Its geopolitical consequences are a prelude to a fundamental upheaval of international financial markets and the world!

Brussels, 17th March, 2022

The sanctions against Russia were surprising both in their scope and speed of implementation as well as by the unprecedented coordination between the governments responsible for the supervision of the world’s major financial centers.

While financial sanctions are not a new weapon in the arsenal of punitive measures that can be deployed to exert pressure from one state on another, their use in the context of the Ukrainian crisis raises their effectiveness to a new level. Its consequences, particularly on the functioning of financial markets, adding to existing challenges including:

–           Their pervasive distortions resulting from the massive interventions of Central Banks in the aftermath of the 2008 financial crisis, the sovereign debt crisis of 2011-12, the pandemic, etc., upsetting irreversibly the traditional relationships between inflation, growth, interest rates, government financing and stock markets.

–           The need to strengthen their supervision and regulation, including clearing/payment systems, crypto-currencies (BITCOIN…), and innovative products (SPACS…) etc.

–           The colossal financing needs generated by global warming, the pandemic, the energy and digital transitions, defense and security spending, etc.

–           Social pressures arising from the explosion of inequalities, etc.

This situation is likely to accelerate a transformation of the world’s geopolitical architecture, heralding a genuine change of era.

Until the outbreak of the Ukrainian crisis, financial sanctions implied – directly and/or indirectly – cutting off access to US dollar financial markets (funding, FX, derivatives, clearing…), the currency in which the vast majority of international transactions are denominated. The Russians meticulously anticipated this factor in planning their military intervention initiated in 2014. They accumulated $630 billion equivalent in diversified foreign exchange and gold reserves, aiming to limit their dependence on the dollar. These measures were complemented by incurring a modest amount of foreign currency debt (public and private) ($220 billion), a surplus government budget fueled by their exports of gas, oil, cereals and metals, a strengthening of their agricultural production and the resilience of a population used to exploitation and coercion. In theory, these preparations were meant to allow the country to endure sanctions until the  dependence of the EU – deemed to be weak and disunited – on energy supplies, led to the rapid lifting of sanctions, once the Kremlin’s ‘special military operation’ was completed. They were not entirely wrong in their assessment insofar as – at the time of writing – the EU is still buying daily around $700 million of gas from Russia.

These predictions have, however, been belied by the prolongation of the conflict, the stubborn resistance of the Ukrainians and an unprecedented reaction of the international community leading to the progressive isolation of Russia. Solidarity has been particularly effective in coordinating financial sanctions among the vast majority of countries whose currencies are accepted in international transactions (US, Eurozone, UK, Japan, Switzerland, Canada, Singapore, Australia) which has resulted in the collapse of the Ruble and the likelihood of a default on Russian external debt in the near future. These measures include the freezing and/or seizure of Russian assets held in these countries, including those of the Central Bank and of major Russian (and Belarusian) banks who are also deprived of access to the SWIFT messaging system, of assets of oligarchs and the suspension of the use of credit cards outside Russia, etc. 

Moreover, these measures are likely to persuade other countries, notably China, to refrain from helping Russia circumvent sanctions on pain of being themselves subjected to restrictions. The objective is therefore to force the Russian aggressor to bend under the progressive reinforcement and cumulative effects of the sanctions. This path is not without risks, however, insofar as it could provoke an unpredictable reaction on the part of a state that controls the largest arsenal of nuclear weapons on the planet. Nevertheless, this risk must be confronted squarely because any attempt at appeasement will come at a higher cost later, as history has taught us.

The consequences of this unprecedented deployment of sanctions call, however, for drawing lessons that go far beyond their use in the Russian-Ukrainian conflict.

Indeed, demonstration has been made that the effectiveness of sanctions requires multilateral coordination to avoid their circumvention. This could presage in the longer term, a gradual weakening of the overbearing dominance of the United States as the exclusive holder of the “economic” weapon of mass destruction embodied by the US dollar. Such a development should, in turn, lead to a series of fundamental changes among which:

–           The reconfiguration of the international financial markets around three main currencies: the $, the € and the Renminbi. For the € to play its role, EMU must first be completed and extended to the 27 Member States which should become an overarching priority.

–           The reintroduction of the “foreign exchange risk” as an essential factor in investment decisions, whether industrial, institutional or private. This imposes on the three currency areas to be geographically sufficiently large and economically powerful to allow a healthy diversification within their respective areas of sovereignty and remain sheltered from foreign exchange restrictions. These contingencies will simultaneously significantly rebalance the exercise of power, increasing that of public authorities at the expense of the private sector. It will allow the deployment of tools to combat more efficiently tax fraud and fiscal optimization, money laundering, funding linked to terrorism or the recycling of profits from the drug trade; it will contribute to fight against the glaring inequalities resulting from the current inadequately regulated global market.

–           In order to ensure the stability of the market, it will be necessary to redesign the multilateral international financial system, operated by the IMF and/or the BIS who could also be charged with the monitoring of sanctions, if an when needed. It should aim at providing adequate, transparent and secure access to liquidity supporting the activities of financial operators. The Swap network between the three main Central Banks should be reinforced; other Central Banks would be linked by similar agreements to the main one in their area (on the model set up in 2008 when the ECB acted as an intermediary to procure $ for certain countries that did not have direct relations with the US Federal Reserve Bank).

–           A fundamental restructuring of financial asset management sector must take into account the risks that sanctions may restrict access to the liquidity of underlying assets. This could be mitigated by segregating assets representing holdings in third currency areas so as not to freeze the entire holdings of say a mutual fund, if part of its investments became inaccessible.

–           The gradual development of “capital markets” in each of the three major currency areas which could eventually rival those of the US and reinforce their independence.  These “multilateral” financial markets will require supervision and interoperability agreements, which should help accessing the financial resources needed to meet the ever-increasing needs of a growing world population, with increasing life expectancy and aspirations for improved living conditions.

Conclusion                          

The extent of the changes outlined above, resulting from possible consequences of the financial sanctions implemented against Russia, will necessarily be amplified by the impact of the other major themes that are bearing dramatically on the evolution of conditions determining the future of our planet.

Certain preliminary conclusions can nevertheless be drawn:

–           At the global level, only solidarity between peoples can ensure the survival of our species. The best way to ensure it has always been, and will continue to be, without the slightest doubt, access to education for as many people as possible.

–           At European level, the Ukrainian conflict has shaken people’s consciences. It requires the EU to complete its integration so as to protect its citizens and be able to play its role as the anchor of the civilizational, moral and ethical values that condition life in society.

–           It is unlikely that a more favorable opportunity will present itself if European public opinion does not seize the current particular circumstances to reform and reinvent itself. Otherwise, the generations that follow us will inherit a world shaped by our weaknesses and our inability to transcend our deeply embedded selfishness.