Is the West Risking Financial Blowback From Sanctions on Russia?

The spectacle of insanely authoritarian policing in Ferguson, as well as media jitters over ISIS and ongoing reports of action in Gaza and Ukraine, has shifted attention a bit away from simply lousy economic results from Europe. A Financial Times overview:

This year was supposed to be the year the eurozone recovery took root – gathering enough pace to create jobs and spur investment.

Instead, growth stalled between April and June, leaving the currency area lagging behind other advanced economies and raising doubts about whether policy makers have done enough to stamp out the twin threats of stagnation and deflation.

The economy is still far smaller than six years ago, unemployment is in double figures and debt burdens in some areas are high.

Naked Capitalism readers will not be surprised at this outcome. We’ve said consistently that austerity would backfire and lead the contraction imposed on the periphery to infect the core. Indeed, Germany registered a small contraction in GDP in the second quarter and France was at stall speed. The results were so troubling that Bloomberg’s editors cleared their throats:

All three of the euro area’s biggest economies — Germany, France and Italy — are failing. Germany’s output actually fell in the second quarter. So did Italy’s, for the second consecutive quarter. (Whether this is a new recession for Italy or a continuation of the old one is debatable.) The European Central Bank currently forecasts a rise in euro-area output of 1 percent this year. Expect that to be revised down next month.

With inflation in the euro area running at 0.4 percent — way below the ECB’s target of less than but close to 2 percent, and far too close to outright deflation — why isn’t the ECB trying harder to ease monetary policy? Its official answer is that it adopted new measures in June, including an expanded program of support for bank lending. These, it says, should be given time to work.

The problem is that the editors then call for more aggressive action by the ECB. Monetary stimulus is simply not remotely an adequate substitute for government spending. Even the austerian IMF has been forced to acknowledge that fact. Admittedly, they’ve done that in techno-speak, by stating that it has found that fiscal multipliers are almost always greater than one, meaning that government spending produces GDP growth greater than the spending rise. So even if on paper debt levels rise, the critical debt to GDP ratio falls because the increase in the denominator more than offsets the rise in the numerator.

So to the extent that European officials rouse themselves to address these alarming results, they will administer the wrong medicine.

And remember, these faltering results came in before the so called Tier Three economic sanctions against Russia went into effect. A new article in Project Syndicate argues that if they prove to be effective, as in they damage Russia in a meaningful way, the blowback to Europe will be even worse. The apparent assumption among Western policy-makers seems to be that Europe has enough fuel stockpiled that Russia will suffer from the loss of income before Europe feels the effect of higher energy prices due to any supply constraints Russia might impose. But the experts appear to have overlooked the fragility of Eurozone banks. From Marcel Fratzscher at Project Syndicate:

The problem with financial sanctions is that no one knows precisely how they will unfold – especially in an economy as large as Russia’s. If they prove to be more effective than intended, they will pose a serious threat to global financial stability.

The restrictions on Russian banks operating in Europe and the US appear modest. The banks can still access money markets, cover their short-term financing needs, and count on the central bank for support. But investors’ risk appetite could easily shift, spurring them to withdraw large amounts of capital. Though Russia’s public debt is modest, its foreign-exchange reserves large, and its economy much stronger than in 1998, once the herd is running, it is impossible to stop it.

Europe’s banks have extended almost €200 billion ($268 billion) in loans to Russian institutions and firms, and hold a significant share of Russia’s euro-denominated assets, making them especially vulnerable. Moreover, the eurozone’s current stress tests may well reveal significant capital holes in major European banks in the coming months. Having just emerged from a deep recession, financial disruptions could easily cause Europe to slide back into recession, particularly given the eurozone economy’s close links to Russia via trade and energy.

Compounding the problem, no one truly understands the precise connections among Russian and European institutions and markets. The collapse of LTCM in 1998 was completely unexpected. Is Europe today prepared to deal with a similar failure of an important financial institution?

