The President of the United States, Joe Biden, has signed an executive order sanctioning US companies from participating in the Russian bond market. The White House said:
“Treasury issued a directive that prohibits U.S. financial institutions from participation in the primary market for ruble or non-ruble denominated bonds issued after June 14, 2021 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation; and lending ruble or non-ruble denominated funds to the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.
This directive provides authority for the U.S. government to expand sovereign debt sanctions on Russia as appropriate.”
The yield on ten year Russian bonds jumped by 1% to 7.2, while their main stock market index, MOEX, fell by 1.2%.
The sanctions are imposed due to a litany of reasons that are sufficient to declare a national emergency, according to the executive order, which says:
“Efforts to undermine the conduct of free and fair democratic elections and democratic institutions in the United States and its allies and partners; to engage in and facilitate malicious cyber-enabled activities against the United States and its allies and partners; to foster and use transnational corruption to influence foreign governments; to pursue extraterritorial activities targeting dissidents or journalists; to undermine security in countries and regions important to United States national security; and to violate well-established principles of international law, including respect for the territorial integrity of states — constitute an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.”
Biden recently offered Russia’s President Vladimir Putin the debate he wanted and has cancelled two war ships that were to enter the Black Sea.
Russian analysts apparently see these two actions as Biden blinking, with reports Russian tanks at the Ukrainian border are being painted with a white cross in a sign of potential invasion.
Troops at the border have now increased to some 110,000, with the German defense minister Annegret Kramp-Karrenbauer stating the completion of the Nord Stream 2 pipeline could be reconsidered in light of Russia’s recent behavior, while the German foreign minister Heiko Maas stated:
“I am skeptical that halting the Nord Stream 2 project would lead to a de-escalation by Moscow — in fact it could have the opposite effect.”
A war with Ukraine is thought to be very unpopular in Russia, a country that has been at war for the better part of the past two decades, starting in Georgia in 2008, Syria in 2012, Ukraine in 2014, Libya more recently.
That has taken a toll on its economy, with wages falling by 15% in the past decade while inflation has recently jumped to 5.8%.
An incursion in Ukraine will likely be met with a very robust response, especially by Europe. Unlike in 2014, Ukraine itself will probably put up a strong resistance with its 250,000 strong army that includes drones.
Just how many drones is not quite known, with Germany in particular probably forced to pick up the tab in case of any incursion to assuage fears in Poland and other Baltic nations.
There are also rumors Europe might consider kicking out Russia from SWIFT if it invades, with Putin piling up on gold in 2018, but it is unknown whether he has accumulated any bitcoin.
The latter could soften the blow, but it would be limited to big payments, with Russia purportedly trying to build a SWIFT alternative in 2018, but that’s probably unlikely to have gone anywhere.
A Swift expulsion would probably be the ultimate response short of troops on the ground, with the situation not quite there as it remains to be seen whether Russia would actually invade, or whether it is really just trying to ‘protect’ Crimea and draw a line there.
Short of such robust action, it is not clear whether sanctions have any effect in situations where the governance system effectively amounts to a dictatorship.
That’s because Putin himself is thought to be one of the richest man on earth, with his wealth estimated by some to be $70 billion.
The economy is not doing well however and these new sanctions on bonds hit the government itself, but those that feel this economic pain, the people of Russia, can’t just vote him out.
Putin’s popularity has been falling there for at least the past two years, and it seems he is generally very disliked especially amongst young people in their 20s and 30s.
Putin however has arrested some 10,000 people by some estimates during the Navalny protests, with some suggesting he is trying to stir up patriotic fervor with this Ukrainian affair like in 2014 to distract.
But yet another adventurism might lead to a further fall in his popularity instead, especially if the economy turns even worse.
This sanction on bonds therefore may well be a very smart move from Biden, with bitcoin so becoming even more of a hedge for Russians especially as their government borrowing becomes even more expensive, and therefore they have to print even more. Meaning inflation may rise a lot further.
Yet it is Europe that has a lot more tools to make very, very expensive any adventurism, and seeing that Ukraine is in this Europe, plenty will now be wondering why America is doing something while Europe is currently doing effectively nothing.
At least as far as visibly can be seen. Behind doors presumably the cost of an incursion has been made very clear, but whether that is indeed the case will only be known if Russia goes back or goes in.
To Poland in particular, an incursion in Ukraine is an existential threat as then Russia is next to its borders again in a domino fall. Meaning the European Union has to respond.
Considering the stakes, whether it will join US in bond sanctioning even without an incursion, remains to be seen.
A bond sanctioning that may in some ways affect bitcoin as some of the funds that would have gone to those bonds may go into bitcoin instead.