Will The West Ever Be Trusted Again?
The consequence of hybrid war and realpolitik: "Your money held by Western institutions doesn’t actually belong to you"
A very common refrain in the war in Ukraine was the moral obligation of the West to sanction Russia. Very little attention has been paid to the actual consequences of the sanctions imposed.
In this article, I will look at the sanctions first. And explain how they utterly destroyed the reputation of the West as a safe jurisdiction, where the rule of law always applies.
I will also look at other similar sanctions and what has been called the “weaponization” of the dollar. As well as the recent rather shocking and casual admission of diplomatic duplicity by Francois Holland and Angela Merkel.
This will have far-reaching consequences, lasting at the very least for decades. And we are already seeing major consequences from it, less than 1 year later. Like the US losing to China a key ally and major relay of power in the Middle East.
The Main Sanctions on Russia
The elephant in the room is of course the freezing of $300B of foreign reserves previously belonging to Russia. I say freezing, but in practice, this was effectively taken away/stolen.
This is even more obvious now that there is plenty of talk of using said money for funding Ukraine. There is no scenario in which Russia will ever see this $300B again.
When foreign countries get a surplus of dollars, they have 2 options:
recycle it into the global financial system
spend it on domestic or international projects.
If we consider an average price of $60/barrel, this is as if the West had gotten for free 5 BILLION barrels of oil.
Despite mounting tensions, Russia naively kept this money in Western banks. I am sure they would have been better off using that money to do things like:
Build a better pipeline network toward Asia
Build better infrastructure at home
Buy fealty from smaller countries like in the Caucasus or Central Asia
Fund fundamental and applied research
The reason why Russia never considered this risk is that they thought it would be too damaging to the West-controlled financial order.
ANY other country in the situation of Russia (surplus of Western currencies) is taking notes.
The lesson is quite simple:
“ Your money held by Western institutions doesn’t actually belong to you”
Considering the incredible advantage the current dollar-centered system provides to the US, this was astonishing. The very last thing you would want to do is make everyone doubt their money is safe.
Now China, but also India, Brazil, and Saudi Arabia, are looking at how to get rid of their surplus dollars that could be taken away overnight. The problem is how to do it discreetly enough, especially when everybody has the same idea at the same time…
The Other Russian Sanctions
Of course, this did not stop there, 3 other major sets of sanctions need to be discussed.
High Profile Individuals
The first one is the sanctions focusing on specific people. For government officials or oligarchs, this is a set of sanctions I personally approve of. At least they target people with actual power instead of the civilian population.
Nevertheless, it made the sanctions go from political/geopolitical to personal.
Plenty of other countries’ influential oligarchs / princes / kings / dictators / presidents took note of what happened.
Tech and Supply Chain
The other set of sanctions was the one about supply and tech/industrial equipment. Any company that ran using even just one Western product ran into a problem.
Sales software, cloud computing, electronics, mechanical parts, coffee cups, planes, insurance contracts, tractors, clothes, EVERYTHING.
If you are an entrepreneur or manager, and your government risks running into trouble with the West, ANY western supplier is now a major risk. If you are that government, you need to preemptively remove as many Western products from your economy as possible, as quickly as possible.
Overnight, this means that most of the world will think twice before buying a tech solution from Microsoft, Oracle or Google ever again... Or any machinery from John Deere, Siemens, GE, Airbus, etc… Even Starbucks or McDonald’s are not immune to this.
Infrastructure Wars
Just when the separation between Russia and the West felt it could hardly get worse, the North Stream pipeline got sabotaged. By now, it is pretty obvious that there is no evidence to blame Russia for it.
Even in the heart of the Cold War, sabotaging such infrastructure was considered a step too far.
Once again, the world looked and took notes. And wonder if their own pipelines, canals, dams, optical cables, and other vital infrastructure are safe.
The Backdrop of Other Sanctions
If this was a unique case, the Russian sanctions could be brushed off as a unique situation, inapplicable to anyone else.
For example, Cuba has been under some trade embargo since the Cuban Missile Crisis (1962!), but this case was not expandable to let’s say, Burma or Iran.
The difference is that in the last 10 years, sanctions have just become more numerous and constantly larger and more aggressive.
Iran sanctions wrecked its economy
Syria sanctions utterly destroyed the country's standards of living, probably as much as the civil war itself.
The gruesome killing of Muammar Gaddafi after a no-fly zone resolution turned into a regime change operation.
Venezuela has seen its only productive sector, oil, obliterated. Its gold was also stolen because it was held in the bank of England. This was a preview of the same trend “Your money held by Western institutions doesn’t actually belong to you”. Except now it can be done to countries with nukes, not just powerless Venezuela.
Sanctions on Chinese companies have gone from simple tariffs to forcing allied countries to kick out Huawei, arresting top executives on bogus charges, forever expanding sanctions on Xinjiang products, and total war on China’s semiconductor industry. So far…
Multiple other sanctions against a wide array of countries or officials of these countries, including Sudan, Turkey (a NATO ally), Burma, etc… Even India was briefly threatened with sanctions.
What used to be a punishment for war (North Korea) or a threat of war against the USA (Cuba) has become a common tool for anyone that fails to comply and submit.
For many nations and people over the world, the only question is more about WHEN there will be sanctions than IF.
Realpolitik At Its Worst
The sanctions previously discussed have pushed a lot of companies and governments to review the risk of doing business with the West.
But at least, they can still talk and iron out peacefully conflicting interests, right?
Not so fast.
