The Breakdown - 15 Key Economic Questions After Russia Invades Ukraine

Starting point is 00:00:00 Now, that said, I do think it's an open question about what Russia does in that context. Is it willing to throw its lot in with another power? Especially when so many of Putin's actions seem designed not just to get it away from the U.S. but to reinstate Russia as a power in its own right? Does that mean that Russia instead tries to take advantage of an alternative system like Bitcoin that hedges not only the U.S. dollar system, but also an emergent alternative such as a Chinese digital currency? Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world.

Starting point is 00:00:39 The breakdown is sponsored by nexus.io, Arculus, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, February 24th, and today we are asking the key economic questions after Russia invades Ukraine. This is a frustrating episode to have to record, but I believe an important one. Before we get into it, if you're enjoying The Breakdown, please go subscribe it, give it a rating, give it a review, or if you want to join the conversation, and certainly there is a lot more to discuss than ever before. Come join us on the Breakers Discord. You can find a link in the show notes or go to bit.com slash breakdown pod. Finally, a disclosure, as always, in addition to them being a sponsor, I also work with FTX. I always say that this show,

Starting point is 00:01:26 is ultimately about power and power shifts. And today is another reminder why. We can talk about Bitcoin and Defi and NFTs till we're blue in the face, but if we don't understand the larger context in which these disruptions, these innovations, these forces are operating, we miss the forest for the trees. Crisis like the one that we are now all watching unfolds via Twitter and TV and TikTok lift, even if briefly, the veil on all of our assumptions about what is and what will be. And into that type of vacuum storms an incredible melange of competing forces, racing to drag the world as far in their direction as possible before the window closes and the norms of normal times return. While this war has just become kinetic, the next stages from the

Starting point is 00:02:13 Western perspective in particular, are largely economic. So here are 15 questions that I think are key to understanding what will happen and what the implications will be. I don't have answers to almost any of them, but I hope to share the questions themselves and some of the responses that might help you make sense of them all. Question one, why isn't the world going even stronger on sanctions? If you listen to my show yesterday, you know that there has been a lot of screaming for stronger sanctions in the U.S. from both sides of the aisle. Now, currently, stronger sanctions are being debated. They're being debated in Europe. They're being debated in the U.S., and it's likely that we will see a much-ratcheted set of economic punishment coming towards the Kremlin in Russia more broadly.

Starting point is 00:02:58 However, unless the most extreme sanctions are implemented today, there will be a large chorus of people asking why not go even farther. Let's use some other questions to explore possible answers to that question. Question two, how is Russia's economy tied to the rest of the world? As a way of shorthand, I'm cribbing a lot here from Peter Zahan, who just released a video today about exactly this topic. If you're not following him yet, I highly suggest you do. His last name is spelled Z-E-I-H-A-N. He put together a 10-minute overview video that explains just how interconnected Russia is with the rest of the world. Here are things that Russia is the world's largest exporter of. Russia sends 80% of its natural gas west. 40% of Europe's natural gas

Starting point is 00:03:46 comes from Russia. This is doubly problematic as most of that goes through Ukraine physically. What about things made from natural gas, such as ammonia, a key ingredient in fertilizer. Russia is the world's largest exporter of two of three key types of fertilizer. Fertilizer was already six or seven times as expensive now as it was a year ago, which was already putting the world at risk of famine. No fertilizer or too expensive fertilizer, that means crops don't get made, that means people don't get fed. Russia is also the world's largest exporter of semi-finished iron and low-quality steel, and the largest exporter of nickel. These are ingredients needed to make stainless steel, which makes just about

Starting point is 00:04:24 everything in our world. And when it comes to wheat, Russia has been a top three grain exporter going back a century. Most of Russia's wheat goes to the Middle East, and the last time there was a disruption with Russian wheat, the Middle East saw a tripling of wheat prices in the period leading up to the Arab Spring. Ukraine is also a top 10 global wheat producer, and to lose both at the same time means wheat prices are likely to go up significantly. Now, what about areas where Russia is the second largest importer in the world? Well, we have crude oil. While Europe is again the biggest recipient of Russia's crude oil, the U.S. also imports a half a million barrels a day of Russian oil, largely to replace low-quality Venezuelan oil that we no longer

