Thread by @SonyKapoor

I have got many questions abt policymaker logic behind #Russia #sanctions, their impact on Russia, EU, global finance, & the economy

Their scope, potential 4 evasion, deterrence, potential long-term impact & possible next steps.

1 Pls read 🧵 ⬇️ 2 I will answer Q in a new🧵👇

https://twitter.com/sonykapoor/status/1497514200343658496

When #Russia attacked, policymakers faced a hard choice. What could we do to deter and dissuade #Putin short of a risky military confrontation between nuclear powers?

We primarily had large financial sanctions that front loaded the pain, ideally narrowly targeted towards Putin!

But in authoritarian Russia, where #Putin could potentially command any state-owned, oligarch or private assets for his objectives, any effective sanction could either be large, or be narrow (a few banks, Putin´s assets) but not both.

Sadly, Broad Sanctions = Collateral Damage!

That is why we successfully argued for the narrow 1st and second set of sanctions announced Fri & Sat to be expanded dramatically.

In particular we looked at the #Iran, #NKorea, #Venezuela precedents to look at #SWIFTban #BlockingSanctions #CentralBankSanction #TradeEmbargoes!

In addition 2 being big, sanctions had to be front-loaded 4 maximum impact now, rather than 6 months or a year from now

#Ukraine is being bombed now, so #Russia must face immediate consequences or too late 2 dissuade #Putin

Hence prioritizing Financial over Economic Sanctions

Why? Becoz financial sanctions, such as asset freezes, can target the far larger stocks of existing assets, whereas economic sanctions, such as trade embargoes affect the smaller flow of future income, which does add up over time, but is much smaller in size than stock of wealth!

Folks say, the #SWIFTban & #RCB asset freeze is one thing, you should really target the oil & gas.

Russian official reserves, + foreign assets of banks + oligarch foreign assets + corporate assets abroad etc.

Easily more than $ 1 trillion!

Daily export income 1-2 billion!

The math is clear. To front load pain for #Putin, being able to devalue or seize even 20% of $1 trillion is much better than choking off fresh flow of export income.

It made no sense to prioritise targeting exports first. Sanctions concentrated to devaluing and freezing assets!

A multi-pronged approach is being followed. It can (& will) be expanded.

Freeze legitimate FX assets, Seize illegitimate FX assets, Penalise X-border transactions, Force Devaluation of #Russian assets, Cut off Access to FX funding, Limit Ability 4 Counter Measures, Induce Panic

1) Devalue the FX denominated assets #Putin has access to 2) Limit his ability to draw on this lower amount of wealth 3) Limit his ability 2 borrow FX against the value of residual wealth (assets) or future income 4) Induce a huge Russia Risk Premium

These Reinforce each other!

Russia´s actions and the sanctions and clear messaging from the West have turned it overnight into a Pariah state. The legal, financial & repetitional risks of holding Russian assets have skyrocketed

The flip side of this high risk premium is the precipitous fall in their value

The second action has been to freeze (for some assets under the threat of seizure) Russian Central Bank and Oligarch assets that fall under Western jurisdictions.

This is like having money in the bank, but the bank being closed, and not knowing when and if it would open again!

The third action has been to limit #Russia´s ability to borrow against these assets, or against expected future export income, by banning it from raising money in Western capital markets.

You can't touch ur money bcoz ur bank is closed, and you r banned from borrowing elsewhere

The fourth action, which has been part regulatory, part voluntary, part moral suasion has been to make the holding of Russian assets poisonous.

This means not just that you would not lend to, or invest in Russia, but that you will liquidate what you already hold at any price!

The fifth action, of blocking sanctions on many Russian banks, and cutting many others (but not all) off the SWIFT network has got the most attention, but is definitely not the most consequential.

It makes life difficult, puts sand in the wheels, & reinforces the pariah status!

The sixth action was a messaging strategy that played up the impact of sanctions, talked up the risk of bank runs & market panic (there was not much danger of a bank run on the Rouble deposits of banks, as the RCB can print Roubles) and hence amplified their real world impact!

Taken together these sanctions and accompanying messaging is truly unprecedented and, as I said in this @WSJ interview wsj.com/articles/ukrai…, the equivalent of a "nuclear bomb" in the world of global finance

Overnight they have cut Russia´s financial wealth by a third or more!

Overnight, Russia has (temporarily?) lost access to half or more of its public & private wealth stashed abroad

Even under the unlikely scenario of a detente´ & a quick reversal of sanctions, we believe that somewhere between $50 - $150 billion has already been permanently lost!

R these sanctions perfect? No

Could we have done more? Yes

Will these b leaky? Mostly depends on China

Can #Putin still fund his war? Sadly, Yes

Should we now go to economic sanctions now? Yes, that is the next step

Will Putin Stop? I don't know

I need to sleep, TBC tom

Sanctions had 2 inflict large & immediate economic pain 2 #Putin & cronies.

But they can mobilise any resources in #Russia, so broad sanctions, with economy-wide impact, despite collateral damage.

Financial better than Economic 4 speed & size. Stock vs Flow. Wealth vs Income.

Besides size and speed, the third criteria 4 "effective" sanctions here is that they need to be asymmetric.

They need to hurt Putin´s #Russia & its economy more than they hurt the #EU & the world economy.

Financial sanctions are much better than economic ones 4 that asymmetry.

Broadly Russia´s main exports to the world are 1) oil 2) gas 3) commodities 4) food and in each of these, it is a major actor on the global stage so much so that if exports were to dry up, it would cause a HUGE supply shock that would take away 5%-15% of the supply immediately!

The demand for oil, gas, metals & in particular food, is relatively inelastic. You gotta eat what you got to eat.

Thus even a relatively small reduction in supply would lead to a huge increase in price.

This would put fuel on the fire in a world struggling with high inflation

Do the math & trying to deprive #Russia of the $1-$2 billion of daily export revenue by cutting off oil, gas, commodity and fuel exports, will impose a first order cost that could easily be 10-100 times bigger than that on the rest of the world.

The poor would suffer the most!

Financial sanctions on #Russia also impose a cost on the rest of the world, particularly for anyone that owns Russian assets.

But on average, these are entities that belong to the upper echelons of the income strata so the impact on the poor & vulnerable outside Russia is low!

So we find ourselves in the bizarre situation where trade with the "enemy" continues with some disruptions & import restrictions.

But this is the "goldilocks" of the sanctions regime in the present context.

Costs 2 Russia are large, immediate & punitive.

Costs 2 ROW limited

But this "goldilocks" sanctions regime is not a stable equilibrium and may not last.

(In my opinion misinformed) moral pressure I building up to cut #Russia´s exports, & with trade finance drying up and Russia´s pariah status, many bottlenecks are building up in supply chains.

#Putin knows that cutting off Russian exports will hit the world asymmetrically & induce serious economic pain, particularly in the EU on gas, in the US on oil (potentially affecting mid-term elections) & to developing economies (India) on food.

So he can do it anytime at all!

THAT is what we need to be "worried" about & "prepared" 4.

1) Tighten financial sanctions further 2) DO NOT touch exports of Oil/Gas/Commodities/Food 3) Impose restrictions on arms/other exports 4) Tighten import restrictions on Russia 5) Contingency plan 4 Putin 2 shut exports