World war of sanctions

                                                                          Part 1

                                                            Clash of civilizations

The West sees the war in Ukraine as non-provoked Russian aggression against Ukraine, and the sanctions imposed on Russia as response to this aggression to inflict damage on Russian economy that could undermine the Putin regime and force the Kremlin to stop the war. Ultimately, Moscow will have to compromise with Washington and to abandon its ambitions to make Russia equal in power and influence to the United States as a world power.

Russia views the war in Ukraine as an operation to eliminate the threat to its existence created by the West and as the first stage in confrontation with the United States that will allow Russia to ensure the necessary level of strategic security and to destroy the existing system of financial, economic and political relations in the world created on the principles of Western democracy and based on the political and financial dominance of the United States. The new system of international relations, as the Kremlin understands it, should be created on the principles of interaction and partnership between the main world civilizations that have indisputable right to preserve and develop their own cultures and socio-economic systems. China stands behind Russia, quietly but firmly.

It is the conflict of civilizations, the conflict of worldviews, evaluative approaches and goal-setting. This conflict reflects the inability of Western and Russian civilizations to correctly assess and foresee plans and actions of counterpart that underlie growing confrontation in the US-Russia-China triangle.

All sides of the conflict do not want uncontrolled expansion and growth of the conflict and hope to achieve their goals with minimum losses, but misunderstanding of another civilization, non-recognition of its features and uniqueness, including perception of the world and reaction to actions of opponent, leads to mistakes on all sides and growth of confrontation, to uncontrolled increase in material losses and size of the humanitarian catastrophe.

This contradiction was clearly manifested both in preparations for the war in Ukraine and during the war, as well as by the sanctions war that I would like to dwell in this article.


                                                        War and Sanctions

The war of sanctions, in terms of its scale, the amount of economic potential involved and the damage that can be inflicted on the financial, economic and social systems of the warring parties, has reached the level of World war.

The sanctions hit the world far more than the war in Ukraine, despite all the huge military losses, including human lives, the destruction of cities and infrastructure in Ukraine, the volume of a humanitarian catastrophe that leads, as it is clear now, to the flow of at least 10 million refugees to Europe. Sanctions will hit the world even harder.

The military actions in Ukraine, which still amaze the world community with scope and brutality, are now increasingly seen as an episode of a larger confrontation and as a trigger that launched the sanctions war.

It is necessary to pay attention to one point.

Under international law, hostilities in Ukraine are not a war. Russia has not declared war on Ukraine. Ukraine, surprising as it may sound, has not yet declared war on Russia either. The reason for this reluctance to declare war is the economic and financial interests of Ukraine, Russia and, above all, Europe.

Despite the hostilities that have engulfed the biggest state in Europe, Russian gas continues to flow to Europe through the gas transportation system of Ukraine. Europe continues to pay Gazprom for gas, and Gazprom continues to pay Ukraine for the use of its gas pipelines. The refusal to officially recognize the war in the face of full-scale military operations and millions of refugees is explained by the fact that declaring of war will inevitably force Europe and Ukraine to first stop Russian gas supplies, and then will lead to a complete blockage of energy supplies from Russia.

Thus, by refusing to officially recognize the war, Ukraine, Russia and Europe are trying to block uncontrolled escalation of the war of sanctions, to avoid the worst-case scenario and, at least temporarily, keep the world from falling into the abyss of the economic crisis.

However, it only seems so, because the sanctions war, even in the form that it is currently being waged, is pushing Europe to fall into the abyss, and the refusal to declare war is not capable of stopping the process.

Let’s take a closer look at what is happening on the fronts of that war of sanctions…


                                       To start with compromise, to end with death

Impact of sanctions depends not only on strength of the side that imposes sanctions, but also on preparedness for sanctions by the opponent against whom these sanctions are applied.

The initial period of the war of sanctions showed that neither Russia nor the West were able to fully prepare for this war. They incorrectly assessed and predicted the opponent’s actions. Those forecasting mistakes were based on civilizational difference in worldviews and mentality.

Russian civilization is based on the communal structure of society. It was the Russian agricultural communes and peasants, members of those communes, who throughout the history made up over 90% of the population of Ancient Russia and the Russian Empire. It was in the Soviet Union, that the share of communal peasants in Russian population began to decline sharply. Peasants became workers, engineers, poets, writers, teachers, scientists, soldiers and officers, but the communal mentality persisted. In the early 1960s, the share of collective farmers and workers in cooperatives and artels, who lived and worked in communes, fell to 50% of the total population of the USSR.

Members of Russian peasant communities at the genetic level avoided sharp aggravation of conflicts. Relations in community, based not on private, but on communal ownership of land and communal use of forests, subsoil, rivers and lakes, forced community members to live on the basis of peace, mutual trust and assistance within communities, to avoid conflicts, and, in the event of appearing contradictions, quickly find compromises acceptable to both sides.

The dispersal of village communities over a vast territory covered with forests, the isolation from large cities and remoteness made village communities convenient targets to bands of robbers and external invaders. That created a special type of the Russian character. Conflict that threatens existence of community and lives of community members cannot be resolved by compromise. There can be only one result of the conflict, and that is destruction of enemy or death of community members.