Starting point is 00:05:05 have access to. Russia is one of the largest exporters of diesel and other refined oil products, basically the things that make the global economy go. When it comes to platinum group metals, which are used in high-priced electronics, catalytic converters, Russia are first second or third, depending on which metal you're looking at. Russia is the second largest exporter of timber, refined copper and seed oils like sunflower and safflower oil, which are used, of course, to make other food. And in many parts of the world are substitutes for the olive oil and canola oil that we use here in the U.S. There is just one category that Russia is the third largest exporter in, and that is coal. And while many will suggest that this is a moment to double down on green energy

Starting point is 00:05:47 sources, it's not an easy thing to do. Having to radically increase the capacity to capture those sources all while other reliable sources of energy like natural gas and oil are going offline is a tough proposition. Now, you may ask, why is Russia so profligate when it comes to these exports? Well, after the fall of the USSR, Russia switched from actually producing things to sending out the raw materials instead. As Zeyan put it in this YouTube video, it's easier to turn a coal mine back on than a tractor factory back on. What's more, this exodus of cheap commodities has been a part of why inflation has been so low for the last 30 years. The point, of course, with all of this, is that Russia is incredibly connected and incredibly important to many other parts of the world

Starting point is 00:06:35 and global economies. Anything that we do that changes the economic relationship with Russia is going to have consequences. Which brings us to question number three, why isn't Russia scared of sanctions. One answer proffered by some is that they've got a different ally that could help them weather the storm in the form of China. Jacob Canfield tweeted last night, Russia and Putin secured massive energy deals with China way ahead of this move into Ukraine. Sanctions won't do anything this time around. China is in a perfect position with both the U.S. and Russia relying on them for trade. We are failing at global strategy. He points to three recent headlines. From February 4th, Putin hails $117.5 billion of China deals as Russia squares off with the West.

Starting point is 00:07:18 Russia-China agree 30-year gas deal via new pipeline to settle in euros. Russia-China agree new coal deal for 100 million tons supply. And Russia already worked out a deal to deliver 40 million tons of coal to India. But it's broader than just China and different allies. The New York Times recently published a piece called Putin facing sanction threats has been saving for this day. The gist of the article is that ever since sanctions targeted the Russian economy after they annexed Crimea in 2014, Putin has been working to make the economy more sanctions proof, and that involves a number of different elements.

Starting point is 00:07:53 One, it involves significantly increasing their foreign currency reserves, which currently stand at $631 billion, equivalent to a third of Russia's entire economy. They got there by diverting oil and gas revenue, and they now have the fourth largest such reserve in the world, is the largest among any petro state. The dollar, which once dominated, now represents only 16% of those currency reserves, which has been replaced instead with euros, China, R&B, and gold. Historian Adam 2 says this is what gives Putin his freedom of strategic maneuver. On top of that, Russia has done other things to sanctions-proof the country. They've shifted imports and gotten consumers comfortable with local alternatives,

Starting point is 00:08:35 while many made fun of Russian brey and parmesan made with palm oil instead of milk, Russian citizens now report being fine with the difference. After business elite lost their London apartments and foreign investments in 2014, Russia effectively bought them off with construction and energy contracts, which not only makes them whole economically, but also strengthens Russian ties as these people have no way now to go back to normal with the West. Question four, will Russia retaliate by cutting off the world from its commodities and exports? This is certainly something that's a real possibility and something that politicians are trying to factor into their calculus of how harsh to go when it comes to sanctions. The challenge for the U.S. in particular is going to be keeping

Starting point is 00:09:18 European allies in line. While citizens of the U.S. will face some economic fallout, such as higher prices at the pump, it's nothing compared to Europe losing access to 40% of its natural gas overnight. Question number five, and this is a big one. Will we see swift sanctions? First, let's discuss what Swift is, and let's do it courtesy of a classic Sahil-Bloom thread. He writes, with the rapid deterioration of the Russia-Ukraine situation, you're going to hear a lot about Swift in the coming days. Swift is short for the Society for Worldwide Interbank Financial Telecommunications. It's a global cooperative of financial institutions based in Belgium. It was formed in 1973, and today Swift connects more than 11,000 financial institutions across 200-plus countries.

