Sanctions Against Russia: U.S. and EU Shoot Themselves In the Foot

Sanctions Against Russia Are Hurting the West

We noted last month that major American business groups are opposed to sanctions against Russia, as they hurt U.S. businesses.

We pointed out that sanctions against Russia are backfiring because they are:

We quoted Zero Hedge to show that – in some ways – sanctions hurt our own economy more than the Russian economy.

The fact that sanctions are backfiring is starting to spread …

Bloomberg notes:

U.S. and European Union sanctions against Russia threaten to hasten a move away from the dollar that’s been stirring since the global financial crisis.


While no one’s suggesting the dollar will lose its status as the main currency of business any time soon, its dominance is ebbing. The greenback’s share of global reserves has already shrunk to under 61 percent from more than 72 percent in 2001. The drumbeat has only gotten louder since the financial crisis in 2008, an event that began in the U.S. when subprime-mortgage loans soured, and the largest emerging-market nations including Russia have vowed to conduct more business in their currencies.


“The crisis created a rethink of the dollar-denominated world that we live in,” said Joseph Quinlan, chief market strategist at Bank of America Corp.’s U.S. Trust, which oversees about $380 billion. “This nasty turn between Russia and the West related to sanctions, that can be an accelerator toward a more multicurrency world.”

Flynt Leverett (Middle East expert on George W. Bush’s National Security Council staff who previously worked at the State Department and the CIA) and  Hillary Mann Leverett (National Security Council expert on Iran) write:

With the rise of the “petroyuan,” movement towards a less dollar-centric currency regime in international energy markets — with potentially serious implications for the dollar’s broader standing — is already underway.

As China has emerged as a major player on the global energy scene, it has also embarked on an extended campaign to internationalize its currency. A rising share of China’s external trade is being denominated and settled in renminbi; issuance of renminbi-denominated financial instruments is growing.

China is pursuing a protracted process of capital account liberalization essential to full renminbi internationalization, and is allowing more exchange rate flexibility for the yuan. The People’s Bank of China (PBOC) now has swap arrangements with over 30 other central banks — meaning that renminbi already effectively functions as a reserve currency.

Chinese policymakers appreciate the “advantages of incumbency” the dollar enjoys; their aim is not for renminbi to replace dollars, but to position the yuan alongside the greenback as a transactional and reserve currency. Besides economic benefits (e.g., lowering Chinese businesses’ foreign exchange costs), Beijing wants — for strategic reasons — to slow further growth of its enormous dollar reserves.

China has watched America’s increasing propensity to cut off countries from the U.S. financial system as a foreign policy tool, and worries about Washington trying to leverage it this way; renminbi internationalization can mitigate such vulnerability. More broadly, Beijing understands the importance of dollar dominance to American power; by chipping away at it, China can contain excessive U.S. unilateralism.

China has long incorporated financial instruments into its efforts to access foreign hydrocarbons. Now Beijing wants major energy producers to accept renminbi as a transactional currency — including to settle Chinese hydrocarbon purchases — and incorporate renminbi in their central bank reserves.

Producers have reason to be receptive. China is, for the vastly foreseeable future, the main incremental market for hydrocarbon producers in the Persian Gulf and former Soviet Union. Widespread expectations of long-term yuan appreciation make accumulating renminbi reserves a “no brainer” in terms of portfolio diversification.

And, as America is increasingly viewed as a hegemon in relative decline, China is seen as the preeminent rising power. Even for Gulf Arab states long reliant on Washington as their ultimate security guarantor, this makes closer ties to Beijing an imperative strategic hedge. For Russia, deteriorating relations with the United States impel deeper cooperation with China, against what both Moscow and Beijing consider a declining, yet still dangerously flailing and over-reactive, America.

For several years, China has paid for some of its oil imports from Iran with renminbi; in 2012, the PBOC and the UAE Central Bank set up a $5.5 billion currency swap, setting the stage for settling Chinese oil imports from Abu Dhabi in renminbi — an important expansion of petroyuan use in the Persian Gulf.

The $400 billion Sino-Russian gas deal that was concluded this year apparently provides for settling Chinese purchases of Russian gas inrenminbi; if fully realized, this would mean an appreciable role for renminbi in transnational gas transactions.

Looking ahead, use of renminbi to settle international hydrocarbon sales will surely increase, accelerating the decline of American influence in key energy-producing regions. It will also make it marginally harder for Washington to finance what China and other rising powers consider overly interventionist foreign policies — a prospect America’s political class has hardly begun to ponder.

Eric Zuesse and EconMatters note that sanctions have also failed because they are greatly strengthening Putin’s popularity and mandate in Russia.

USA Today headlined on July 30, “Russian stocks rally in face of U.S. sanctions“.

And Zero Hedge notes that sanctions continue to hit Western economies harder than Russia:

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