March 25, 2022

The Burgeoning Economic War Between The US And Russia.

Modern Military Strategists tell us that war in the 21st century is fought on many fronts.

There is the Kinetic War that we see playing out on the battlefields of Ukraine.

There is an information war, where each side tries to portray itself as both the victor and the morally superior force in the war.

And then there is the economic war. Fought not on the battlefield, but in the boardroom.

On February 24th, President Joe Biden declared economic war on Russia. The war's opening salvo took the form of “stiff” sanctions against Russia for their incursion in Ukraine.

Up until that point, the two belligerents in this struggle were Russia, with possible ally Crimea, and Ukraine.

By declaring sanctions as he did, Biden opened a second flank for Russia to defend, their economy.

Biden stated:

We will limit Russia's ability to do business in dollars, euros, pounds, and yen, to be part of the global economy…. We’re going to stop the ability to finance and grow the Russian military,” Biden said.

Simply put, these were the most severe sanctions ever against the Russians.

It took Russia three weeks to respond. When they came back to the US with limited sanctions against President Biden, his son Hunter, and certain other high-ranking officials in the Administration.

It was a very measured targeted approach.

Overall it is certainly the Americans who have taken the more aggressive stance in the economic war.

So, although it's very early in this conflict, I thought it a good time to start measuring just how this second front in the Ukraine War is going. The Economic War between the USA and The Russian Federation.

So far I see two decisive battles in this economic war.

The first battle is being fought over the price and availability of energy, specifically gasoline. The fuel that powers most American automobiles.

When President Biden declared those sanctions on February 24, the average price of gasoline in the US was $2.45 per gallon. After spiking to a high of $3.85 gas has now settled down to $3.38 per gallon. An increase of 38% in a little over a month.

Now gas is one of the components of the calculations for inflation. I would expect that at the next inflation update in a few weeks, we will see yet another big jump in inflation because of this.

And of course, this is one of the primary expenses for working families. Put this all together, and you can readily see that this is going to be a major blow to the American economy.

Whether this jump in gas prices, will be enough to drive the economy into recession remains to be seen. But no matter how you slice it, this is a major victory for Russia in the Economic Battle.

The other major economic battlefront is occurring in international finance. And this is much more subtle. Perhaps less apparent.

We've talked a lot about how the Dollar-denominated SWIFT System for international transactions has been dealt a severe blow.

To make a long story short, The SWIFT System, a place where transactions have all been priced in US Dollars, had been the major pillar of the dollar's reserve status.

Well, in a major victory for Russia, they have managed to move all Russian oil transactions off of SWIFT.

First the Chinese, then the Europeans, and shortly it looks like the Indians will all use alternatives to Swift. And most decidedly they will not be using US Dollars for these transactions.

In the long sweep of history, this is the battle that will hurt the most.

Russia went after the Dollar's Reserve Status and has scored at least an initial decisive victory.

No doubt many battles over the Dollar remain. But for now, this is the definitive victory for Russia.

That's how I see this second front of the war emerging. And it is not going well for the Americans. We have suffered severe losses. Losses that don't bode well for our future financial health.

With their ears pinned back, the Biden Administration must now regroup.  They must decide whether they want to continue with this losing strategy or perhaps try something different.

But bottom line: if the goal was to limit Russia's ability to do business in the Global Community, to date that goal has proven unreachable.