Starting point is 00:10:03 Think of it as a simple email system enabling secure messages across its members. An average 40 million messages a day, including orders, payment confirmations, FX exchanges, and trades. Swift doesn't actually do any of the transfer or holding of funds, but it's a critical part of the communication infrastructure that enables cross-border money flows. Cutting off a nation's banks from Swift access restricts flows into and out of that nation, resulting in real economic pain. Now, and we're back to NLW here again, Swift has been weaponized before against Iran, and the decision to remove Russia from the SWIF system has been widespread. widely considered a nuclear option, although that word has even more significant and ominous

Starting point is 00:10:42 meaning today than it did before. It appears to be the thing that Putin and Russia believe is least likely and most extreme to happen. So what is the state of the discourse around Swift right now? Reuters reported earlier today that foreign ministers of the Baltic states have called today for an end to Russia's access to Swift, but others are reluctant because while it might hit Russian banks the hardest, it would make it difficult for European creditors to get their money back as well. Indeed, this gets us to question six, is there concern in the United States that swift sanctions could threaten the U.S. dollar status as global reserve? And the short answer is yes, there are. From protocol, quote, there's a more complicated and consequential explanation that has to do

Starting point is 00:11:22 with the anxiety over the U.S.'s dollar status as global reserve currency. Swift sanctions, rather than being a nuclear option thwarting Russia, could be the first domino in a sequence of events that bolster China and Russia-backed alternative digital payment systems. Such sanctions might also in the long run steer emerging markets towards blockchain-based systems that would reduce global reliance on the U.S.-centric international monetary system. Altogether, Swift sanctions could very well incite the de-dollarization of the world economy. End quote. In short, Swift's power also creates its own threats as people don't want to necessarily be subject to that power.

Starting point is 00:11:56 In 2018, in a speech explaining why Europe needed a homegrown version of Swift, a then-German-affirms minister said, we must increase Europe's autonomy and sovereignty and trade, economic and financial policies. At the time, they were looking for a way of conducting transactions with Iranian financial institutions who were being punished for abandoning the nuclear deal. Miles Souter commented on this on Twitter, saying, de-platforming Russia from the SWIF system feels like a real possibility tomorrow. This would mark the end of the USD global reserve currency era

Starting point is 00:12:24 and kick off countless cascading externalities to the current system and incalculably accelerate the emerging crypto era. U.S.D. Global Reserve status in conjunction with the U.S. military is America's greatest tool for global control. Russia and China have long sought and worked towards an alternative. Short term, it'll serve the interest of those applying it and disrupt Russia, but long term, it will only accelerate the world's transition away from the U.S. and the West's Fiat Money Monopoly experiment and usher in the next era. Question 7, I think, might follow quite naturally, which is what alternatives to Swift exist.

Starting point is 00:12:58 Russia has their own system as PFS, but as a of 2020, only about 20% of domestic bank settlements in that country even used it. China has Sips, the cross-border interbank payment system. It had in 2021-613 indirect participating banks from overseas, but that only amounts to about 0.3% the size of SWIFT. In Europe, there's INSTEX, which is a European native system that's limited to facilitating humanitarian trade that's permitted by U.S. sanctions, even in places that are cut off from SWIFT. Nexto is a trusted and easy-to-use crypto platform where you can buy cryptocurrencies at the touch of a button and start earning up to 18% annual interest that is paid out daily.

