ColdFusion - Russian Sanctions and Global Economic Risk

Starting point is 00:00:00 The full extent of the damage Russia's war cannot yet be known, but Western powers are hoping, inflicting economic pain will push President Putin to reverse his course. Hi, welcome to another cold fusion video, where I cover anything in science, technology, business or history. As you all know, there's a conflict going on between Russia and Ukraine. It's a terrible situation, and I do hope there can be a peaceful resolution. For this video, I particularly want to talk about

Starting point is 00:00:30 some of the sanctions that have been placed on Russia. A group of nations barred Russian banks from the SWIFT system and also levied some other sanctions against their central bank. We'll see while the financial sanctions on Russia may have unintended consequences that may affect you and I, so stay tuned for that. You are watching Tull Fusion TV. As Russian forces began their attack, Ukraine's foreign minister made angry calls for Russia to be banned from SWIFT,

Starting point is 00:00:59 but world leaders appeared divided. Later, we'll see why. But in the time since they've decided to act. The United States, Britain and the European Union announced that selected Russian banks will be removed from SWIFT. The Society for Worldwide International Financial Telecommunications, or SWIFT for short, is a vital piece of the plumbing that connects the world's banks. If you've ever sent money overseas, then you've used the SWIFT payment system. There are more than 11,000 global SWIFT member institutions and around 42 million messages as soon. million messages are sent through the network daily. Before Swift, transaction messages had to be

Starting point is 00:01:40 written on a computer manually. The messages would describe the transaction in sentences, which were then interpreted and then carried out by the receiver. As you could imagine, human error became a factor. Being frustrated with this, six banks in Luxembourg and Paris started a new messaging network, which would become the Swift Company in 1973. Swift is an organization. It has to be a It has a CEO and gains revenues by fees from banks joining and also charging other fees per message based on the type of message and the length. Today, it secures trillions of dollars in flows of trade and investment between 200 countries. So that brings us up to now.

Starting point is 00:02:20 What do these Russian sanctions really entail? In February of 2022, after Russia's invasion of Ukraine, leaders from the UK, EU, United States and Canada announced that selected banks in Russia would be disconnected from Swift. A spokesperson for Swift stated that the move would be a collective benefit to the global community. They stated the decision to impose sanctions rests solely in the hand of government bodies and applicable legislators. So what will these sanctions do exactly? According to EE Commission President, Ursula von der Leyen, cutting banks off will stop them from conducting most of their financial transactions worldwide

Starting point is 00:03:00 and effectively block Russian exports and imports. But it's not all as it seems, as Royce's reports, quote, getting kicked out of Swift doesn't make transactions impossible, it makes them much more difficult, and it increases transaction costs significantly. Julia Friedlander, senior fellow at the Atlantic Council, states, banks can also resort to alternative systems and even communicate via email to send payment instructions. Bloomberg's in-house energy expert, Xavier Blas, notes that the German government said that the ban would only affect Russia.

Starting point is 00:03:33 banks that were already sanctioned. In other words, it's an action that really has no teeth. It may purely be political just to soothe populist anger. So, the SWIFT ban wasn't as big a deal as it was made out to be at first, but the thing that is really crippling Russia at the moment is the central bank sanctions. In conjunction with the SWIFT ban, the United States banned transactions with the Russian central bank. That means no transactions in dollars, euros, pounds or yen. Currently, the Russian The Russian Central Bank has $630 billion in reserves, but the reserves aren't on shore. They're mostly with other institutions overseas.

Starting point is 00:04:12 The move to block the Russian Central Bank from international transactions was done to stop them from attempting to bring assets into Russia. The purpose was both to weaken the Russian currency and make financing more difficult. But as time has gone on since those days, it seems that there might be unintended consequences. Russia's central bank out of the global economy isn't going to come without some consequences. According to the European Commission, Russia is the EU's fifth largest trading partner. The Eastern nation has supplied much machinery and transport equipment, chemicals and manufacturing goods to the west.

