M.A.D. Sanctions; Two Games at Once

M.A.D. Sanctions

Sanctions are a lose-lose-lose game. Consumers lose, businesses lose, countries lose. And the hypocrisy alone is appalling.

The EU wants sanctions to hurt Russia "more" than the EU. Thus the EU let a French military sale to Russia go through, while blocking transactions and travel of Russians who had virtually nothing to do with this mess.

Knockout Blow?

For all their efforts will the US or EU accomplish anything with the sanctions on Russia?

Financial Times writer Christopher Granville has the answer in his take EU’s Sanctions on Russia Will Fail to be a Knockout Blow.

The main burden of the EU sanctions mooted by the commission would appear to fall on the UK. The core measure targets debt and equity capital raising by the Russian state banks and bans European intermediaries from offering associated underwriting and advisory services, and the bulk of such business is done in the City of London. Capital market funding is also a small portion of overall foreign funding of Russian banks (about 3.5 per cent as of March 2014), so an important detail about the EU sanctions package as regards both overall impact and burden sharing between the member states will be whether the prohibition on financing Russian banks will extend to ordinary lending. The international syndicated loan market for Russian borrowers is dominated by continental European banks. French banks have the largest exposure of $52.5bn.

This analysis presupposes that the EU will never go for the “nuclear” sanctions option of banning gas imports from Russia, and that the EU and US together will not try to replicate against Russia the ban on oil exports imposed on Iran. The EU cannot for now substitute its present annual gas import volumes of 150bn cubic metres from Russia, and the loss of Russia’s present level of crude oil exports – 7m barrels a day, compared to Iran’s 2.5m b/d – would trigger a sharp rise in the oil price and a global economic slump. This would be the economic equivalent of the Cold War-era concept of nuclear deterrence based on mutually assured destruction.

Short of the “MAD” options, the Russian economy will decline and Europe will suffer, but there will be no knockout blow and, as so often in Russia’s history, the Russian nation may be expected to rally around in the face of hardship caused by foreign foes.

Loser Analysis

According to Granville, Europe and Russia will both suffer. On that, I agree.

Granville thinks the UK will suffer most.

From a financing standpoint, I suspect Granville is correct. But from a manufacturing and trade standpoint, I believe Germany will be the big loser.

Two Games at Once

MAD is really a game of chicken.

Granville misses the mark in one respect: The choice to go “nuclear” is not only in the hands of the EU.

Yes, the EU could ban all imports. But they won't.

Here's the MAD game at hand: The US and EU want to apply pressure on Russia but not so much pressure that Russia cuts off natural gas supplies to the rest of Europe.

Europe needs the gas, and Russia needs the hard currency. It's mutual destruction if gas is shutoff.

Fool's Mission

If things do get MAD, there will be a knockout blow to global trade, not just to Russia. Yet, if the US and EU pressure Russia too much, then Russia may feel like it has nothing to lose. Why not go down fighting?

The US/EU game of chicken all starts with the notion that Putin will react as expected and eventually blink first.

I wonder how long the expected lasts. I suggest not as long as the bureaucrats think. Regardless, the exercise is a fool's mission from the start given that everyone loses from sanctions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com