Starting point is 00:13:41 They support all of the major assets on the market and even allow you to swap one asset for another or borrow cash against your crypto without selling it. Nearly 3 million people in over 200 countries trust Nexo with their digital assets. So whether you're just getting started or you're a season pro, get the most of your crypto today. with NXO at N-EXO.io. Meet Arculus, the next-generation cold storage wallet. Arculus secures your crypto using three-factor authentication, providing a simpler, safer, and smarter way to store, buy,

Starting point is 00:14:18 swap, send, and receive crypto. Arculus is offline cold storage. Your private keys are encrypted on the Arculus keycard and are never online. Stay safe from hackers with no cords, no charging, no Bluetooth. Just crypto security made simple. Buy now at getarkilus.com. That's G-E-T-A-R-C-U-L-S.com. The breakdown is sponsored by F-TX-U-S.

Starting point is 00:14:49 F-T-X-U-S is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no A-C-H transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. F-T-X-U-S is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. Question 8. Does this put Bitcoin and blockchain-based systems

Starting point is 00:15:26 in the spotlight? And indeed, does this shed new light on Russia's potential legalization and regulation of crypto and Bitcoin? And to that, I'd say it sure does. Remember, Bitcoin is a large, near-instant final global settlement system that already exists and is already working. All of a sudden, El Salvador's experiment starts to look very interesting. However, I will caution that I don't believe that it's nearly as neat and tidy as people are trying to make it. In terms of there being a clear, step one, legalize and regulate Bitcoin, step two, go against the West's entire financial system kind of logic. But whatever the case, I think it does lead to question nine. Does this Russia situation risk the further politicization of Bitcoin, and the answer there is, again, of course it does.

Starting point is 00:16:11 Ryan Selkis tweeted even up until a week ago, I thought Bitcoin could be a peaceful exit ramp and gradual replacement to fiat currencies. With war, sanctions, and asset repricing away from USD, Bitcoin will be treated as an enemy technology. I hope I'm wrong, but I flipped pessimistic. I have seen a lot of versions of this concern, and I think it's an important consideration. I don't think it's quite as clear cut as if Russia starts to make moves to use Bitcoin more, Bitcoin becomes the political scapegoat. It's certainly one possibility that will happen, but it could also have the opposite effect of bolstering the voices of the allies in Congress and the Senate who have been saying

Starting point is 00:16:46 that we need to look at and understand Bitcoin as a geopolitical asset for a long time now. Question 10, how does this situation change the discussion of CBDCs and stable coins? And in that case, I think the answer is dramatically. In the context of a world where the U.S. and Europe are contemplating kicking Russia off the SWIF system, China's forthcoming digital currency starts to look a lot less like a local tool for efficiency and even social control and a lot more like an emergent alternative global settlement system. Now, that said, I do think it's an open question about what Russia does in that context. Is it willing to throw its lot in with another power?

Starting point is 00:17:26 Especially when so many of Putin's actions seem designed not just to give, it away from the U.S., but to reinstate Russia as a power in its own right? Does that mean that Russia instead tries to take advantage of an alternative system like Bitcoin that hedges not only the U.S. dollar system, but also an emergent alternative, such as a Chinese digital currency? I don't have the answers to that, but I think it's one of the most significant and salient questions to watch in the months to come. What about for a U.S. digital dollar? There has already been the start of a narrative shift in Washington, D.C., from stable coins being, a threat to the U.S. dollar, to, in fact, the exact thing that allows expansion of the dollar

Starting point is 00:18:06 system for a new generation of monetary dominance. Stablecoins today demonstrate the preference of people around the world to transact in a U.S. dollar-linked system. They just want speed, ease, convenience, they want to be able to move their U.S. dollars or their U.S. dollar equivalence at the speed of the Internet. I anticipate a major pickup in this narrative of U.S. Stablecoin, as geostrategically significant and something to be seen as a way to double down on existing advantages and existing network effects.

