The Weaponization of Money
How SWIFT, Reserve Currency, and Sanctions are being used to Handcuff Russia
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Everything has a cost.
Some are direct – like the price tag on the clothes you buy. Some are hidden – like sleepless nights as a new parent.
Either way, you have to pay a price for everything.
When an invasion through needless acts of aggression threatens the post cold war era of peace, tragically, a price is already being paid by both sides.
The tangible prices of war are civilian lives, guns, ammunition, tanks, and fighter jets. The intangible prices are fear, terror, and despair.
The tangible mediums of aggression usually do not spawn alone from fierce nationalism but need to be financed through capital in order to be obtained. Someone needs to pay for the war machine to run.
Choking the funding source will limit the resources available.
The ultimate fight against tyranny is refusing to be a bystander in an ever-connected global social economy. Imposing sanctions is a good start – but even further measures are now being taken.
There are numerous headlines about the globally organized “weaponization of money” in order to stymie Russian advances.
This week, in <5 minutes, we’ll go over the weaponization of money:
State of Russian Economy Pre-Ukraine 👉 Major imports/exports, energy impact
Russian Economic Response 👉 SWIFT cutoff, Ruble plummets, Central bank doubling interest rates
How GRIT’s Playing It 👉 In a rising rate environment, stick to these names.
Let’s get started!
1. State of Russian Economy Pre-Ukraine 👉 Major imports/exports, energy impact
In order to understand how to best stifle the Russian attack, we need to understand what the state of the economy was leading into the invasion.
Russia is a commodity-driven economy, with its major exports broken down as follows:
The main takeaway here is energy dominant – and extremely concentrated. So we know a primary driver of their economy is exporting Oil & Gas, but who is it to?
Predominantly Europe (purple) and China. While we can look at this and say, “well let’s slow down major energy consumption from Russia in order to stifle their economy”, it’s not that straightforward. When we look at the reliance on natural gas, there is dependence on Russia:
As for major imports into Russia?
Very all over the map – the top ones being machinery (blue), transportation (light blue), and chemical products (pink). AKA a lot of goods that power the real economy. The main takeaway here is that imports are very diversified – and it doesn’t look like they can produce a lot of it themselves.
What countries are the main suppliers?
Again – Europe and China. What this all brings us to is the implementation of sanctions on imports and exports as an effective tool used to choke the Russian economy.
Limiting the number of imports into Russia robs them of essential goods needed for day-to-day activities. By limiting the amount of energy Russia is able to export, this even further weakens the current account balance as well as the ability of Putin’s oligarch cronies to pad their coffers.
The downside is that the citizens of Russia will be impacted in a massive way and do not support the actions of the Kremlin. Their life savings have much less purchasing power, and they will have trouble obtaining goods in a more and more inflationary environment. Both of these contribute to drastically lower purchasing power.
In an ever-connected global economy, the ripple effects of sanctions turn into tidal waves, and we’re seeing the most drastic effects on the energy economy…
Direct Impact on Energy Market
Many are likening the international backlash of Russia’s invasion of Ukraine to the 1970s Oil shocks when Iran went under a revolution at home and an asset freeze by the US government. Bloomberg’s gauge of raw materials was set for its biggest weekly gain since the 1960s as sanctions on Russia have now scared off all major buyers.
European nat gas broke price records and oil futures swung in the widest range in three decades. For those following GRIT on Instagram, I also highlighted these points:
The economy is more intertwined than ever, and further to the nat gas chart above, crude dependency in Europe on Russia is critical:
So we need to come up with viable alternatives for energy consumption away from Russia which is why everyone is scrambling right now.
A key method of exporting all the Crude that Russia produces is shipping, which accounts for 2/3rds of export volume. When there was a widespread inability to secure insurance or tankers, this caused a huge run on Brent crude futures, rising to $120 per barrel. Now there’s a JPM analyst out saying Oil is on track to hit $185 per barrel by the end of the year.
This prompted a response that included the first coordinated deployment of emergency oil reserves by members of the IEA in a decade.
As mentioned above Iran/Venezuela/Saudi Arabia could add capacity, but even Iran looks like a drop in the bucket compared to taking Russia offline.
It’s estimated the EU could reduce its nat gas imports by about 40%, but it would take years of disruptions to people’s everyday lives.