The financial sanctions on Russia are not targeted, temporary, or fully credible…Once these sanctions begin to bite, no one can say who will be hurt – or how badly. And, as Russia’s experience in 1998, and Argentina’s after 2002, demonstrated, the process of restoring confidence among market participants is a long and painful one…

In any case, US and European leaders must recognize that all sanctions will have costs – many of them unexpected – for both sides. If they are not willing to risk global financial stability in an unpredictable game of chicken with Putin, perhaps it would be wise to re-think the composition of the sanctions that they impose.

Yves again. I had dinner with Mark Ames earlier this week, and he remarked that the escalation of tensions in Ukraine has done the most to benefit the extremists west Ukraine in the part of the country that was never part of the USSR and Putin himself, as his opponents on the left have either gone silent or moved into support in the face of an existential threat from the US and Europe. So that means that so far, Putin has come out a winner from this battle of wills. American experts seem unduly confident that imposing economic costs on ordinary Russians will erode Putin’s record popularity, but Russia has had such a wild economic ride over the last two decades this seems like an optimistic assumption, particularly if it is seen as a cost imposed by clearly hostile foreign powers. So the upside scenario for the West is not all that likely to play out as hoped, and as Fratzscher stresses, the downside may be much greater than they envision.

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  1. ex-PFC Chuck

    There are also the counter sanctions, both soon to be implemented and threatened, which you don’t dwell upon in this post. As the Saker pointed out shortly after they were announced a week or so ago, they appear to be well thought out to cause visible pain, benefit Russia and to expand the already widening fissures among countries in the Eurozone.

  2. Christopher Dale Rogers


    Thanks for posting on the far-reaching economic implications associated with the present crisis unfurling in the Ukraine in front of our eyes – if we look further afield at other crisis ongoing in the Middle East, the picture you have painted is somewhat more rosy than the actuality calls for at present.

    Although its difficult to keep up with events as they happen, already the Western European media is howling over an alleged Russian military excursion into Ukraine with a convoy of military vehicles, among them APCs. This is not to be confused with the humanitarian aid convoy which Kiev has now sanctioned to enter the disputed territories adjacent to Russia’s border with the Ukraine – at first sight, and if these media reports are to believed, we may be witnessing Putin and Russia intervening directly within the disputed territories to protect civilians – be they ethnic Russians or actual Ukrainians. This would fit in with Paul Craig Robert’s opinion found here: – which essentially claims Putin blundered by not annexing the disputed Ukrainian territories and drawing a clear and uneducable line in the sand.

    Without even the crisis in Ukraine and impact of the EU’s Tier III sanctions, it seems that global implications are being ignored or discounted. Not only is Europe heavily reliant on Russian hydrocarbons, but its reliant on a steady supply of hydrocarbons from the Middle East, rather than EM states being able to ramp up production to meet Western European demands for alternative sources of Russian hydrocarbons, the reverse seems to apply, namely, the crisis in Iraq is undermining that nations ability to produce oil, and that’s before we look at North Africa, specifically Libya. I get the sense that policy-makers seem to be discounting a large spike in oil prices, never mind international gas prices outside of the USA – I WOULD APPRECIATE IF OTHER POSTERS COULD JUMP IN HERE with some factual analysis.

    My great concern, as the crisis of the ME and Ukraine continue apace is that hydrocarbon prices will increase dramatically if these crisis are not dealt with diplomatically with speed and good grace. Whilst present oil prices have only been oscillating in a tight manner, a spike in the price of oil to above US$150 would have chronic effects, whilst a spike to US$200 would result in a global depression.

    I am unable to touch on all the bases here, but it’s a fact that European banks are in a mess and no where has capitalised as US peers, which itself remains well undercapitalised when compared with peers in Asia, with the exception of Japanese financial institutions. Further, all Western central banks have been battling deflation – they are scarred shit of it – and yet we have deflation in most of the Euro member states, despite all the QE and blowing of asset bubbles that has characterised macroeconomic responses to the financial crisis in 2007/8.