Western European civilization is based on the principles of democracy. It assumes upholding and protection of interests from the very beginning of any conflict. Conflicts develop sharply and grow to their limits, but when there is a threat that even in case of victory, losses may significantly exceed possible gains, the Europeans begin to search for compromises. Compromises are enshrined in laws and regulations.

Thus, for the European-American civilization, compromise is a natural result of the conflict, and for the Russian, compromise is the natural way to resolve the conflict at its initial stage. For the Russian, the conflict ends with the destruction of one of the parties to the conflict.

This civilizational difference led to the fact that Russia did not expect such a rapid massive and large-scale of sanctions imposed on it. Moscow expected sanctions and had been preparing for them for a long time, but believed that there would be a gradual increase in sanctions pressure with breaks for negotiation process that would provide Moscow with opportunity to discuss and, most importantly, to warn Europe and the United States about Russia’s retaliatory steps and to explain consequences of Russian counter-sanctions. It was believed that the heaviest and most dangerous sanctions for Russia, as well as its counter-sanctions that could be the most painful for the world, primarily to the European economy, Russia would be able to avoid by explaining to Western politicians the possible consequences for them.

That did not work out…

Sanctions pressure hit Russia, and Moscow responded in the way that it intended to respond only in emergency, in the event of war, and the world began to slide into the abyss of economic and social collapse.

In addition, in the very first days, the weakest elements and links in the economies and systems of state administration in Russia and the West were highlighted. These weak links will inevitably begin to break down and collapse in the near future… However, that gives opportunity to predict the possible consequences for the parties to the conflict and the world as a whole.


                                  Money doesn’t disappear. Money changes owners

In Russian media, over the past two years there has been a lot of talk about necessity of refusal to hold Russian state reserves in dollars, euros, pounds. Economists and politicians of all levels and views insisted that state reserves should be kept only in yuan and gold. Everyone was talking about it, except for the Russian liberal elite.

Liberals in Russia were those who overthrew Mikhail Gorbachev, and after the collapse of the USSR, came to power as Boris Yeltsin’s entourage and formed Russian Government in 1990-s. They are considered not just liberals, but pro-Western liberals. At present, the liberals control the financial sector, and the most prominent among them are Elvira Nabiullina, Chairman of the Central Bank of Russia, and Anton Siluanov, Finance Minister.

Photo: Chairman of the Central Bank of the Russian Federation Elvira Nabiullina (left) and Minister of Finance Anton Siluanov

Over the past two years, the Central Bank of Russia has been constantly reducing its reserves in dollars, and by the beginning of 2022, the share of dollars was brought down to 10% of the reserves. However, critics of Nabiullina and Siluanov believed that even that share should also be reduced.

Reduction of euro reserves had also been demanded, but most of politicians and economists believed that in the event of an economic war between the US and Russia, the EU would take a soft line towards Moscow. Yet, demands for reduction in reserves in Western currencies have become louder and more insistent over the past few years, especially with growing tensions between Moscow and Kiev.

Nabiullina and Siluanov almost did not respond to the calls of the opposition, and this caused not only indignation, but also demands on Vladimir Putin to reason, punish and even dismiss the Chairman of the Central Bank and the Minister of Finance. Putin’s statements that he trusted Nabiullina and Siluanov, that he was satisfied with their work, caused bewilderment and confusion among most of the politically active public.

The invasion of Russian troops into the territory of Ukraine for the majority of the Russian population, including political analysts, politicians and government officials, was unexpected. However, the most unexpected was the size of state reserves that the Central Bank of the Russian Federation kept in dollars and euros at the time of the invasion and adoption by the West of sanctions against Russia, including blocking of its foreign exchange reserves. In total, in terms of dollars, 300-320 billion dollars were blocked.

This was the most severe blow to the financial system and the most unpleasant news for the Russian public. Surprise and shock were the reaction to this news. The Russian media, primarily the state, pro-government, as well as the media of the left and right opposition, demanded to crack down on the liberals. There were open accusations of treason, betrayal, undermining the state and its financial system. They demanded from Putin an immediate investigation, initiation of a criminal case and the arrest of Nabiullina and Siluanov.

Disheartened and depressed, Nabiullina limited herself to brief statements that she and the Government did not expect such actions from the West. Siluanov refused to meet with the press for almost three weeks and did not give any explanation.

Putin’s reaction surprised everyone. He just said nothing, as if nothing out of the ordinary had happened. As if three hundred billion dollars of state reserves, which could be used for retirement, benefits for mothers and children, raising the standard of living of the population or developing health care and education, did not mean anything special to him…

I personally did not know Anton Siluanov. However, working at the facilities of the Office of the President, as well as on the projects of Olimpstroy, Federal Service of Guards and the Government of the Russian Federation (only with the Office of the President, in the period from 1994 to 2011, I signed and completed several dozen of contracts for designing, construction and reconstruction of facilities, including in the Kremlin), I closely observed the work of the Ministry of Finance.