Lots of uncertainty still to come here…
Under the Radar
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ONLINE GAMBLING IS COMING TO CANADA. Already the most engaged brand in esports betting globally, Rivalry averaged +22% MoM growth in 2021. As one of the first three companies to be fully registered for internet gaming and sports betting in Canada (and recently licensed in Australia), the Company is now poised to accelerate its growth in regulated markets*.
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2. Economic Sanctions👉 SWIFT cutoff, Ruble plummets, Central bank doubling interest rates
The U.S., EU, UK, Canada, Japan, and other countries have moved to delist certain Russian banks from the SWIFT financial transactions system.
SWIFT, formally known as the Society for Worldwide Interbank Financial Telecommunication, is a messaging system for banks and other financial institutions around the world. It doesn’t shuttle any money itself but provides instruction messages for just how to give and receive specific funds.
There are workarounds—the banks could use other messaging systems, such as apps or email—but those transactions likely won’t be as secure and could end up being slower and costing more. Overall – this is a great speedbump to put in place.
But the biggest hammer in the toolshed was next to come…
On Monday last week, the Biden administration imposed sanctions on Russia’s Central Bank that prohibit U.S. dollar-denominated transactions and are intended to largely wipe out Moscow’s $630 billion foreign currency war chest, which the Kremlin hoped would insulate the Russian economy from other sanctions Western nations have imposed.
Collectively, several financial sanctions aimed to freeze any remaining U.S.-based assets held by the Russian Central Bank in the United States or by Americans abroad.
Typically, what foreign reserves are used for is to prop up currencies in the event of massive adverse moves. After these reserves were frozen, the Ruble plummeted:
This led to the Russian central bank immediately doubling its interest rates in order to try to stop the bleeding.
A bank will increase the rates in order to entice capital into the country but when assets and the flow of goods get frozen altogether, the notion of interest rate price parity kind of goes right out the window.
This kind of makes me question what the point of holding foreign currency reserves is in the first place…
But first, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
3. How GRIT’s Playing It 👉 In a rising rate environment, stick to these names.
I do think that in a rising rate environment, banks are the way to play. As long as we can avoid major recession, the macro read-throughs particularly for Canadian banks, look promising.
For those following my paid newsletter, you’re aware that I recently added to my Royal Bank of Canada (RY-T) as well as Manulife (MFC-T). I like low-risk insurers in a rising rate environment (higher discount rate = lower liabilities). Q4 Beat EPS (strong asset management). Strong chart: stock poking its head above 13-year resistance ~$27. Next resistance = $34 / 40. Strong yield +5%.
Wrapping Up…
Supply chains don’t seem to be clearing up from Covid, now we have government-mandated sanctions and commodity prices are back to sky-rocketing. What this is going to lead to is a longer-term inflationary period which is 1) higher than we have experienced in the last few decades and 2) higher than we were initially expecting.
There is going to be a much more prolonged pressure to raise rates and at the same time avoid the dreaded “S” word… Stagflation (little to no growth and higher than normal inflation).
Long-tail black swan events galore.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S. With the crypto market pulling back over 40% after reaching a new record of nearly $3 TRILLION in 2021, we believe NOW is the BEST time to go hunting for opportunities in the alt-coin market!
That’s why we’ve launched a new GRIT CRYPTO NEWSLETTER! Read the first issue here!
What else we Grittin’ On?
QUARTER-POINT HIKE. Fed Chair Jerome Powell backed a quarter-point interest rate hike at the Fed's next meeting. The Fed will meet on March 16.
SPAC TROUBLE. Dozens of companies that went public via SPAC missed 2021 revenue projections. By A LOT!
U.S. SHALE. You already know OPEC isn't boosting production but U.S. shale producers don't have plans to increase output in 2022. Make oil negative again!
CRYPTO ADOPTION. Wall Street traded $1.4T worth of cryptocurrency on Coinbase in 2021. That's up from $120B in 2020.
FORD GOES ELECTRIC. Ford Motor will create an electric vehicle & software division separate from its conventional gas-engine business. It expects EVs to account for 1/3 of sales by 2026.
Sources:
https://rollcall.com/2022/02/28/new-sanctions-cut-russia-off-from-its-foreign-currency-reserves/
https://www.bloomberg.com/news/articles/2022-03-05/russia-energy-chaos-triggers-the-biggest-market-shock-in-decades?srnd=premium
https://time.com/6153951/swift-sanctions-russia/
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