Starting point is 00:04:47 The sanctions could come back and hurt Europe's economy. Germany may be the hardest hit, with a large percentage of energy coming from Russia. But the risks go far beyond Europe, however. It could impact the United States and the rest of the world. The price of oil is also rapidly spiking, and oil is an input cost to almost everything, from the transportation of goods to the actual manufacturing of them. Absolutely. There is nothing more fundamental to costs than the cost of energy.

Starting point is 00:05:16 Basically it's the start of pretty much everything. And so you're right, not just motorists, all sorts of businesses will see their costs rise. Ultimately that means consumers will see their prices rise. So we are talking quite a challenge and it comes to top existing. challenging challenges for inflation. With rising geopolitical tensions, Russia somewhat has seen this coming and has taken steps to reduce their dependence on the US dollar. For one, over the years, their central bank has sold a lot of US dollar reserves and bought

Starting point is 00:05:46 gold. Moreover, they've developed their own banking messaging system, the system of the Bank of Russia, or SPFS. This new system is opening up to mostly Belarusian banks and already has over 399 institutions. is in talks with China to join their system too. China themselves also have their own system called the cross-border interbank payment system, or CIPS. So at this point, you might start to see what's happening here.

Starting point is 00:06:15 The world may be splitting into two payment systems, one system for friends of the United States and Western Allies, and another system for those who are wary of the United States. According to an analyst who wrote in Bloomberg, quote, one could even imagine a future in which, which rival nations turn similar financial weapons against the United States. Continuing on with unintended consequences, more broadly, this all in the future could lead to a decline of the US dollar as the reserve currency. Currently, all oil payments are done in US dollars. Every country needs oil,

Starting point is 00:06:50 so this keeps the demand for the dollar high and gives the United States a lot of leverage geopolitically. This is often referred to as the petro dollar system. It's been keeping the United States in charge of the world economy since 1971. Since Russia is the world's second largest oil producer, if they sold oil for gold, it would be the first time oil has been sold in something else besides the US dollar by a major player. A spokesman for Goldman Sachs stated, quote, overuse of dollar sanctions could compel other actors to try and replace dollar transactions. Also, in a very recent Federal Reserve meeting, Federal Reserve Chairman Jerome Powell recently admitted that there could be more than one reserve currency.

Starting point is 00:07:32 We do benefit from being the reserve currency for the main reserve currency for the world, and that really is because we have open capital accounts in the rule of law. Over time, the question is if some want to move away from the dollar, what will be the effect on us? I don't think it's something you would feel right away. Over time, they would have to create an economic ecosystem, whereby, another currency becomes, you know, a better currency for them to use. You know, what we can do is we can make the dollar the most attractive currency

Starting point is 00:08:10 by continuing to have the rule of law and open capital accounts and make it an attractive place for people to invest and to use in their businesses. There wouldn't be any short-term effect of that over time, though. You know, it would, I suppose it would diminish our status as the reserve currency. It's also possible to have more than one large reserve currency. So it's not really clear. So obviously it's not something that's going to happen tomorrow, but it's a trend that started and could continue in the future.

Starting point is 00:08:42 J.P. Morgan and other Wall Street firms counselled Washington against some of the Russian sanctions, saying that it could have far-reaching faller that could hurt the global economy and undermine the purpose of the penalties. Already, the sanctions have hit Russia's local economy hard. Their currency, the ruble, has fallen off. a cliff. Legendary is here with BetMGM Sportsbook.

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Starting point is 00:09:24 Betm. operates pursuant to an operating agreement with the Alberta Eye Gaming Corporation. Standard message and data rates may apply. Now being worth less than the currency in the mobile game, Clash of Clans. Locals have been rushing to ATMs to withdraw US dollars, running to stores to buy food and anything that isn't nailed down. All of this in an attempt to save some of their purchasing power. Since Thursday, everyone has been running between ATMs to redraw cash. Someone gets lucky, others not so lucky.