The Ministry of Finance was, like all ministries and corporations in modern Russia, a separate clan that firmly defended its interests by distribution of financial flows and used its power over finances to push and defend its interests in other areas far from finance. Where there was money going from the state budget, there were the interests of the Ministry of Finance, and nobody dared to rebuff “wishes” of financiers.

The only place where the Ministry of Finance turned into performer and executioner without right to claim its share of interests was the Kremlin. The order or request of the President and his inner circle was executed immediately, and non-execution was considered to be «Russian roulette» with a high chance of “getting a bullet in the temple… However, even in the Kremlin projects and in execution of the President’s orders, financiers were able to play their quiet and sober games.

I knew Elvira Nabiullina personally. I was a member of her Expert Council under the Government that dealt with economic reforms, including development of construction industry and scrutiny of new trends in designs of cities and towns.

Nabiullina was active, attentive, listening and trying to understand the ideas put forward, but at the same time she was a representative of academic and near-academic circles, who had no experience in specific work in industry, construction or any other industry, who did not go from bottom to top, but floated in an elevator from the “university” floor to the “post-graduate” floor, then swam to the floor “Advisor to the Government”, and then came out on the floor “Minister” and “Chairman”.

Under Stalin, this type of leaders used to quickly fly out, at best landing in Siberia at a logging site. In the last years of the USSR, such advisers and academicians bred and became an influential force, shaping opinion of the party leadership with informational and analytical «notes» for the CPSU Central Committee. Those who worked «in the field» used to call those «academicians», as » humanoids»… Nothing offensive, just noting the fact of their isolation from reality. These “humanoids” led Andropov and then Gorbachev into “perestroika”, which in essence was a “collapse” …

At the same time, Nabiullina radiated a desire to fulfill assignment, to achieve some result, albeit not very connected with reality, but supported by the opinions of academicians, consultants and experts. She could not approve or invent something that had been rejected by experts or not worked out by them. She was absolutely incapable of not fulfilling orders of President or Prime Minister, or of going openly against their will… In any case, I can’t even imagine it.

What happened then?

Did the Kremlin not warn Nabiullina and Siluanov about the start of a military operation in Ukraine?

This is not only possible, but also most probable. Everyone knows that the Russian Central Bank is part of the international financial system and is subordinate not so much to the Government of the Russian Federation as to the IMF. The Central Bank of Russia closely cooperates with other international financial organizations. The Kremlin could not allow the information about the beginning of the invasion of Ukraine to leak from the Ministry of Finance and the Central Bank to the West, and therefore Nabiullina and Siluanov were not warned about the start of the military operation.

However, this does not explain why half of the Russian state foreign exchange reserves ended up in dollars, euros and pounds. Moreover, information appeared in the media that at the end of January 2022, one month before the invasion of Ukraine, the Central Bank of the Russian Federation delivered 200 tons of gold from state reserves to London. That information was not confirmed by the Government, but was not rejected also, and it generated explosion of public indignation in Russia.

Was it possible that the Russian top officials Nabiullina and Siluanov did not understand what could happen in Ukraine? Did they believe statements in media that Russia did not intend to invade Ukraine? Were they acting on the orders of the IMF and in the interests of the West at a time when Putin repeatedly said that sanctions against Russia would be in any case, and these statements by Putin were shown on Russian television? In Soviet times, Nabiollina and Siluanov would be sentenced and shot in 24 hours… On Putin’s times, Siluanov and Nabiullina continued to hold their posts…

However, after the invasion began, information leaked out that the Kremlin considered the Western sanctions to block Russia’s foreign exchange reserves not just as actions directed against Russia’s interests, but as an act of war. At least, economic war… In response to those sanctions, Moscow announced that it can now refuse to pay debts in foreign currency and switch to paying debt obligations in rubles… Few days later, information appeared that all private Russian banks, organizations, corporations and companies that had taken foreign currency loans would now begin to pay their debts in rubles to special account at the Central Bank.

Western financial companies, banks and funds that bought Russian private companies bonds, securities or issued foreign currency loans will now be able to receive payment only in rubles, they will be forced to buy rubles for the currency that the Central Bank of Russia will designate and at the rate that it will determine.

Later, information appeared that the debt of Russian private companies and banks in Western currencies, mainly in dollars, was estimated at amount ranging from $1 trillion to $1.5 trillion. The Russian Government refused to comment…

Then, Vladimir Putin officially announced that Russian private companies can now make payments on debts to the West in rubles, by transfer to an account with the Central Bank.

And then there was information that the banks, companies and corporations, owned by the same oligarchs who were under sanctions, took out loans and sold bonds for several trillion dollars, and the total debt amounted to $6 trillion… There were no comments from the Kremlin.

Moreover, a significant part of these obligations and bonds were bought by the US and European pension funds… What will happen to the Western pension funds? What does this mean to the world economy and financial system? In any case, it will shake dollar…

Now we can move on to another front of the war of sanctions that is even more dangerous for Europe…

(To be continued)

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