Why US sanctions have failed to collapse the Russian economy

The post-Afghanistan-and-Iraq foreign policy orthodoxy in Washington is that economic and financial sanctions are a bona fide alternative to direct war with a country. This is an ideological, not empirical position.

The United States has not engaged in a direct war – or proxy war, for that matter – with an enemy that has posed a realistic physical threat to our country since World War II. The sense that our country has become “the policeman of the world” eroded faith in the federal government significantly. That faith was pretty much nuked after a series of conflicts in the Middle East that were mostly multi-trillion-dollar make-work projects for the defense industry and DC laptop class. Hence the novel popularity of sanctions – we will go into some figurative economic war with a country instead of “putting boots on the ground.” Another perk is that most of the cost of an economic war is opportunity costs (damage to our economic prospects across generations), rather than budget line-items you have to quantify and run through Congress (read: justify to voters).

This strategy has reached peak ridiculousness with the Ukraine – Russia war. No serious person is going to take Russia’s side in this conflict, which was waged on a lie and has killed and maimed thousands of innocent people, including vulnerable populations like children and the elderly. Russia has morphed into a terrorist state not unlike Iran or North Korea and deserves zero sympathy from decent folks.

But there is this desire among the chattering class to make the sanctions against Russia seem like some immense triumph, when the reality is the exact opposite. The Russian economy has undeniably stabilized, partly because of weak and incompetent leadership in the western world, while the US economy and Eurozone are seemingly headed into a downward spiral economically exacerbated by an energy crisis. The sanctions will not be the proximate cause of our recession, but they are certainly an accelerant.

When US corporations started moving out of Russia, Putin did not blink. He started dividing up US assets amongst Russian elites. Many US companies (like McDonalds) made a grand gesture of pulling out of Russia, but they are mostly just selling off their assets there for a song. In short, they are working to the benefit of people who are willing and able to still do business in Russia.

In this sense, the US sanctions are not all that different than the Biden administration’s ill-advised withdrawal from Afghanistan. We accomplished nothing, but enriched the very terrorists we spent decades fighting. They captured billions and billions of dollars of high-end military equipment, cash, intelligence, everything. Sanctions in Russia meant the abandonment of US assets in Putin’s hands – instead of a punishment, a massive transfer of wealth.

Now, the Biden administration is, in their minds, forcing Putin to default on their debt by not allowing Putin (who has the funds on hand to make the payments, which go to US bondholders) to pay in US dollars as the contracts require. What kind of punishment is a debt holiday on the backs of US investors? Really sticking it to Putin’s war machine, geniuses.

But the real reason why Russia is stabilizing as the US breaks down? Read China sits in Russia oil sanction sweet spot:

China is in pretty good position when it comes to the global energy shakeup. Cheap Russian crude hit by a Western boycott is heading to Asia, yet the increase to the world’s biggest importer has been more modest compared to India. And in the continuing absence of a European embargo, buyers like Italy keep snapping it up. The upshot is that Beijing is likely to buy more.

Politicians in Washington had warned they were ready to shut down Chinese companies such as chip producer Semiconductor Manufacturing International Corporation (0981.HK) if they sabotage sanctions designed to pressure President Vladimir Putin. read more Beijing has showed sympathy for Moscow and refuses to call the invasion a war. Oil lubricates its tightrope: exempting Saudi Arabia, Russia is China’s largest source of oil.

Thus far, India’s surprisingly aggressive bargain-hunting has diverted much of the spotlight. The similarly energy-poor country is home to Reliance Industries (RELI.NS), owner of the world’s biggest refining complex, and has scooped up discounted Russian Urals crude at record speed since the start of the war. Daily shipments hit 674,000 barrels last month, more than doubling from March, according to S&P Global’s Commodities at Sea. Russian daily loadings to China, meanwhile, rose just 10% to 781,000 barrels.

Some European countries, despite Brussels’ decision of a ban in six months, are also dragging their feet. While demand in Germany has collapsed, Italy’s Russian crude imports, for example, jumped 40% in April, S&P data showed.

That gives the People’s Republic some cover. Russian cargoes factoring in transportation and insurance costs carried discounts of $8 a barrel or more to Brent, according to Bloomberg. China’s Shandong Port International Trade Group, which handles approximately a quarter of the country’s crude oil imports, has secured a rare Russian shipment for arrival this month, Reuters reported.

More Chinese buying is set to follow. About 650,000 barrels of daily Russian crude oil that previously shipped to developed economies like the EU could be replaced with similar grades and volumes from the Middle East that now mostly go to China and India, energy consultancy Wood Mackenzie estimates. While breaking long-term contracts for opportunist gain would normally be a commercial mistake, high energy prices mean Saudi Arabia can probably divert supplies to Europe without a financial hit. As Chinese demand recovers from nearly two months of Covid-19 lockdowns, Russia’s discounts will be hard to resist.

– Russian daily crude oil loadings earmarked for China increased 10% from a month earlier to 781,000 barrels in April, the highest rate of the year, while those to India more than doubled to a record 674,000 barrels, according to S&P Global’s Commodities at Sea.

– China’s Shandong Port International Trade Group, a provincial government-backed commodities and oil trader, has secured a rare shipment of Russian crude oil for arrival into east China this month, Reuters reported on May 11, citing traders and a company statement.

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