    Indeed, given the precarious financial condition of many of Europe’s leading banks and their emphasis on including property assets and loans on said assets in their Basel III calculations, and further fall in asset property related prices would have a huge impact, both a Europe, and via interconnectedness, globally.

    I have asked now on numerous occasions what the hell are the Western European elites thinking, for it seems to me little if any actual thought has been put into their anti-Russian posturing on behalf of their US masters. Even before considering any likelihood of armed confrontation and a potential nuclear escalation, it seems scant attention has been paid to the economic and financial consequences of this madness.

    One looks forward to others commenting and engaging on these issues, which I’m getting more and more concerned about with every passing hour – and lets not forget that I’m not suffering from hyperbola, quite the reverse, history from 100 years ago clearly demonstrates that from little acorns big crisis grow, and its seems presently the elites are trying to grow a forest of Oak on our behalf’s.

    1. Banger

      I think Euro elites are much more afraid of the allegedly “declining” USA than they are of any economic consequences from sanctions or even war with Russia. This is obvious and has been, in particular, since 9/11 when the ruthlessness of American power became obvious.

  3. paulmeli

    Virtually every mainstream article we see assumes without question that a country’s income is dependent on foreign trade while ignoring the fact that most growth is funded from within, and if necessary all of it could be, especially for a country like Russia that has all of the resources it needs within it’s own borders.

    For every exporter there has to be an importer…someone has to lose in that game if someone else is to have net income.

  4. Cocomaan

    ANY sanction has consequences, especially any sanction against a country as large and as wealthy in resources as Russia. Sanctioning North Korea or Iran is one thing. Sanctioning a major world power is another kind of beast. This one actually resembles a bear.

    Sure, it’s better than fighting, but if you think you are going to enact sanctions without having very real economic effects, you’re not thinking things through.

    I mean, if we’re still in an “economic recovery”,and we still have “work to do” to build the economy back to a decent rate of growth, this is just the kind of thing to break said recovery.

  5. zapster

    Some additional background stuff I dug up recently:
    Looting Ukraine
    While I want to agree with Dr. Roberts on his opinion that Russia should have simply struck, I think that that would have been bad timing. Russia has been so relentlessly slimed for so long by the West’s cold war propaganda (and memories of Stalin hang on, especially among germans) that the reaction from the rest of the world would have been violent, I think.
    However, after months of seeing the Donbass pulverized and the leaked photos of Kiev’s atrocities there is more sympathy for them. Putin’s restraint and reasonable, measured statements stand in stark contrast to what’s coming out of Kiev and the State Dept. as well. It’s hard to miss the complete lack of credible evidence of anything whatsoever, from the MH17 to the reasons for the war in the first place. The US’ backing of a patently illegal neo-nazi putsch is shocking (well, to many, anyway.) Putin gave it time to allow the world to see what the US has become. There’s a lot more support now, and even outright demand, for Putin to come to the rescue.

    As for the gas wars (which this is, largely)–we have to stop:
    It’s time to leave it in the freakin’ ground

  6. OIFVet

    ‘Europe “shot itself in foot” with Russia sanctions -Hungary PM’: “The European Union has harmed itself economically with the sanctions it has imposed on Russia over Ukraine, Hungarian Prime Minister Viktor Orban said on Friday, calling for a rethink..

    Orban’s remarks came a day after his Slovak counterpart, Robert Fico, criticised the sanctions as “meaningless”, saying they would threaten economic growth in the 28-member bloc.

    “The sanctions policy pursued by the West, that is, ourselves, a necessary consequence of which has been what the Russians are doing, causes more harm to us than to Russia,” Orban said in a radio interview. “In politics, this is called shooting oneself in the foot.”

    “The EU should not only compensate producers somehow, be they Polish, Slovak, Hungarian or Greek, who now have to suffer losses, but the entire sanctions policy should be reconsidered,” Orban said.

