Why Russian Sanctions Aren't Working...

...and why sanctions do not usually work.

The United States has the plan to cripple Russia's economy by issuing sanctions. Unfortunately, this was ill-founded and followed a long line of instances where sanctions did not work. What is interesting is that Russia was even less susceptible than other countries.

We are now at the point with many scratching their heads about Russia and why the economy is not dead.

In this article we will go through the situation with Russia in particular and sanctions in general.

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Russian Sanctions Were Never Going To Work

The idea of sanctions against Russia never made sense. When looking at the economy, it was pretty foolish to believe it would be crushing.

I made the point at the beginning of this situation where if we looked at the baseline, it revealed everything.

Russia is a nation rich in energy and agriculture. This means that, when it comes to its population, it can keep everyone warm and fed. Even if the country was completely shut off from the rest of the world, energy and food would be plentiful.

If dealing with a country that has to import these products, sanctions could be more effective. People start to get upset when starvation is spreading.

The Russian Saw It Coming

The West telegraphed what its response would be. That provided Russia with the option of preparing.

Alliances were formed in the traditional sense, providing Russia with some of the things it needed. China became a willing partner as did some other countries. The actions taken against Russia pushed them even closer to the east.

This might have happened regardless but it accelerated things.

Another factor is the Russian had dumped U.S. Treasuries. The country moved into gold since it is neutral. This means that the US had less impact on the holdings of the Russian government.

Preparation allowed the Russian to establish supply chains to feed their manufacturing sector. It is often not advertised that Russia is the 7ths largest manufacturer in the world, behind South Korea and slightly ahead of Italy.

This is crucial when one flips to a wartime economy, which Russia likely did before it even entered Ukraine.

There is, however, even a bigger reason why the sanctions weren't going to work.

Eurodollar System

Over the last few years, we often discussed the Eurodollar System. This is an important component to this discussion.

A lot of attention was placed on the United States weaponizing the US Dollar and kicking the largest Russian banks off SWIFT. Many believe this was a big deal.

In reality, it was a minor blip.

The reason for this is the real action, internationally, is not through SWIFT, BIS, or any of the channels most commonly discuss. Instead we are dealing an elaborate system that bypasses all this.

When discussing the Eurodollar System, it is crucial to highlight this is a system that is designed to get money where it is needed, when it is needed. At the same time, it is outside the reach of any government or central bank.

Read that last part again.

The Eurodollar System is immune to any sanctions or edicts of any government, including the United States.

Simply put, the head of Sberbank, the largest bank in Russia has relationships with other bankers around the world. This does not suddenly go away.

When we say that the world is run by the international banking cartel, this is not country specific. To bankers, that is above all else.

Since many of these are bilateral agreements that take place using off balance sheet assets, there is little that governments can do. At the same time, there is always a third party to route things though. For example, a banker in Japan might do a deal with Noor Bank in the UAE, not knowing or caring what agreement the that banker has on the other side.

In short, the Russians can still get their needs met even without SWIFT. If we are looking at the big numbers, it is resident here. Noor Bank simply becomes the middleman in the transaction, taking a small cut for the trouble.

Here is where the United States, along with many others, mistakes the US dollar as the reserve currency. It is not. The true reserve currency is the Eurodollar, a ledger based currency that exists in many forms. Basically, it is a "currency" in a world where there is none.

The real action isn't with the banking channels everyone focuses upon. Rather, when it comes to this situation, it is the bilateral agreements that nobody has any clue are taking place.

It is a good bet the head of Sberbank and other Russians banks are operating business as usual.

This is why sanctions end up being ineffective.

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