In the first week of hostilities in Ukraine, the West quickly announced sanctions on Russia. Beyond the anticipated sanctions, big hitters like cutting off SWIFT access, freezing and seizing oligarch assets and going after central bank reserves were trotted out. Russia has the GDP the size of Italy, but this is a large market of consumers and producers of strategic commodities. Those sanctions will boomerang and crush many in the West.
These sanctions will affect Russia. Russia withstood the previous round of sanctions with import substitution and enjoyed the devaluation of the ruble when the entire world was in the beggar thy neighbor mid-‘10s. Russia now had an excuse for their devaluation. These announced sanctions already hurt everyone because no one said if any financial entity is exempt. It’s chaos. No one wants to make any deal. America is directing the show and going so far as to cut Russia from SWIFT is a move even JP Morgan counseled against. SWIFT is just messaging and Russia worked for years on alternative (so has China). Cost of business goes up for banks, bottom lines get hit and maybe Russia retaliates financially. Maybe Mr. Dimon remembers the Russian bond default, which was a surprise, and how that nearly took down Wall Street due to LTCM’s investments in Russia. No one thought five steps ahead. They preached globalization but forgot how integrated and dependent it made America.
America can lead a charge to isolate Russia and what does it do to commodities? Russia is second in the export of timber and third in plywood. Enjoy the rising cost of housing construction. Agricultural exports and agricultural fertilizer production are Russian and Belorussian specialties. No one has to eat, right? Americans can but not our allies. Acquaint yourself with Norilsk Nickel. They provide big chunks of production of many metals for the globe. Many inputs in America’s supply chains. What happens when supply is not there? Shut down the factories today, boys, got no copper, palladium, nickel, etc. The buying power of firms will matter more, so expect consolidation. This is dangerous because what was considered heightened geopolitical risk that could aggravate input inflation is now supply destruction.
Not every nation is going along so those countries will enjoy the shift in resource allocation. If America forces firms to stop selling goods to Russia, the non-aligned global market will fill that vacuum. Disney, Netflix, OnlyFans, Pornhub and other soft power media firms are cutting Russia off, but that’s a net positive for Russia. It’s an opportunity for foreign media entities, but more importantly, it is an opportunity for developing cultural sovereignty. It is a big world, and America is learning the multipolar future is knocking on the door .
Did any American firm mention this in quarterly calls? Did they plan for this? No. They barely think beyond their three year plans with step stair quarterly earnings. They will have to be careful on the next quarterly call due to geopolitical correctness. At the same time as Russian erasure in the West, some executives may have to divorce their Russian wives. Suddenly, American firms have to deal with losing Russian clients, loss of Russian supplies and a hit to their revenues they did not plan for in ‘22. Everything tied to Russia has a war risk and with no end in sight for Western punishment. No Western authority has laid out conditions for rolling back moves.
Immediate shock will be gas for consumers. They see summer prices now in March, so summer price assumptions must be raised. Commodity inflation will cause firms to adjust prices to get ahead of coming input cost increases. Airlines will have to plan for triple digit oil, which if readers recall in ‘07-‘08 nearly killed the industry (except Southwest due to their oil hedge).
The shock does not come without risks. Russia can do a little economic warfare back. Wheat exports can be directed elsewhere, picking and choosing winners and causing chaos in US imperial vassal states. OPEC is not budging. This is not the 1980s. America isn’t even serious about expanding production to provide its citizens relief, and unserious about the oil game to attack a geopolitical foe.
A dark interpretation is that this is an indirect means to punish the American middle, pounding them into serfdom. The Great Reset by means of war not covid. That remains to be seen. It could just be war fever guiding ideologues into moves they did not think clearly about and are unaware of how it will hurt their empire or empower an ascendant power in the Pacific. This will hurt Americans. Discretionary income will be squeezed further and savings are already down. How many helicopter drops of money are left? From firms to shoppers, everyone will suffer for the accumulation of incompetent moves in Eastern Europe.