    This coming from Hungary, which unlike certain others former Soviet Block members, is apparently clear-thinking enough to know the difference between present day Russia and the Soviets of 1956. Same with the Slovaks and the Czechs. One is left wondering when will the Poles wake up and kick out the Fifth Column represented by Mr Anne Applebaum-Sikorski. Now, Orban and Hungary have already given the EU no small amount of heartburn by refusing to adhere to Eurocratic orders to commit national economic suicide for the greater good of German and French banks, so one also wonders how long before a color revolutionaries appear in Budapest’s central square.

    1. Fiver

      It strikes me the US move was intended to rattle both the EU/Germany and Russia. People forget that the EU prior to the US-centred financial fraud meltdown was being openly promoted by themselves and others as a serious economic and political rival for the US. So much for that idea. Yet it’s a major error for the US to be pushing this idiocy with Russia so far, so clearly against the will of important populations and leaders, with nothing but the prospect of worse for company. The US seems to believe it can eventually install another bozo like Yeltsin, but there is zero chance of that. The Russians have had real leadership in a conflict they have no doubt is being forced upon them from the outside, not inside, and they are not going to just fold and lose 20 years of ground hard won. Nor will Germany, I think, if this drags out too long and pointlessly.

    2. nry

      A dogmatic worldview leads you to funny places, doesn’t it? You’re singing praises for a man who has *explicitly* stated that he wants to turn Hungary into an authoritarian “illiberal” state comparable to Russia and Turkey. The Putin axis you’re cheering for is basically a bunch of conservative, right-wing authoritarians.

    1. Lambert Strether

      And by “twitter feed” we mean “putative twitter feed” until such time as such digital evidence is fully vetted. Which, sadly, with digital evidence it’s “virtually” impossible to do.

  7. steviefinn

    This article is over a month old but it gives details of some of the earlier refugees into Russia & states that the communist party & civic groups were transporting civilians from the Slavyansk region into Russia. Let’s hope that’s where the vast majority are now.
    The return of ethnic cleansing & Europeans throwing stones from a glasshouse. Common sense is a rarity nowadays but that has been evident for some time in many ways, within the Eurocracy.

  8. Banger

    Despite the obvious harm sanctions will cause on the German economy 70% of Germans favor the sanctions due to the MH-17 operation wherein Russia was tried and convicted without a shred of evidence by the CIA and the entire Western media, as they have done for a long time, simply repeated the lies produced by the US Ministry of Truth. It is one thing to see the US public following the controlled media since the oligarchs have had nearly an uninterrupted century to perfect their propaganda techniques–but one would have thought the Germans would be a little more skeptical of official pronouncements. The fact the MH-17 story has disappeared from view should signal that it may have been a false-flag operation not unlike Syrian gas attack of a year ago which also swiftly disappeared from the news. Compare the MH-17 story to the MH-370 story that was front page for weeks.

    1. Fiver

      I think it will be much more difficult for Washington and Kiev to make their case and that the failure to provide proof on this one will weigh more heavily this time. Enough to revive talk of impeachment, perhaps.

  9. Jackrabbit

    Yves asks: Is the West Risking Financial Blowback?

    The better question is WHY? I think that has been answered by the commentariate here at NC. The short answer:

    >> Its not just about Ukraine anymore, its about toppling Putin

    >> And its also about ending the BRICS challenge to a unilateral NWO (with US as hegemonic enforcer)

    By the looks of it, Western elites are fairly united (and those who are unsure are cowered). It seems like its again, more a matter of ‘the 1%’ vs. ‘the 99%’. Oligarchs and their toadies/lackeys will reap all the benefits of a unilateral NWO.

    H O P

  10. nry

    “I had dinner with Mark Ames earlier this week, and he remarked that the escalation of tensions in Ukraine has done the most to benefit the extremists west Ukraine in the part of the country that was never part of the USSR…”

    Pardon? There is no part of current Ukraine that I know of that wasn’t part of the Ukrainian SSR and thus USSR. The rest doesn’t make much sense either, since Western Ukraine is as peaceful as you can get in a nation at war. If you disregard the obviously worst extremists, the Russian and Russian-backed militias, the small bunch of extremists Ukraine has are probably pretty much all fighting for independence in the East at the moment.

