Dividends and Russia’s failed attempt to sanction-proof itself

Risk management is the insurance you thought you had. The last time Russia invaded Ukraine, the world for all intensive purposes was willing to let Russia control the Crimea without much hassle. Russia needed access to the Black Sea and port of Sevastopol and by hook or crook they will likely going to take the region. One could have offer counterpoints to many of the issues, although the Crimea was part of Ukraine and Russia took their land. When the world offered little consequence to Russia, the President of Russia must have started the process to have more – the whole of Ukraine.

The military commanders would have gone through the logistical problems and what they needed to do and be willing to do. The diplomats would have made the rounds to ensure that Russia only wanted Ukraine. President Putin would have meant with the head of Russia Central Bank and be assured that although there would be fall out, the normal business of Russia could continue.

In an article by Patricia Cohen and Jeanna Smialek of the New York Times News Service, the Russians miscalculated on the west resolve to to something about taking the whole of Ukraine. The country of Ukraine is an independent state and while it has strong links to Russia, it also has links to the west including Europe and the US.

For generations the global financial system has been biased at moving money around the world and whether it was legal or semi-legal, the opportunity was once money was accepted by the system, the financial system provided quick movement to where ever the account holder wanted it to go. A example is when the writer had an account at a large financial institution, the transactions to pay bills or move around was built around using one branch. After a merger, a person could use whatever branch in the system they wanted to. The only reason a person used a branch was convenience to the account holder, not the financial institution.

Ever since the war in the Ukraine started the western has frozen hundreds of billions of dollars of Russian assets that are held by their own financial institutions. An individual goes to a bank or payments system such as Western Union to move money; financial institutions use a system called SWIFT to move money. If a country is not on the system, it is hard to receive and pay funds to the counterparty. The effect of closing down the credit system was the ruble fell to one cent on the dollar; the largest bank in Russia (where 2/3 of Russian business have accounts) meant the bank will run out of cash and Sherbank’s shares on the London Stock Exchange fell to a single penny. (companies coming out of bankruptcy trade at that level).

According to Carl Weinberg, chief economist at the High Frequency Economics, he wrote the sanctions are severe enough to dismantle Russia’s economy and financial system. Something we have not ever seen in history.

Russia had been subject to sanctions before, but they were more of an irritant than anything disruptive. However if it planned to invade Ukraine, the country was trying to sanction proof its economy by reducing its dependence on the US dollar and other common reserve currencies. It also shifted away from German, French and American holdings towards Chinese and Japanese holdings.

Although there are 180 currencies around the world, most global payments are dominated through a Western currency financial system, said Eswar Prasad, a professor of international trade at Cornell University. Thus it is hard to avoid western currencies and half of the $630 billion in foreign exchange reserves owned by the Russian central bank is under the digital thumb of central and commercial banks in the US, Europe and their allies.

Will an alternative system develop? the trouble with Russia, is its economy in reality is oil and gas based which tends to trade in dollars. Any commodity which trades in dollars will be vulnerable to sanctions imposed by the west. Perhaps, if Russia was more intertwined in the western economy, the sanctions would not work because the western partners would be taking the billion dollar write downs and who wants to do that?

Linking to dividend paying stocks, all companies try to do risk management and depends on their size, it is possible to do risk management at the basic level. When the world’s governments turn their sights on the company, the company can do little and feels the effects until the sanctions are taken off. Risk management can not do everything unless you go off the grid, but then you are off the grid.

There are more questions than answers, till the next time – to raising questions.

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