next Come The Unintended Consequences.

The news of the Russian invasion of Ukraine was followed quickly by news of financial warfare initiated against Russia by the United States, the EU, and other western countries. The U.S. Treasury has announced 15 separate sanctions programs in recent days and no doubt more are on the way.

The targets of these sanctions include Russian banks, Russian stocks and bonds, and various payment channels. Most significantly, the U.S. froze the accounts of the Central Bank of Russia. That’s the first time central bank assets have been frozen since the Cold War, possibly ever.

Yet, the financial attacks on Russia go far beyond official sanctions as described in this article.

Numerous private companies including Microsoft, ExxonMobil, Shell, and some major airlines have ceased their business activities in Russia. Visa and MasterCard have stopped accepting credit card charges from Russia. Google and Apple have turned off the mobile phone payment apps on phones held by Russian citizens.

Shipping giant Maersk has stopped its vessels from unloading or taking cargo from Russian ports. Stock index funds are pushing Russian companies out of their indices and the Norwegian sovereign wealth fund is divesting Russian stocks. The list of public and private embargoes and boycotts goes on.

Russia has not stood still. The Central Bank of Russia imposed capital controls so that Russian companies cannot pay interest or principal on international debts. That means those loans and bonds may soon go into default.

Many such securities may be stuffed into 401(k) plans of Americans under the umbrella of “emerging markets funds” or ETFs. Even more important is the possibility that inter-bank Eurodollar lending may start to dry up as Russian banks are frozen and western banks reduce leverage and contract balance sheets in order to reduce risk.

That type of activity can lead to a global liquidity crisis that can only be contained by Federal Reserve currency swap lines. Even that technique may not work since there are no swap arrangements in place between the Fed and the Central Bank of Russia.

The shooting war may be over soon, but the financial war has just started and will continue after the shooting stops. For that matter, a global financial panic may emerge even before the shooting stops. Investors should prepare now with larger allocations to cash and gold and by reducing stock market exposure.

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