    1. Yves Smith Post author

      Ames said he was shocked to see Ukraine of all places erupt into what amounts to ethnic strife.

      The right radicals in Kiev get what they want, a state with ties and backing from Europe. So they win.

      Putin has wound up winning by virtue of the Western escalation driving even his former leftist critics to his side.

      He may have meant that the western part of Ukraine had a contingent that was always more focused on Western Europe than Russia. And he may be referring to the fact that a substantial part of Ukraine had been part of Russia for hundreds of years. But I infer there are parts near the western border that haven’t identified much with Russia. How large that area is physically and what it history (re its national identity) isn’t something I’ve followed.

      1. OpenThePodBayDoorsHAL

        After wars, rich white men get into rooms, light cigars, and redraw lines on maps. We’ve got the wars, can’t we just get going with the map redrawing already? Ukraine, Western half independent, West-leaning, Eastern half incl Crimea, part of Russia. Iraq: Kurd portion, Sunni portion, Shi’a portion. Maybe the fact the map redrawing is not happening tells you everything you need to know: It’s no longer the wars that decide the’s the war-making itself that is the treasure.

      2. nry

        Alright, thanks. This would make more sense. Ukraine is indeed somewhat culturally and historically divided, which raises the possibility of something like an ethnic strife under worsening conditions, especially if escalated by irresponsible actors. It’s not the Balkans, though.

        But here I disagree strongly: a Ukrainian state with ties, backing and values from Europe is not only what “right radicals” want. It’s a very popular idea and demand throughout Ukraine, with middle class everywhere and in the west throughout the population, although with less support around Donets Basin in the industrial east where a kind of “Soviet” identity is popular as well. The socio-cultural split on moving towards Europe is not as clear-cut as you might think, either, since it was basically one of Yanukovych’s themes as well since 2012 (and then in late 2013 obviously contributed to why the people felt betrayed by his maneuvering). “Europe” is not perceived as simply EU or NATO, but it’s more like an ideal, a symbol for what they want to move away from or reject, i.e., unstable state institutions, rampant political and other corruption, including corrupt judiciary etc., eastern authoritarianism, and so on.

        1. nry

          Actually, as a small additional remark, the “right radical” wing of Euromaidan (which as a whole is/was a hugely heterogenic movement with a dominating moderate and middle-class pro-European and anticorruption component) is clearly *more* euroskeptic than the movement on average. Unless you’re referring to (Euro)maidan as “right radical” in general, which is deeply intellectually dishonest.

          1. Christopher Dale Rogers

            So what happened?

            It may assist you in comparing the Euromaiden non-revolution with that in Iran in 1978, suffice to say, all that was achieved was replacing one gang of crooks with another, which is why, had they actually followed the “judicial” course, namely to eject the scum via the electoral ballot, democracy in the Ukraine would have been cemented – now you have no democracy due to the fact many of these supposed “pro-European” forces were happy to cut off their own noses to spite themselves. Not only did they achieve zero, they have sparked a civil war and ethnic strife – so, again I’ll invoke people to read Edmund Burke’s “Reflections on the French Revolution”.

  11. kevinearick

    Intermittent Learning: Fire Creates Its Own Weather

    Short cut efficiencies ‘work’ under zero variability, so the system seeks zero variability, until it blows up, which physics tells you is going to happen, but that doesn’t tell you when. If there’s a 90% probability that your distributor circuit is failing, a 9% probability that your fuel pump circuit is failing, and other, a thousand different possibilities, is 1%, are you going to swap out your distributor and/or your fuel pump, or buy another car? (no, no, & no)

    If you accept higher education, forming a committee to solve a problem from the past, created by higher education, to propose a plan for the future, buying consensus with printed money, while a thousand other outcomes occur, you get what you get, war. At the beginning of each empire cycle, this stuff is common sense, because Goliath just got his a* kicked, again. Labor is in the business of cleaning up the mess and rebooting the system.

