Global Financial Crises Happen Slowly. The Next One Has Already Begun.

We’ve seen and heard extensive news coverage about U.S. and EU financial and economic sanctions being imposed on Russia as a result of Russia’s invasion of Ukraine. These sanctions include freezing the assets of the Central Bank of Russia, banning the Central Bank of Russia and the ten largest Russian banks from the use of international payments systems and the SWIFT financial message system, prohibitions on high-tech exports to Russia, and bans on many Russian exports to the West.

This is the most extensive and punishing set of economic sanctions ever imposed and it’s tantamount to financial warfare side-by-side with the shooting war occurring in Ukraine itself. Still, there’s a backstory as described in this article that shows there’s much less than meets the eye when it comes to sanctions.

Many of the sanctions announced by the White House and the EU have delayed effective dates. These delays can range from 30 to 60 or even 90 days, depending on the sanction.

Since many of the sanctions were announced in early March, some are just now taking effect and others are not in effect yet. For example, the EU announced a ban on purchases of coal from Russia on April 8, 2022. But, the ban does not take effect until August 2022.

No doubt, the EU hopes the war will be over by then and the ban can be relaxed. In any case, the ban is not in effect yet, despite the high-profile announcement.

Many exceptions to the stated sanctions have also been offered in the form of what the U.S. Treasury calls “licenses.” There has been almost no diminution in Russian exports of oil and natural gas (and hard currency flows to Russia to pay for it) despite the headlines.

Russia has issued about $40 billion in external dollar-denominated government debt held by U.S. investors, including wealth manager BlackRock. Some of that debt may even be buried in your 401(k) if you have an emerging markets ETF.

Last week, interest payments on some of that debt were due. Russia actually has sufficient dollar reserves to make the payments, but those reserves are frozen in U.S. banks such as JPMorgan and were not allowed to be used for the payments.

Russia has other dollars in Eurodollar accounts at Gazprom bank that it received for natural gas deliveries. The U.S. is trying to force Russia to use those unfrozen dollar reserves while we maintain the freeze on accounts in U.S. banks. Russia decided to pay the interest in rubles while saying that it would be glad to convert the rubles to dollars using funds in the blocked accounts if allowed.

The U.S.-Russia dispute is a Mexican standoff, but the entire global financial system may be at risk.

In August 1998, Russia defaulted on its debt and devalued its currency. The losses were not confined to Russia. By late September 1998, every financial market in the world was in danger of shutting down pending the dramatic rescue of Long-Term Capital Management, which became the center of a global financial panic. Something similar could happen again. It just takes time.

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