Starting point is 00:09:53 The last time the Russian ruble collapsed was in 1998. The fall in the currency caused a complicated. chain of events that eventually led to the collapse of the loan firm long-term capital management. The collapse of this firm almost took down the entire global economy, but it was bailed out to the tune of $4 billion just in time. Today, Russia could default on hundreds of billions of dollars' worth of bonds, as roughly half of their reserves have been frozen in the foreign exchange markets. If they can't pay their debts, experts warn it could, once again, lead to a cascading chain of events.

Starting point is 00:10:28 As the old saying goes, if you owe the bank a million dollars, that's your problem. But if you owe the bank a billion dollars, that's their problem. In other areas, Russia has the highest wheat exports in the world. This has made the price of wheat absolutely sore. Ukraine produces half the world's neon gas, which is critical for the manufacturing of semiconductors. So there's a lot of things in flux at the moment, and no one really knows how this is going to play out. Moscow supplies 40% of Europe's natural gas. Prices on the continent have increased by a third since Thursday, when the invasion began.

Starting point is 00:11:03 Russia is the world's largest wheat exporter. Prices last year were already 31% higher than in 2020. That's according to the UN's Food and Agriculture Agency. Economists fear they could climb even higher. As for what to do financially, I definitely can't advise you. But as I said in the video, how money is created, it's important. might be worth taking some time to study hard assets and the sectors that you could see benefiting from such scenarios. For example, wheat and gold have risen in price substantially recently.

Starting point is 00:11:35 So, in conclusion, perhaps world leaders may not have thought through the effects of cutting Russia from the global economy, but also perhaps they do know what they're doing and nothing will happen. Right now, no one knows. As the world painfully learned in 2008, the modern global economy is extremely complex and impossibly integrated. It's impossible for any one person or body to predict what's going to happen. But everyone can agree that the economic global risks have increased. It's really imposed severe trade sanctions. We've imposed heavy financial sanctions, but we've not been willing to go after the oil and gas because Europe gets over 40% of its gas from Russia. Russia is still one of the three largest oil producers in the world.

Starting point is 00:12:18 And so it would be destructive, both especially to Europe but also to the U.S. to put those kinds of sanctions in place. And so we've held back on that to try to minimize the effect on the world. But we shouldn't kid ourselves. There's going to be a cost here to all of us. Oil is already over $100 a barrel. Europeans are paying five or eight times as much for natural gas as Americans are paying for it. And yes, there are going to be costs to what we're doing.

Starting point is 00:12:44 Now, in saying all of this, I have to make it clear that the other option of doing absolutely, nothing wasn't valid. Actions of some kind had to be taken against Putin to send as a signal. All in all, if anything can be learned, is that war helps no one. Whether it's in Ukraine, Afghanistan, Iraq, Syria, Israel or Palestine, war only leads to more human suffering. I really do hope that an agreement can be reached to the current conflict. I don't like to see anyone's suffering. For you that's watching, I at least hope that this episode provided you with some insight into what's going on financially. and was helpful to you.

Starting point is 00:13:20 In the next episode, we'll take a look at something a bit more positive, a new technology that's helping paraplegics walk again. So don't worry, there's still some good stuff going on in the world. If you want to discuss today's topic in more detail, you can head on over to the Cold Fusion Discord, but please be respectful. If you want more Cold Fusion, I co-host a podcast called Through the Web, where I talk about these topics and more depth. Follow my Instagram for podcast clips and other fun stuff.

Starting point is 00:13:47 If you want to see these episodes early and add free, the nebulous streaming platform is the place to do that. To listen to the audio versions of these episodes, they're on Spotify and other streaming platforms. And lastly, I'm also on Twitter. So thanks for watching. My name is DeGogo, and you've been watching Cold Fusion. And I'll catch you again soon for the next episode. Cheers, guys. Have a good one.

ColdFusion - Russian Sanctions and Global Economic Risk

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