    The vast majority of critters will accept derivative civil marriage compliance by age two, and confirm compliance to a particular peer pressure event horizon, usually their parent’s FILO placement, by age sixteen. The vast majority of the rest will join the futile peer pressure resistance event horizon, employed as an example to the remainder, who will be hunted down by process of elimination.

    Capitalism simply exploits the resulting demographic boom bust cycle of socialism, in what it chooses to call a market. When the boom started was the time to consider demographic stabilization, and when the capitalists lost control was the time to implement developments. In 2008, the price tag was $2T. Now that the critters have demonstrated complete incompetence, bidding against themselves to the tune of $50T, and demographic collapse has taken hold within the majorities, war is escalating out of control.

    The FILO ‘first-ins’ are given every advantage – free money, technology, extortion, military and information advantage, within the closed system they create for the purpose, but the committee gets beat by a kid every single time, which is the point of public education. Don’t get upset because your children tell you school is stupid; tell them to teach themselves, to focus on the relationship between life and gravity, because timing gravity to turn on itself is everything.

    Waiting for God’s time, unknown recognition, is not about sitting on you’re a*, reading the bible, re-reading empire History, gossiping at the office, building a more efficient rat trap, or coming up with yet another theory on the Internet, to maintain the status quo of false assumptions. It’s about preparing to be successful until you are, practicing faith, by seeking and finding what others do not, acquiring physical and mental skills in the process of developing your talent.

    The economy is always being rebuilt, from the bottom up, hidden only by false assumptions accepted by the majority, through kindness of a stranger, because no one can f* you like your family, copying feudalism more efficiently. In a nutshell, regardless of job, which is always fubared, you clean up the mess on Friday so the critters can start on Monday, until you don’t, by walking through gravity to alter the outcome data, making stupid obvious for those who have not accepted the false assumptions.

    If you happen to be assigned to the homeless event horizon with kids, and you figure out how to feed and cloth them, get them off to school with a good attitude, and get yourself to that $10/hr job, when 1st, last and deposit is $2500, without accepting the assumptions of your station, whether you are advantaged or disadvantaged is a matter of perspective. Regardless, your role is a helleva lot more important to the economy than which quarterback supposedly won the superbowl, not that you can’t enjoy a football game.

    The morons, paying $100/barrel for oil, increasing rent on falling income, and bombing impoverished children along with their parents’ industry, to get cheaper crap at higher prices, are their own worst enemies. Regardless of answer proffered by the socialists, it should be obvious that queuing people up as bait for capitalist predators, to secure FILO entitlement, doesn’t work.

    On a scale of 100, parenting is 100. Anything you do at a public, private or non-profit corporation is a 1. Finding an effective spouse and having children, as real demand becomes obvious, is your top priority. Next is a job and a landlord to adjust your income to rent ratio. What you actually do for an empire job is irrelevant, as is the empire. For every Joe Montana, there were a thousand better quarterbacks who didn’t go to the NFL, because the false assumptions of the majority simply weren’t a priority.

    We have 2000 firefighters up here creating economic activity, fighting nature, while their boss ships redwoods through San Francisco to Asia, and replacing it with pot, playing last to lose in a drought. It’s always a food war, but you’ll have that. The critters are going to do what they are going to do, following the laws of gravity. Don’t step in front of that train expecting them to stop. You can see everything you need to see at the station.

  12. optimader

    “American experts seem unduly confident that imposing economic costs on ordinary Russians will erode Putin’s record popularity, but Russia has had such a wild economic ride over the last two decades this seems like an optimistic assumption,,”
    Where unduly confident segues to naïve expectation only to go up on the reef of unintended consequences

    If the Russians know how to do anything, it’s “scaling back” under austere conditions.. As a matter of fact, they take such pride in stoically dealing with adversity, it can practically be considered a time honored National sport. There is no better catalyst for Russian solidarity than existential threat. Hell, they rallied being Stalin! Relatively speaking, Putin is a farm team player.

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