Starting point is 00:18:38 Question 11. Why is the price of Bitcoin down right now? And will we see the other side? This is, of course, a question that you saw a lot on crypto Twitter last night. Or really, it wasn't so much crypto Twitter. Instead, it was a group of people who hate Bitcoin so much that while the rest of us

Starting point is 00:18:54 were trying to figure out what was going on and how to make sense of a world where kinetic war had come back to Europe. They were instead taking victory laps, dunking on Bitcoin going down, instead of acting as some safe haven. I've talked about this almost ad nauseum at this point, so I'm going to turn it over to a few other people. We're going to start with Sam, the CEO of FTX. He wrote a long thread on this last night, and here's an excerpt. In the last day, the S&P 500 is down about 4%, and Bitcoin is down about 8%.

Starting point is 00:19:23 Why? Well, I mean, because of the obvious. It makes sense that stocks are down. War is generally bad. What should Bitcoin be doing here? Well, on the one hand, if the world gets shi-year, people have less free cash, basically selling Bitcoin along with stocks, et cetera, to pay for war. On the other hand, this is likely destabilizing for Eastern European currencies

Starting point is 00:19:42 and more generally for Eastern European financial systems, which means they might be looking to alternatives. If you were in Ukraine right now, where would you trust your money? So there are arguments both ways for what should be happening to Bitcoin right now. I'm not really sure I would have guessed it would go down based on the fundamentals, but it is down a lot. Why? Well, let's say there are two types of people in the world, fundamental investors and algorithm followers. Fundamental investors look at the situation and are uncertain which direction Bitcoin USD should move.

Starting point is 00:20:09 Algorithm followers consult the data. Historically, what's the trend? Well, over the last year, there's been a really high correlation between crypto inequities. The main reason is monetary policy, moves and expectations of inflation, and interest rate change USD and other fiat currencies. More inflation means crypto inequities up versus USD. And so the algorithms look at the data and decide, based on that, Bitcoin should be 80% correlated to the S&P 500 with a beta of 4. I.e, if S&P 500 moves 1%, Bitcoin moves 4%. Then war happens. Fundamental investors are neutral, but algorithmic investors see the S&P go down 4%,

Starting point is 00:20:43 and so expect Bitcoin to go down 4% or 16% based on historical studies. Fundamental investors are neutral, but algorithmic investors see the S&P 500 go down 4%, so expect Bitcoin to go down 4% or 16% based on historical studies. There's a push and a pull with fundamental investors buying and algorithmic investors selling. On net, Bitcoin ends up halfway in between down 8% on the day. So who's quote-unquote right? Well, I don't know. Maybe the algorithmic investor is.

Starting point is 00:21:11 Maybe we think this is about financial systems, but actually the dominant effect is just everything selling off to fund wars. But maybe they're not. Maybe they're basing their judgments on monetary policy moves, but this isn't a monetary policy move. So Bitcoin goes down 8%, half of the 16% that the algorithmic investors predict, at which point their model updates a bit. Bitcoin went down less than the 4x they predicted, and the cycle begins. Maybe. Or maybe the real effect here has nothing to do with any of these things. Maybe it's

Starting point is 00:21:36 liquidity. Maybe you're risk-averse. Maybe you're selling whatever you have right now, because who knows what will happen? And markets are illiquid right now. Who's buying volatile assets? Anyway, who knows what will happen? Anything could, and I don't mean to imply that I know what will. But I also think we're probably in a new regime than we've been in in the last year and a half. We'll have to see how things work here. Alex Kruger built on that, sharing Sam's threat and saying crypto's been going down as both algorithmic and discretionary traders are treating Bitcoin as a risk-on asset highly correlated with stock indices. Fundamental investors who are bullish Bitcoin as an alternative currency may get their day once panic subsides. The point that I think

Starting point is 00:22:12 both of these guys are making in different ways is that Bitcoin continues to function as multiple things to different people and in different contexts. It is a risk-on asset that sells off when there's a flight to safety. But for higher conviction, long-term holders, it's very much a safe haven asset. Time scale matters, and as long as Bitcoin has an incredibly diverse set of holders who are invested for different reasons, we're going to see tensions pulling it in different directions at the same time. Question 12. How does this Russia situation change the Fed's calculus? This one, I think, is incredibly important and likely something we'll spend more time on in the days to come. Adam Butler, who does research at resolve asset management, had a nice little summary, though.

