Sanctions Hurt, But They Always Have Workarounds. Here Are Examples.

There’s no doubt that the financial sanctions put on Russia by the U.S., UK, EU members, and others are the most severe ever imposed. All Russian assets have been frozen. Even the Central Bank of  Russia has had assets subject to western control frozen.

The financial impact on Russia will be extreme. The Russian economy may be expected to collapse by 20% or more in the first half of 2022, an amount comparable to the economic collapse in the second quarter of 2020 during the first lockdown stage of the pandemic.

Yet, this article describes some of the many ways that Russia can workaround the sanctions to obtain at least some access to the global financial system.

The main loophole is that Russia may still receive dollar payments for oil and natural gas. Those payments may be frozen inside the central bank, but they can still be received and added to Russia’s reserves.

Russia can also transact outside the SWIFT messaging system using older technologies such as telex and internet channels outside of SWIFT. Russians can also transact through Chinese and other banks that have not joined the sanctions.

Russia has pushed back in certain ways. Foreign investors who try to sell Russian companies will find that their sales are blocked. Russia imposed capital controls so that Russian borrowers cannot pay their creditors in dollars or euros. This will lead to defaults in the West and could even mark the beginning of a financial crisis.

Finally, Russia has $150 billion in physical gold bullion. This gold cannot easily be sold or bartered, but it can be leased or used as collateral for hard currency loans. And Russia can use parallel loan structures (which haven’t been used much since the 1970s) where a lender inside Russia can also be a borrower outside Russia in a separate transaction with the obligations netted out.

None of this is efficient relative to a normally functioning system, but it does work. The bottom line is that the Russian economy will muddle through with higher costs, more risk, and less liquidity.

The main point for investors to understand is the damage will not be confined to Russia. These inefficiencies and this illiquidity will ripple out to all parts of the global financial system. It’s a good idea to build up your own liquidity before the wave of defaults and margin calls hits home.

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