It’s interesting reading bank research and indeed much of the media that assume a Joe Biden presidency will see the speedy rollout of a wave of new sanctions against Russia. There is an assumption that Russian assets underperform as a result – indeed that seems to have been the trend on the ruble at least since around June when markets begin to wake up to the reality of a Biden win.
They assume that the US – Russia relations will remain strained and that any chances of the warming in relations that Donald Trump promised throughout his term will be dead in the water because there is just so much unfinished business with the likely incoming Democratic administration. They kind of assume that the Biden presidency will want to punish Russia for the 2016 presidential outcome and the reality that Moscow intervened in that election to ensure a Trump win. I guess they also assume that Russia will continue to challenge the US – as in Ukraine or in delivering S400 missile systems to Turkey – and that the direction of travel in US – Russia relations will remain on the deteriorating course set since perhaps 2007 and Vladimir Putin’s Munich Security Conference speech, and that the U.S. will respond with its policy of choice now, sanctions.
While I do think the course of US – Russia relations will remain on this deteriorating path I am not sure that we should expect an immediate rollout of additional “pent-up” sanctions on Russia.
In this respect, I think those candidates likely to be running Russian affairs in a Biden presidency are all pretty experienced and level headed. They won’t want to roll out sanctions for sanctions’ sake. They will want to be very proportionate and logical in approach, while also not wanting to lose sight of the bigger picture that it is important for the US to have a business-like relationship with Russia to ensure delivery on the US’s strategic interests. They will understand that Russia has its own strategic interests and redlines and that sometimes they will overlap or clash with those of the US. It’s figuring out where the two sides can learn where they can tolerate each other and get along on certain areas of mutual interest – such as arms control – and reducing risks of conflict where strategic interests compete, for example on areas like Ukraine, even Belarus, and Turkey. Sanctions will be part of the tool kit herein, but only one such tool. And I would add herein that perhaps one takeout from the Obama administration and its failure to adequately counter Russian interference in the US election and Western democracy more generally was its failure – for security or domestic political reasons – to call out that interference. I think they will not make this mistake a second time around.
So I guess putting together a few points as regards likely US policy towards Russia and specifically related to sanctions as they relate to markets.
First, it’s not going to be sanctions for sanctions; sake. Sanctions roll out will be related to specific bad behavior by Russia, identified, and called out quickly by the new Biden administration.
Second, and as noted in the first point above, I think the Biden administration will not want the blurring in terms of timing of Russian bad behavior and rolling out sanctions – this has tended to be the case with the Trump presidency say in relations to CBW act infringements. The Biden presidency will want to quickly identify and call out any such Russian misdemeanors and then quickly roll out suitable but proportionate sanctions. In this respect, I think the US sanctions team has by this time got quite sophisticated set sanctions of calibrated gears they can go through which provides effective signaling from actions to consequences.
Third, there is lots of discussion about the benefits or otherwise of sanctioning Russian sovereign debt. But with the sanctioning of Russian sovereign issuance in dollars, I think the rubicon has been crossed. It’s not a particularly big jump now for Russian ruble issuance to be sanctioned – and indeed likely one of the next steps. It’s a bigger leap to sanctioning secondary trading in such debt – as this is punishing existing holders, including likely US institutions. This could still happen but I would expect to see signaling or warnings first to U.S. institutions that this is a possibility and that they should reduce exposure long before sanctions actually hit. But I think importantly in first sanctioning primary issuance of dollar debt it’s been made clear that fallout to broader markets can be contained from any such actions. The bar to further sovereign debt sanctions has been lowered.
Fourth, and I think most importantly, what I think we have learned most over the past three or four years of Russian malign activity against the West is that the role of money in corrupting and undermining the system of Western liberal market democracy has been far more effective than missiles and troops on the ground. Read Catherine Belton’s book, Putin’s People. Putin has learned what makes the West tick – money, it is banks and business, and its ability to infiltrate and corrupt political systems have simply been astonishing. The black money flows earned via commodity dollars, channeled through Western banks, by oligarchs and their accomplices to corrupt Western politicians, the media, academia, finance, culture, and business. It’s like the morphing of Ian Fleming’s Spectre with Orwell’s 84’ creating a dystopian world controlled by Putin. It’s easy to adopt sanctions against specific military or cyber-attacks by Russia – annexation of Crimea or the invasion of Eastern Ukraine. But what we have seen over the past couple of decades is a systemic attack across Western financial markets. A specific one-off sanctions for such actions is clearly insufficient. Rather a wholesale cleansing of the system is needed to root out these corrupting influences. It’s about finding the corrupt Russian money relationships and eradicating them. It’s also about making it clear to Western counterparties of a zero-tolerance for such activity. Banks and Western financial institutions and actors (politicians, journalists, academics) have to be made clear that they are responsible for identifying, reporting, and clearing out such activity. The very future of liberal market democracy is on the line here.
On this latter point, I would expect the main initiative from a future Biden administration to lie exactly in this field of as frankly the Western response so far had been feeble. Action against such malign financial corruption is as important as the West’s nuclear weapons defenses. It’s that mission-critical to the very survival of Western liberal market democracy.
So I expect much more in terms of US sanctions on the financial sphere – much more in terms of the so-called Forbes List sanctions of April 2018 or Magnitsky style designations. And I expect the US to expose more of their Western accomplices – be that banks, politicians, or football clubs.
Fifth, in terms of investment choices, with environmental, social & governance, or ESG, assuming a much bigger role in investment decision making for Western portfolio managers I think the pressure will be out on them to take greater account for the “G” in it as it relates to corruption and thus malign financial pressure to erode the bases of Western liberal market democracies. Governments could perhaps encourage state-owned pension funds to take greater notice of ESG in relation to state actors trying to corrupt Western systems of government – why, for example, are pension funds of Californian teachers, firemen, or police office invested in the Russian government of corporate debt – in a regime which is trying to undermine our very system of government? The same could be said for U.K. public sector work pension funds – Salsbery Council, for example, or the Met Police.
