Russia: Off-Script?

Russia, with a current account surplus in January — November 2023 amounting to $50.5 billion ($223.0 billion in the corresponding period of 2022) is not behaving according to plan. Russia's trade turnover amounted to 530.2 billion dollars in the first nine months of 2023. Exports reached 316.9 billion dollars, while imports amounted to 213.3 billion dollars during this period. It sounds like the country has veered off-script from the narrative written by Washington, and applauded by the EU. What's to be done?

The US answer has been to amp up the sanctions by targeting banks that facilitate payments for what seems to be anything Russia-related. The goal and logic of which is becoming increasingly obscure, and looking desperate.

President Joe Biden amended two executive orders on December 22nd in a move that will allow the US to impose what are referred to as secondary sanctions which are financial penalties on US and non-US banks for doing business with firms sanctioned for links to Russia... whether they are aware of it or not. The US now can target financial institutions directly in cases where officials don't get cooperation from foreign governments to scrupulously enforce anti-Russia sanctions, in time for the New Year, effective January 1st.

This approach is oddly unscientific, despite all the political investment and emotional posturing that have been made to date. Science is all about reproducibility. The definition of science is doing the same thing over and over and knowing that you'll get the same result. You can prove scientifically that if you drop an apple, in the absence of interference from other forces, it will fall. It would be incredibly stupid and yes… insane to believe that the apple may not fall. It will be unscientific, which means that it is not the way the universe we live in works. When dealing with chaotic systems, like politics, "expecting the unexpected" is not insanity, but is it courting unexpected outcomes which may truly be crazy. Somewhat akin to "I never make the same mistake twice. I make it eight or twelve times, you know, just to be sure".

Many have spoken or written about the ineffectiveness of sanctions, especially after European Union leaders, in consultation with Washington earlier this week backed their 12th sanctions package. This latest batch attempts to dampen down Russia's lucrative diamond industry, prohibit the import of liquefied petroleum gas from Russia, restrict the import of some processed metals, and ban the export of machine tools and machinery parts to Russia.

The US move will cause further pain for most banks processing the US Dollar, which have already erected expensive compliance protocols to ensure they don't run afoul of sanctions. While many international banks no longer do business directly with Russia, they can act as correspondent banks for client financial institutions in third countries that continue to finance and engage in neutral free trade.

The signing of the Executive Order implies that all banks trading in dollars must bow to Washington's extraterritorial demands, or face penalties for maintaining those 'sanctioned' relationships if any trade continues. Janet Yellen recently said, "We expect financial institutions will undertake every effort to ensure that they are not witting or unwitting facilitators of circumvention and evasion."

Russia has found ways to get around Western sanctions by using financial intermediaries to help normalize the import and export of all manner of necessary goods.

The order will give US authorities the ability to place bans on products that originated in Russia but were further processed outside of Russia by non-Russian businesses.

What may have provoked the US is that 2023 has seen a strong showing by Russian producers exporting products unrelated to oil, gas, energy, or other natural resources. Such exports brought the Russian budget 4.25 trillion rubles in taxes, duties, and related revenues for both national and regional budgets, accounting for about 9% of GDP, and 7% of all employment which is oriented to exports.

This recent executive order could turn out to be a very strong incentive for many countries to speed up their participation in de-dollarization. After all, carrot-and-stick approaches are hard to swallow for any country. Especially for any foreign nation as to what relations they can or can not have when trying to serve their own country's best economic and trade interests.