Do you remember the Minsk Agreements? They were a multilateral treaty signed by Russia & Ukraine, under the tutelage of France, Germany, and the Organization for Security and Co-operation in Europe (OSCE).
These agreements were supposed to allow for a de-escalation of the situation in the Donbass. It could have permitted not only the fighting to stop, but also the Eastern regions to be semi-autonomous, putting to rest their grievances against Kiev.
It could have worked towards avoiding the current war and hundreds of thousands of unnecessary deaths and almost 10 million refugees. But we will never know because Ukraine always refused to implement the agreements.
Russia repeatedly called for Germany and France to force Ukraine to follow the treaty it signed. To no avail.
For a while, everybody assumes that it came from Ukrainian intransigence, and/or France/Germany’s inability to influence Ukraine.
Instead, both Merkel and Francois Hollande, the former German and French leaders who signed the agreement, publicly and proudly admitted it was all a sham. A former Ukrainian president agrees as well.
“The 2014 Minsk agreement was an attempt to give Ukraine time,” Merkel told the weekly Die Zeit. “It also used this time to become stronger, as you can see today.”
So the peace treaty was never more than a ploy to give Ukraine time to get strong enough to defeat Russia. Or at least kill a lot of Russian soldiers “cheaply”.
This would not be the first time in realpolitik that a politician promises something while doing something else. What is more shocking is how open and honest they are about it.
The habit has always been to at least keep pretending to have respected the treaty.
You might think “who cares? It is not like the Russians don’t deserve it anyway!” The problem comes when future negotiations take place.
For example to stop the war in Ukraine. Or about the Iranian nuclear program. Or North Korean ballistic tests. Or to negotiate the status of Taiwan. Or of the South Sea of China.
Does the Iranian leadership believe that any delay will just be used against them to get them “Gaddafi-ed”? Do the North Koreans? Is it even useful for Xi Jinping to meet Biden if he assumes even a formal multilateral treaty will be worthless?
This loss of trust in US-China relations is compounded by a marked disdain for maintaining proper diplomatic ties, something bipartisan.
More importantly, can allies like Turkey, Japan, Korea, Taiwan, or Saudi Arabia believe any promises made to them?
What about Egypt, Pakistan, India, or Brazil? Indonesia, Argentina, and South Africa?
Will ANYBODY still believe Western leaders going forward?
The problem with casual disregard for diplomacy and treaties with a Great Power, is that other Great Powers take note and will act accordingly. And weaker players will be even more paranoid.
The Consequences
Geopolitics and international relations have always been based on a contradictory mix of 2 elements:
Raw power expressed in military might and overt influence. Bullying, blockading, bombing, and outright conquest are always a possibility.
Mutual respect, including between different power levels. Things like diplomatic immunity, respect for treaties, or at least the pretense of respect for treaties.
The reason for accommodating this formal respect is that it leaves the door open to diplomacy even, and maybe especially, after a war. In the age of nuclear weapons, the mutual openness to at least talk, created by JFK during the Cuban missile crisis, is a necessity.
The other reason is that short of outright war, it allows allies, neutral smaller states, and vassals to expect to be treated reasonably well.
It seems that the West, in its hubristic arrogance, is giving up on the fundamental principles of diplomacy, held for centuries. This is a terrible message to send:
You need to submit completely or get sanctioned. And if you are an “adversary”, don’t expect any treaty or agreement with the West to be worth more than toilet paper.
The first obvious negative aspect is that it makes war more likely. If you assume the other side despises you, you will assume they might attack tomorrow. This is the kind of relationship the Soviet Union and Nazi Germany had just before Operation Barbarossa.
Not a model to emulate if you ask me. USA-Soviet relations under JFK sounds a lot more preferable. Even at the brink of nuclear war, they still believed they should try to talk their way out of it, in a way that could be acceptable to both.
Defecting Allies
The second, less obvious consequence is that non-Western allies might start to prefer another patron to the USA+EU. Especially if their culture is far from compatible with modern Western culture.
This is exactly what is happening.
In the next report “Looking to the East”, we will see how and why the Saudi, once a key ally, is drifting away from the West quickly. And might turn from the center of American influence in the Middle-East to the new “evil regime” to sanction or maybe even bomb to oblivion.
Lastly, we will see if this turn of events is unavoidable, and some scenarios on how it might play out.
Considering the prize is the persistence of the dollar as the world’s reserve currency, the control over the world’s energy supply, and who will control the Muslim world, I think this might be quite an important report.
Stay tuned.
Completely agree with your points on the west ruining its reputation and not helping contribute to world peace.
But although I do agree with your point that money in foreign accounts isn’t safe for a country, the 2 examples you give are vastly different. I agree that stealing 300b of russian money was wrong, because they had very little debt and didn’t say they would stop paying government bonds till after its money was stolen.
Vezuela on the other hand had stolen many company’s there assets and had to pay a lot of people back and just didn’t, so holding there gold till a agreement is made to pay back debt holders isn’t that rare or bad I think. If the country doesn’t want to cooperate with debt holders they should be held accountable and I think this is a fair way to do it, same thing happened when Argentinia defaulted on its debt.
I think it would be a 10/10 if u explained that somewhat better.
Great post. The West has truly ruined its reputation and relationship with increasing segments of the Global South.
There are plenty of ways to take advantage of this from an investment stand point. Your quote on thinking twice about buying machinery from western companies I echo. One of my long term positions is Sany Heavy Industries who are growing much more quickly than and will take a lot of market share from Caterpillar, Komatsu and Deer over the coming years in the developing world.