Starting point is 00:22:54 He basically says that this was perfectly timed to be maximally disruptive to central banks. Writing markets had already been reacting to the most significant inflation surge in decades leading to early stage increases in global risk premium, i.e. lower multiples, cheaper stocks. Their only hope was that inflation would indeed prove transitory. However, as Adam points out, that wasn't what happened. We have no wiggle room for central banks to positively surprise markets with more dovish policy communications and actions without igniting an inflationary spiral. Now, Adam writes, global central banks have only bad and worse options. The least worst option in the shorter term may turn out to be the absolute worst option in the long term. Option one, lean-doveish

Starting point is 00:23:33 to accommodate policy action to support markets, grease the wheels of commerce, and finance war spending if necessary. Equities may rally initially on this pivot, however, this action has the potential to embed much higher long-term inflation expectations. This, Adam points out, comes with a whole host of consequences once we have to manage it on the other side. And they look particularly unfun in the context of wartime precedent. We're talking profit caps, price controls, things that would crush U.S. corporations. The other option Adam writes is for the Fed, quote, to focus aggressively on moderating inflation in the near term. The hope would be that the adaptive expectations channel could be avoided entirely, so inflation expectations never fixate at a higher

Starting point is 00:24:11 equilibrium. This would require aggressive draining of liquidity, i.e. more aggressive quantitative tightening, and much more aggressive rate hike cycle than the market is currently pricing. This would also be very challenging for risk. assets in the immediate term. So you see, and I agree with Adam here, that the Fed and other central banks are in a rock and hard place situation. There is simply no good response that leads to markets being happy. I believe that makes a lot of the optimism among some of the crypto investors that I'm seeing that this will force the Fed's hand to be much more accommodative again, a little bit premature and probably unrealistic. But that is definitely a larger conversation that we will be having.

Starting point is 00:24:51 Question 13. Does this change our thinking about energy? Nick Carter quote tweeted some headlines from the German economy minister Hebeck saying that 50% of Germany's coal comes from Russia, 55% of their gas comes from Russia, and 35% of their oil comes from Russia. Nick adds, so Germany got Greta-pilled and now can't enforce sanctions against Russia or defend Europe because they'd freeze and starve. Turns out energy is a matter of national security. Who knew? If I was from Ukraine, I'd never forgive the anti-human environmental list that shut down all the nuclear plants in Germany. They have a lot to answer for. The number one thing the U.S. can do to salvage this nightmare situation? Eliminate all constraints

Starting point is 00:25:30 on fracking. Eliminate all opposition to pipelines. Start exporting dirt, cheap, abundant, light natural gas to Europe. Cameron Winklevoss echoed this sentiment, saying, we can end this with energy independence. We built a vaccine in a year. Can we build the Keystone pipeline and a sufficient number of nuclear reactors in a year? I think we can. Let's do it and stop feeding the mouth that bites. This to me is part two of a conversation that started during COVID, where we realized that things that we had taken for granted, such as supply chains, were actual national security concerns. I expect that this is going to shape the discussion of energy significantly in the months to come. Question 14. This one isn't exactly economic, but still is lurking around

Starting point is 00:26:11 everyone. And that's what about China and Taiwan. The concern here, of course, and this is something that people have been talking about for a very long time, is that China is that China is. watching what the West does as Russia tries to have its way with Ukraine and is looking hungrily at Taiwan and wondering if it can do the same. On Thursday morning, Taiwan's defense ministry announced that nine Chinese aircraft had come into its air defense identification zone, and this was just hours after Russia had launched its invasion. One of the people who expressed concerns about the implications for Taiwan was the UK's Prime Minister Boris Johnson. However, a Chinese foreign ministry spokesperson said in Beijing, Taiwan is not Ukraine. Taiwan is

