The Law of Unintended Consequences

Actions have consequences. Sometimes-- or better, most of the time-- they have unintended consequences. When a country makes policy, it ought in the best circumstances to consider all of the possible and even impossible consequences. It should avoid the therapy-driven error of imagining that policy should be designed to express one’s deepest personal feelings. 

One suspects that the Biden administration has been expressing its feelings by imposing sanctions on Russia. One suspects that it believes that it is on the side of the angels and therefore that things will work out well.

For now, they seem to be working out better than expected. But, the chances are good that the Russian bear will refuse to accept humiliation at the hands of Ukraine. Thus, sanctions or no sanctions, in Ukraine the worst is yet to come.

As for unintended consequences, especially as regards the removal of Russia from the SWIFT banking system, yesterday we quoted David Goldman, far savvier than yours truly, on the potential unintended consequences.

Today, we quote Jamie Dimon the CEO of JP Morgan Chase bank, and Financial Times columnist Rana Foroohar. The latter is notably liberal, but is far more intelligent than the idiot savant who fulfills a similar role at the New York Times.

First, Dimon, via Zero Hedge and Bloomberg News. For Dimon the issue is not about an unintended consequence, but about a spectacular backfire:

Just hours after western leaders slapped Russia with unprecedented sanctions the likes of which the world has never seen, including a targeted SWIFT expulsion of key Russia banks as well as an asset and transaction freeze of the Russia central bank, JPMorgan CEO Jamie Dimon explained not only why this harsh escalation may be futile but why it could backfire spectacularly in the years to come.

In an interview with Bloomberg TV, the CEO of the world's largest bank said that "there are a lot of workarounds for SWIFT, so there are different tools we use for different reasons" adding that “the banks are talking with the government so everyone understands the issues, not because they’re for or against any particular thing."

While SWIFT sanctions mean companies can’t use the messaging system to do business with the Russian entities affected, they can still do business with them, Dimon said. In fact it's as simple as sending an email with payment instructions, because what SWIFT really is, is a messaging remnant from a bygone era, before emails, even before the fax machine.  

Dimon also said that disconnecting Russian banks from the SWIFT messaging system may bring “unintended consequences” that include third parties finding ways around the penalty.

“What countries do you hurt? What people are going to do workarounds?” Dimon said, referring to "bad players" and others finding workarounds, not his own firm, according to a company spokesperson. Dimon said sanctions, by contrast, are “very targeted, very specific, very clean.”

As Bloomberg reported on Friday, JPMorgan was among Wall Street firms that had counseled Washington against kicking Russia off SWIFT, arguing that it could have far-reaching fallout that could hurt the global economy and undermine the purpose of the penalties.

And Foroohar, sounding like she is on the same page as the more conservative David Goldman, had this to say in her column yesterday:

The process of financial decoupling between Russia and the west has, of course, been going on for some time. Western banks reduced their exposure to Russian financial institutions by 80 per cent following the country’s annexation of Crimea in 2014, and their claims on the rest of Russia’s private sector have halved since then, according to a recent Capital Economics report. The new and more aggressive sanctions announced by the US will take that decoupling much further.

It will also make Russia much more dependent on China, which will use the US and EU sanctions as an opportunity to pick up excess Russian oil and gas on the cheap. China is no fan of Vladimir Putin’s war. But it needs Russian commodities and arms, and sees the country as a key part of a new Beijing-led order, something Moscow is aware of.

“China is our strategic cushion,” Sergei Karaganov, a political scientist at the Moscow-based Council on Foreign and Defense Policy, told Nikkei Asia recently. “We know that in any difficult situation, we can lean on it for military, political and economic support.”

That does not mean China would break US or European sanctions to support Russia, but it could certainly allow Russian banks and companies more access to its own financial markets and institutions. Indeed, just a few weeks ago, the two countries announced a “friendship without limits”, one that will certainly include closer financial ties as Russia is shut out of western markets. This follows a 2019 agreement between Russia and China to settle all trade in their respective currencies rather than in dollars. The war in Ukraine will speed this up. Witness, in the past few days, China lifting an import ban on Russian wheat, as well as a new long-term Chinese gas deal with Gazprom.

All of this supports China’s long-term goal of building a post-dollarised world, in which Russia would be one of many vassal states settling all transactions in renminbi. Getting there is not an easy process. The Chinese want to de-dollarise, but they also want complete control of their own financial system. That’s a difficult circle to square. One of the reasons that the dollar is the world’s reserve currency is that, in contrast, the US markets are so open and liquid.

But the Chinese are playing a long game. Finance is a key pillar in the new Great Power competition with America; currency, capital flows and the Belt and Road Initiative trade pathway will all play a role in that. Beijing is slowly diversifying its foreign exchange reserves, as well as buying up a lot of gold. This can be seen as a kind of hedge on a post-dollar world (the assumption being that gold will rise as the dollar falls).

While sanctions against Russia herald more decoupling, it is also possible that the economic fallout from the war (lowered demand, even higher inflation) would push America and other nations into succumbing to pricing pressures that would favour Chinese goods. While there is likely to be a lot of political posturing on both sides of the aisle about standing up to Russia and China, it takes a long time to decouple supply chains. Policymakers in Washington have yet to get really serious about it.

I refrain from offering too much commentary about matters in which I am not at all competent to offer any commentary at all.

And yet, when considering the chess game that is being played on the world stage, one does well to consider the possible outcomes and consequences. Just because we side with the Ukrainian people does not mean that our actions supporting them will not backfire spectacularly.