Impact of a shooting war on global flows...
I'VE TAUGHT a seminar on financial warfare at the US Army War College for the past seven years, writes Jim Rickards at The Daily Reckoning.
It's always a delight and a challenge because these people are so smart to begin with. These are serious, super sharp people that any top corporation would love to have. They certainly refute the popular refrain that military intelligence is an oxymoron.
I can assure you, it's not true.
I usually have about 12 students from all branches (Army, Navy, Marines, Air Force, and Coast Guard) as well as civilians from the State Department, CIA and other agencies.
They're generally mid-career, about 35-years old. Some are older, with the rank of Lt. Colonel, Commander, or fighter pilot.
I once had the real TOPGUN from the US Navy Fighter Weapons School in my class. Great guy.
The students are all hand-picked as part of the Advanced Strategic Arts Program. They're being fast-tracked toward future high leadership positions in combat commands or the National Security Council.
My 2023 seminar is coming up soon. I can't wait to see what emerges from all the back and forth. So much has taken place over the past year.
My 2022 seminar was the most interesting so far because I told the students that after six years of studying hypothetical financial wars...we finally had a real war to discuss.
That is of course the war in Ukraine.
The US and allied financial sanctions on Russia were extreme and unprecedented. To a great extent, the Russian economy had been cut out of the global economy.
Russia was kicked out of the SWIFT global financial telecommunications system, which was a momentous development. A long list of Russian banks, oligarchs and major companies were listed among those who cannot transact with Western parties. These included Gazprom (the major Russian natural gas company), among others.
Biden also prohibited exports of semiconductors, high-tech equipment and other technology to Russia.
All this allowed us to discuss real world outcomes instead of war gaming scenarios. I told the class that the US sanctions would be worse than failures.
I argued that not only would the sanctions fail to deter Russia or even cause much economic damage, they would blowback to the US and injure our economic standing in the world. I encountered a lot of skepticism from the class.
That's OK; that's how seminars are conducted. They're intended to be round table discussions with lots of interaction and debate. It's definitely not a case of "teacher knows best."
These kinds of seminars are designed to bring out the best in everyone so that nothing is overlooked. That said, my forecast was exactly right.
When you add all the sanctions together, many expected a decline on the order of 25% in Russian GDP in 2022. That's massive. But in reality, the Russian economy had only a mild slowdown in 2022, not the collapse many predicted. The best estimates for 2023 are that the Russian economy will outperform the US economy.
Why was I able to successfully forecast that the sanctions wouldn't work when so many other "experts" got it wrong?
The answer is that I knew Russia simply wasn't a punching bag that would take hits without designing inventive workarounds designed to defeat the sanctions.
For example, as I explained to last year's class, it's easy to evade sanctions even in a world of satellite surveillance and GPS tracking.
The US and EU have prohibited the purchase of oil exported by Russia using tankers unless the price falls below an arbitrary price cap imposed by the US This ban on high-priced oil exports by tanker was enforced by denying insurance to the shippers a
Seasoned observers of international trade and sanctions know the sanctions are easy to work around. The only ones who don't know how easy are eggheads like Janet Yellen who have spent their entire careers in a government cocoon and have never worked in the real world of international trade.
Maybe she's finally getting a clue. Yellen admits that weaponizing the Dollar can result in the destruction of the Dollar as adversaries seek alternatives. I explained this dynamic to the Pentagon and Treasury ten years ago. The slow kids in the class are finally catching up.
Even when the kinetic war is over, the economic war will continue and the effects on the global economy (not just Russia) will last for decades.
Even now, the US Dollar is being widely displaced around the world as a payment currency in favor of Rubles, Yuan, rupees, and other developing market currencies.
In 2009, I facilitated and participated in the first-ever financial war game hosted by the Pentagon. This war game was conducted at the top-secret Warfare Analysis Laboratory of the United States (code name: WALRUS) located in the Applied Physics Laboratory, about halfway between Washington and Baltimore.
I wrote about this in 2011 in Chapters 1 and 2 of my book Currency Wars. The scenario I presented at the time was that Russia and China would accumulate large gold reserves, pool their gold and launch a new digital currency backed by gold in place of the US Dollar.
Russia and China would then insist that any purchases of Russian energy or Chinese manufactured goods be paid for in the new currency. It would be a clear-cut effort to get out from under US Dollar hegemony and to protect themselves from Dollar-based economic sanctions.
Of course, that's exactly what's playing out today.
The Russian central bank just announced that its foreign currency reserves and gold holdings stand at $600 billion. That's just $30 billion short of pre-war levels and they're continuing to grow. Russia has been able to do this in the face of the most aggressive sanctions regime ever imposed.
I'll be sure to explain this carefully to my upcoming class. Let's hope they're in charge sooner than later.
nd prohibiting any tanker that shipped Russian oil from participating in commerce with any state that joined the sanctions.
How's that working out? It's not.
A 'ghost fleet' has emerged to ship Russian oil regardless of the sanctions. The vessels were sold by prior owners to new owners whose name and address is unclear.
The tankers can turn off GPS transmitters while underway. Offices of the ship operators were moved frequently. Insurance is obtained from ad hoc syndicates that can use self-insurance pools or that can obtain reinsurance through layers of shell companies.
Some essential services can be obtained from countries like India and China that never joined the sanctions regime. In short, it's business as usual for Russian oil exports subject to a few documentation hurdles and some fees to middlemen.
This technique was perfected by world famous commodities trader Marc Rich in the 1990s to help Iraq export oil at a time when Saddam Hussein and Iraq were the target of sanctions. Rich made a fortune in the process