Starting point is 00:26:49 always been an inalienable part of China. This is an indisputable legal and historical fact. Those words will be cold comfort for those concerned that China gets more active about defending that position. In December, Eli Ratner, the Assistant Secretary of Defense for Indo-Pacific Security Affairs, said bolstering Taiwan's defenses is an urgent task. We are modernizing our capabilities, updating U.S. force posture, and developing new operational concepts. When it comes to power, this is obviously one of the most important parts of the world to watch, in terms of fallout from this European situation. And finally, question 15, is there any possibility of sanctions actually working? There is much to be pessimistic about, so is anyone arguing the other side?

Starting point is 00:27:31 An interesting take on this comes from Javier Blas, who's a Bloomberg opinion columnist, formerly at the Financial Times, who covers energy and commodities. He wrote a piece called Shock and Aw sanctions could still stop Putin. The Saudis bested Putin in their 2020 oil price war by showing him they could sustain more economic pain than Russia could. So here's what happened. In March 2020, Saudi Arabia and Russia had been working together to manage the global supply of oil. But as COVID hit, Saudi Arabia wanted to cut oil production to shore up prices, but Russia didn't. So for a short time, everyone in the OPEC cartel did basically whatever the hell they wanted. However, Saudi then went after Russia by going all out on

Starting point is 00:28:09 production, which sparked a price war. They offered the biggest price discounts ever for crude oil plus an output hike. And when trading opened, we saw the biggest one-day price drop since the Gulf war, with Brent crude plunging 24%. Russia was completely caught off guard, and as oil prices fell, it dragged the rubble with it. The rubble was down 5%, which hit a record low against the dollar. However, then Saudi Arabia kept going, sending their clear intent to drive prices lower, which they did. Oil went down 40% in two weeks. Here's how Blas sums it up. The Saudi shock and awe campaign was so brazen that its motive was clear to Moscow, a maximum of economic pain to force the Kremlin back to the negotiating table immediately.

Starting point is 00:28:51 It worked and the two oil powers ultimately came to an agreement. The episode demonstrates that Russia is economically vulnerable and that oil and other commodities are its greatest weakness. The Kremlin may have already priced in Western sanctions on its banking sector, its sovereign debt, and its oligarchs. What it is not counted on is that the West would shoot itself in the foot by cutting commodities imports to zero to thwart Putin. Blasthen is suggesting that we cut off swift or proactively stut.

Starting point is 00:29:15 stop buying Russian resources and to hell with the consequences. Is there the political will to do this, even if it costs Biden and the Democrats another term? I don't know, but it's interesting to see it discussed. Now, by way of conclusion, the one missing piece of the puzzle for me with all of this is Russian citizens and what they think. I'm seeing reports of protests and anti-war graffiti, and I'm wondering how much economic pain they're willing to endure for this operation in Ukraine. The Russian stock market plunged today as much as 45% before closing down 33,000 when denominated in rubles. Denominated in dollars, it was down 39% because the ruble also cratered 8% on the day.

Starting point is 00:29:52 Will Russian citizens have the stomach and the conviction that Putin does to see this all the way through? As I promised at the beginning, there are more questions than answers here, and they're just the beginning of what we're going to be asking over the days and weeks to come. I will say, as I leave you, be wary of those who say that they know why things are happening or what happens next. Be skeptical of those who try to use this situation as a new cudgel for whatever it is they were selling before, economically or politically, and be hopeful, even if naively so, for those in the middle of violence. I want to say thanks again to my sponsors for allowing me this platform to have this show, nexo.io, Arculus, and FTX. And of course,

Starting point is 00:30:30 the biggest thanks to you guys for listening and engaging and having the conversations that matter. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - 15 Key Economic Questions After Russia Invades Ukraine

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.