Felix Salmon writes that until last weekend, Russia's invasion of Ukraine looked quaint, with “columns of tanks, prisoners of war [and] bombed buildings.”
As a new week unfolds, however, the U.S., Canada and Europe on one side and Putin on the other have rolled out their respective nuclear options—the former three financial, the latter literal—although neither has actually been used.
The stakes couldn’t be higher. This is no longer just about Ukraine. It’s quickly evolved into a full-blown confrontation between nuclear powers.
Salmon fears if the conflict continues to escalate like a hundred-yard sprint, the unthinkable could quickly become a reality.
By Dave Allen for Discount Gold & Silver
Felix Salmon writes that until last weekend, Russia's invasion of Ukraine looked quaint, with “columns of tanks, prisoners of war [and] bombed buildings.”
As a new week unfolds, however, the U.S., Canada and Europe on one side and Putin on the other have rolled out their respective nuclear options—the former three financial, the latter literal—although neither has actually been used.
The stakes couldn’t be higher. This is no longer just about Ukraine. It’s quickly evolved into a full-blown confrontation between nuclear powers.
Salmon fears if the conflict continues to escalate like a hundred-yard sprint, the unthinkable could quickly become a reality.
What’s Happened So Far
The West’s cutting off Russia from the international financial system has been referred to in recent days as "the nuclear option." Some of it’s already been implemented:
Russia's too big to fail (i.e., “systemically important”) banks are now unable to operate in the dollar-based financial system.
Russian banks' ability to easily transact in dollars and euros will be severely hampered when they get kicked out of SWIFT.
The Society for Worldwide Interbank for Financial Telecommunication is the international financial-messaging system that supports virtually all international money transfers.
SWIFT was founded in 1973 and is headquartered in Belgium. It’s overseen by the National Bank of Belgium, the Federal Reserve, the European Central Bank.
It connects more than 11,000 financial institutions in more than 200 countries and territories worldwide about daily banking transactions.
The Russian central bank will also be unable to support the ruble if its dollar and euro accounts are actually frozen (a distinct possibility).
Add to that BP’s announcement that it’s selling its stake in Russian energy giant Rosneft; that the EU is shutting its airspace to Russian planes; and that Norway's large national wealth fund is divesting from Russia.
All of a sudden, you have a cornered Russian president who’s no doubt hearing from his filthy rich oligarchs, with a broader segment of the Russian population not too far behind.
The question is, will they put pressure on Putin to look for a quick way to wind down his fantasy war game (and thus put an end to the sanctions)? Or, will fear of being taken out by Putin’s henchmen clam them up?
The Impact Has Been Swift and Marked
Russia's currency has already plunged. Sunday night, the ruble dropped by as much as 40% against the dollar, before Russian bankers launched a furious effort to defend the currency, cutting some of the losses.
The ruble was still down 15% as of 6:00 a.m. Eastern Monday. The nosedive shows that the steadily increasing sanctions are starting to inflict massive pain on Russia's economy and its people.
Soon after the open of the overnight foreign exchange trading session the ruble was being quoted at between 115 and 119 per dollar. It closed Friday at roughly 83 and was in the 70s a week earlier.
Since January 1st, the ruble has fallen by nearly 30%, reflecting an already weakened Russian economy. It now sits at a record low versus the dollar. Matt Phillips believes it’s a shock “that could reverberate throughout the global financial system.”
In response to the ruble’s collapse, the Bank of Russia more than doubled interest rates from 9.5% to 20%.
That kind of hike is designed to keep money from fleeing Russian banks and from the country in general—in theory, helping to support the currency, but potentially crippling the economy.
The Russian central bank also said the country’s stock market—the RTS, for Russian Trading System—would remain closed until further notice to protect investors from financial calamity.
The market had already tanked by 50% late last week. Shares of Russia’s largest bank, Sberbank, fell by as much as 77% today, while shares of Rosneft tumbled 40%.
Phillips says the ruble’s devaluation “threatens to vaporize much of the ruble-based savings sitting in Russia's banks.” He adds that it will send rates of inflation —already high in Russia—a lot higher.
It causes people to withdraw their cash en masse and quickly try to convert it to more perceived stable currencies, such as the dollar, the euro and gold. In fact, long lines at Russian ATMs were seen in Russia over the weekend.
It also sends interest rates skyward, as global investors pull back at the idea of lending to banks or countries that use a currency that could become worthless or next to it.
And, of course, high-interest rates slam the brakes on an economy, throwing people out of work just as prices soar—a miserable combination of conditions we know as stagflation.
An economic shock of this magnitude will likely hit markets around the world, probably in unpredictable ways. Investors appear to be bracing by moving out of risky markets to the safety of gold and U.S. Treasuries.
It's not outside the realm of possibility that some major financial player — a hedge fund or a too big to fail bank trading desk — won’t be able to absorb a shock this large. (Is that a Black Swan I see?)
The West is still allowing Russian energy exports, and that’s big—both for Russia and large segments of Europe.
"If Russia stops selling its oil and gas, that would be the end of Russia as we know it,” according to Edward Fishman, former head of Russia and Europe sanctions in the State Department.
Fishman notes that Russia will still be allowed to buy food, medical necessities, and the like. "Sanctions aren't going to kill anyone," he adds.
The West has promised to impose "the financial equivalent of a nuclear strike," says former George W. Bush speechwriter David Frum.
Putin Issues Veiled Nuclear Threat of His Own
In Moscow, Putin's response to Biden’s latest sanctions announcement— and to what he called “aggressive statements” from the West—was to put his nuclear forces into a “special regime of combat duty."
Yes, he put his tactical and strategic nukes on "high" alert, with the clear message that he’s threatening a nuclear strike of his own, without specifying when or where such a strike might take place.
Aside from a dangerous and reckless warning meant to intimidate Ukraine and all of the Western World, Putin’s terrorist-like posture recently has rightly made people wonder if he’s unstable.
That’s not a comforting thought about a man with his finger on over 6,000 nuclear-tipped warheads plus several hundred launchers--many of which could be unleashed on, and reach, neighboring Ukraine and other eurozone nations in a matter of minutes.
Thus, you could say that geopolitical uncertainty has scaled up a notch or three. What is clear is that the bear has been poked, and the stakes are now exceptionally higher than they were just a few weeks ago.