Maybe reconsider your thoughts on the effectiveness of sanctions? Consider their effectiveness against Iran. Sanctions were phased in over +/- 9 years until trade in USDIRR was frozen. Over that time the rial fell 80% against the dollar and Iranian GDP fell by more than 2/3rds. The Rial exchange rate became entirely event-driven. For Russia, it's much worse since they're depleting their capital stock on a war at a run rate of +/- 25% of GDP, annualized.
Well, the issue is that Russia is not Iran. Iran could be sidelined because it was small enough. We could lean on India, for example, and convince them to dump Iranian oil. Russia is likely too big to do this to. There is also reason to believe that Russia and China have been coordinating on new trade relations for quite a long time behind the scenes. The response to this invasion looks like it was factored in by Russia. Finally, Russia supply 25% of the EU's energy. Could the EU afford to sanction completely? If they did it would mean energy rationing. The devastation that would cause to the European economy would be profound. We could get hyperinflation.
BUT, let's say we did it. The key question then is: would the price increase in oil outweigh the quantity shortfall of barrels shipped? I modelled this yesterday, it almost certainly would. See:
If the war doesn't end soon Russia will be in a worse position than Iran and the ruble will fall much further, IMO. What is the utility of a CA surplus given sanctions (which will get worse)? Given the sanctions, what is the economic impact of incinerating 25% of GDP per annum on war? War spending will supplant the domestic economy and the money supply will skyrocket.
I don’t follow the argument. Sorry. My points are: (a) a ban on EU-Russian oil imports would savage the EU economy possibly leading to a hyperinflationary collapse and (b) even if the EU did this, if you model it, the rising oil prices it would cause would more than compensate for the lower quantity of barrels being sold by Russia.
It’s pretty clear that policymakers have not planned this out coherently.
I was focused more on the value of the rouble, the title of your substack article. Regarding your point (b), I'm saying "So what?". The war spending is at least 2x the CA surplus. Moreover, the CA surplus is restricted given sanctions. The reallocation of resources and the incineration of capital stock, will consume the Russian domestic economy and continue to crush the rouble. Let's see if they continue to publish the money supply #'s. I'll bet that goes away soon.
That’s not how FX values work. The war spending (which isn’t that high, nowhere near 20% of GDP and maybe a quarter that) is in roubles that are spent domestically. That has zero impact on rouble value directly. I can impact it indirectly via inflation, but the Russian central bank has adjusted interest rates to stop this. In FX markets speak, they’ve rebalanced the potential PPP impact by raising the carry component of the rouble.
All this is only short term noise anyway. The long run equilibrium of the rouble, as my regression shows, is set by Brent.
We can agree to disagree. It's an internal devaluation. Inflation is just getting started. I'd throw out that regression for a few years. If they keep publishing economic data it will be pretty obvious by the time Q2 #s come out.
Maybe reconsider your thoughts on the effectiveness of sanctions? Consider their effectiveness against Iran. Sanctions were phased in over +/- 9 years until trade in USDIRR was frozen. Over that time the rial fell 80% against the dollar and Iranian GDP fell by more than 2/3rds. The Rial exchange rate became entirely event-driven. For Russia, it's much worse since they're depleting their capital stock on a war at a run rate of +/- 25% of GDP, annualized.
Well, the issue is that Russia is not Iran. Iran could be sidelined because it was small enough. We could lean on India, for example, and convince them to dump Iranian oil. Russia is likely too big to do this to. There is also reason to believe that Russia and China have been coordinating on new trade relations for quite a long time behind the scenes. The response to this invasion looks like it was factored in by Russia. Finally, Russia supply 25% of the EU's energy. Could the EU afford to sanction completely? If they did it would mean energy rationing. The devastation that would cause to the European economy would be profound. We could get hyperinflation.
BUT, let's say we did it. The key question then is: would the price increase in oil outweigh the quantity shortfall of barrels shipped? I modelled this yesterday, it almost certainly would. See:
https://macrocosm.substack.com/p/russias-current-account-worst-case?s=w
If the war doesn't end soon Russia will be in a worse position than Iran and the ruble will fall much further, IMO. What is the utility of a CA surplus given sanctions (which will get worse)? Given the sanctions, what is the economic impact of incinerating 25% of GDP per annum on war? War spending will supplant the domestic economy and the money supply will skyrocket.
I don’t follow the argument. Sorry. My points are: (a) a ban on EU-Russian oil imports would savage the EU economy possibly leading to a hyperinflationary collapse and (b) even if the EU did this, if you model it, the rising oil prices it would cause would more than compensate for the lower quantity of barrels being sold by Russia.
It’s pretty clear that policymakers have not planned this out coherently.
I was focused more on the value of the rouble, the title of your substack article. Regarding your point (b), I'm saying "So what?". The war spending is at least 2x the CA surplus. Moreover, the CA surplus is restricted given sanctions. The reallocation of resources and the incineration of capital stock, will consume the Russian domestic economy and continue to crush the rouble. Let's see if they continue to publish the money supply #'s. I'll bet that goes away soon.
That’s not how FX values work. The war spending (which isn’t that high, nowhere near 20% of GDP and maybe a quarter that) is in roubles that are spent domestically. That has zero impact on rouble value directly. I can impact it indirectly via inflation, but the Russian central bank has adjusted interest rates to stop this. In FX markets speak, they’ve rebalanced the potential PPP impact by raising the carry component of the rouble.
All this is only short term noise anyway. The long run equilibrium of the rouble, as my regression shows, is set by Brent.
We can agree to disagree. It's an internal devaluation. Inflation is just getting started. I'd throw out that regression for a few years. If they keep publishing economic data it will be pretty obvious by the time Q2 #s come out.